Thursday, January 21, 2010

Morning Note...

Futures are flat this morning, as GS beats earnings estimates and trades higher – ironically – on a day which may see increased financial regulation proposals from the Obama Administration.  Goldman Sachs reported earnings of $8.20/share vs. an expectation of $5.18/share.  President Obama is due to “offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking” at 11:40am, according to Bloomberg News.  Apparently, the proprietary trading arm of major banks will be the major focus of the proposals.  Considering that many investment professionals consider GS to be little more than a glorified hedge fund which often “shoots against” clients in it’s prop account, the timing of it all is high irony.   In economic news, Initial Jobless Claims rose to 482k – from 446k last week – and was worse than the 440k estimate.  However, the Bureau of Labor Statistics released a statement with the data, calling the rise “administrative, not economic.”  Huhn?  Continuing Claims were 4.599M vs. 4.598M expected.  Philly Fed and LEI are due at 10am today.  Overseas, CDS on Greek debt continue to rise, as their financial situation becomes more and more precarious.  Greece itself continues to claim a bailout is not needed.  And as Art Cashin said on CNBC this morning, “the financials are worried about Washington and the rest of the world is worried about China.”  To his point, the big news overnight was in China, where Q4GDP rose 10.7% year-over-year, the most since 2007.  This obviously fuels continued speculation that China will start raising rates and continue to tighten lending restrictions in an effort to temper its economy.  Goldman Sachs had this to say regarding China:

CHINA TRADING STRATEGIES: Markets appear to be reflecting risk of policy tightening in China
-- Macro investors have expressed concern that China tightening may proceed faster than expected, extend to other countries
-- We make three points surrounding these concerns
(1) Chinese financial conditions still very supportive for current levels of growth
(2) If this is more of a growth shock (rather than inflation shock), equity markets can still make progress even through a short term selloff, especially in EM equities
(3) Long S&P/Short EEM type trades positioning for China tightening fear can work, but average returns are typically slow in up markets.
ECONOMICS: China Real GDP accelerated to +10.7% yoy in 4Q09 (from +9.1% yoy in 3Q09)
-- This number was just below our forecast of 11.5% growth, but generally confirms our robust growth outlook,
-- Inflationary pressures appear to be increasing, December CPI inflation rose to +1.9% yoy (up from +0.6% yoy in Nov)
-- Our more benign 2010 CPI inflation forecast of 3.5% CPI inflation assumes government policy tightening.
-- While recent PBOC / CBRC action to tighten lending via reserve requirement ratio hikes, window guidance, open mkt operations has created a impression of tightening, policy has actually been loosened in early 2010
-- We remain more concerned about risks of insufficient tightening rather than risks of over-tightening given govt's cautious outlook on external demand

Washington is still coming to terms with Tuesday’s shocking Republican victory in Massachusetts.  It’s worth pointing out that President Obama has now “stuck his neck out” in three elections (two gubernatorial and one Senate) and lost all three.  BTIG’s Mike O’Rourke does a nice job of re-setting the political landscape in economic terms:

The rest of the President’s agenda now comes under serious question.  Initiatives like “Cap and Trade” should now be dead.  Any new rounds of stimulus, no matter what you call them, are also likely to be dead.  First and foremost, there is a lack of public support for such measures.  Second, Republicans currently in Congress survived 2008’s perfect storm and generally, as a group they are established.  There is no way such a small established Republican minority will permit any new handouts to help incumbent Democrats save seats if they can prevent it.  For the past year with no power, the Republicans have simply been trying to run out the clock.  Now that they have picked off this interception and garnered some influence, they will not change their strategy in a midterm election year.  Along the same lines, moderate and in-jeopardy Democrats recognize that the President’s popularity will not save them come election day.  They have to answer to their constituents, not the White House.

We believe the weakness in the equity market today was likely an acknowledgement that no new stimulus will be forthcoming.  Likewise, the strength of the Dollar was a result of the belief that gridlock will keep fiscal policy in check.  From our perspective, the economy needed these fiscal measures a year ago and we supported the President’s policies and intervention.  There comes a time when the economy needs to start being weaned off of government aid.  With estimates of Q4 GDP at the 4.5% level, no new Fiscal aid should be an easy place to start.  The economy will not be left flat footed by any means.  The majority of last year’s stimulus has yet to hit and monetary policy is, and will remain, accommodative.  While we know we cannot walk on our own yet, let’s at least try to get out of bed and crawl. 

EBAY beat by 4c last night and trades up over 5%.  SBUX also beat by 5c and raised forward guidance.  STX beats by 40c and trades 10% higher.  EL raises guidance.  FCS beats by 6c.  FFIV beats by 3c.  DOX beats by 2c.  FITB higher on earnings. GRM -8% as Nokia releases new version of Ovi maps at no extra cost.  GSCO cuts KMX.  LM lower on earnings miss.  LUV higher on earnings beat.  NITE higher after beating by 2c.  CITI cuts PCX.  PLXS beats by 2c.  TSS beats by 1c but guides lower.  XRX beats by 3c.  BCAP positive URBN.  TGT analyst day today.  BofAMLCO ups BBBB, DOX, FFIV.  CITI ups UGI.  DBAB ups SBUX.  FBRC ups WFC.  PIPR ups COV.  UBSS ups DWA, EDR, UA.  BofAMLCO cuts AMTD, MET.  BERN cuts BSX.  CITI cuts ACI, CNX, MEE, NI.  KBWI cuts MS, NTRS.  MSCO cuts ENR. 

Asia mixed overnight.  Europe slightly higher this morning.  USD +25bps.  Oil +10bps.  Gold -60bps. 

Brightpoint News:  

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
TOTAL SYS SERVS         14.75    -13.29%            22082
EBAY INC                       24.12    +8.5 %              2729027
FIFTH THIRD BANC         12.20    +7.87%             894702
ESTEE LAUDER               52.55    +7.16%             26370
LEGG MASON INC           30.05    -4.39%              351439
KEYCORP                       7.25      +4.17%             161630
STARBUCKS CORP          24.08    +3.39%             958037
XEROX CORP                 9.17      +3.15%             533117
MASSEY ENERGY CO       46.45    -3.15%              12625

Today’s Trivia:  Currently re-reading The Odyssey… when Ulysses returns home to Ithaca, after 20 years, disguised as a beggar to determine what has been going on at his home since his absence, his faithful dog takes one look at him and – his loyal vigil ended – thus dies… What is the dog’s name?

Yesterday's Answer:   According to Stanford professor David Kennedy, the USA and Mexico are the two nations, sharing a border, with the largest wealth disparity as measured by wage differential.   

Best Quotes:   “The euro has clearly become a full Greek tragedy and a self-fulfilling prophecy, with whatever bad news -- lower U.S. stocks, China’s tighter monetary policy -- being an excuse to sell,” a team of analysts including Roberto Mialich in Milan wrote in a report today. “Stay short as reversal is only above $1.43 and the pair will target $1.39 once $1.4080 has gone.”  --BBERG news

Roubini Says Stock Rally May End Amid Muted Recovery - 2010-01-21 10:39:57.470 GMT

By Le-Min Lim and Shamim Adam
     Jan. 21 (Bloomberg) -- A global rally in stocks may end in the second half of the year amid a muted recovery in the world’s largest economies and as deflationary pressures limit gains in corporate earnings, Nouriel Roubini said. Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may also cause an “unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth,” Roubini, the Harvard- schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today. The MSCI World Index has surged 73 percent from last year’s low in March, adding more than $27 trillion to the equity rally as the global economy rebounds from the worst postwar recession. The World Bank, while raising its forecast for global growth in 2010 yesterday, warned that the recovery may lose momentum as stimulus programs wind down and “high” unemployment persists. “The real economy is gradually recovering but since March, asset prices have gone through the roof,” Roubini said. “If I’m correct, by the second half of the year, there’s going to be a slowdown of growth in U.S., Europe and Japan. That could be the beginning of a market correction because the macroeconomic news is going to surprise on the downside.” Any decline in commodities may be limited because of demand for raw materials from emerging markets, he said.

                         Sovereign Risks

     Europe and Japan have less room to implement counter- cyclical policies compared to the U.S., making it less likely for those markets to lead the world in the global economic recovery, Roubini said. Sovereign risks in Europe are rising because of persistent budget deficits, and the appreciation of the yen and euro against the U.S. dollar are “making things worse,” he said. “Even the earnings news is going to surprise on the downside,” Roubini said. Weak economic recovery and deflationary pressures will limit revenue growth as the ability of firms to cut costs runs its course, while losses at U.S. and European financial institutions are going to be larger than those that have been priced by the market amid low growth, a high unemployment rate and still falling home prices, he said. In the U.S., where the Federal Reserve has pledged to keep interest rates near zero for an “extended period,” the risk of a policy mistake is significant especially in an election year, Roubini said.

                         Risk of Mistake

     “The path of exit is very narrow and the risk of a mistake is significant,” he said, referring to both fiscal and monetary policies. Economic expansion will be more “robust” in Asia and emerging markets, and parts of the Chinese and Indian economies are showing signs of overheating, Roubini said. “In emerging markets economies like China and India, inflation is already returning to positive levels because there’s high economic growth and policy boosts,” he said. China last week unexpectedly raised the proportion of deposits that banks must set aside as reserves as a credit boom threatens to stoke inflation and create asset bubbles. Economies including South Korea and Hong Kong are facing rising asset prices, consumer credit and corporate loans, spurred by record- low interest rates and government stimulus. The short-term pain to the market caused by the tightening of China’s “super loose” monetary policy is necessary for sustainable growth, Roubini said, adding that consumption rates there are still very low. Hong Kong should have a managed float for its currency instead of pegging it to the U.S. dollar, as the Fed’s interest- rate policy may not be appropriate for the city, which tracks the U.S. central bank’s rate decisions, Roubini said. There are also pitfalls to pegging the Hong Kong dollar to the yuan, as the loose policies of the U.S. and China aren’t relevant to the city, he said.

--BBERG news

No comments:

Post a Comment