Friday, January 22, 2010

Morning Note...

Futures slightly lower (-25bps) this morning as markets continue to digest yesterday’s negative action.  “Selling the good news” continued in earnest on solid earnings and bullish GDP data from China, and momentum only grew as President Obama targeted the financials with new regulations.  Note that volume (highest since December 18th, 2009) and breadth (6:1 sellers, worst since November 27th, 2009) were considerable yesterday, hinting that there was real conviction behind the market weakness.  Further, the VIX (an estimate of future S&P volatility based on a weighted average of implied volatilities on a wide range of options strikes; sometimes known as the “fear gauge”) is up a massive 25% in the last two sessions.  (Is Goldman Sachs still pushing to be short the VIX?)  In corporate news this morning, GE reported better than expected – despite a 19% drop in profits – and is trading slightly higher.  GOOG (-3%) and AXP (-2%) also reported better than expected numbers last night after the close.  Additionally, MCD is flat post-earnings despite another earnings beat and oil giant SLB is down ~1%.  Capital One (COF) also beat by 38c and beat on revenues, but is down 4% pre-market. 

Following Obama’s “Volcker Rule” announcement yesterday, bellwether financials lagged the market yesterday and are trading lower across the board this morning – for example, CS and DB are down 4%, UBS is down 3%, RBS is down 5%, and HBC is down 2%.  Additionally, exchanges are trading lower in anticipation of lighter volumes, and thus lighter revenue streams, ahead.  [Which may be slightly overblown…many bank props desk trade structured and over-the-counter products, including CDS, that do not trade on any exchange…]  Further, banks/financials are scrambling to define the exact regulations and the necessary compliance (with the FT already reporting that GS closed its Global Opportunities Fund):

Obama Proposal May Force JPMorgan, Goldman to Sell Buyout Units 2010-01-22 05:01:01.4 GMT
Jan. 22 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc. may have to sell some private-equity businesses and stop investing in buyouts under a proposal by President Barack Obama to limit bets made by banks with their own capital. Obama asked Congress yesterday to prohibit banks from owning or making investments in private-equity and hedge funds that “are unrelated to serving customers.” While financial institutions could still manage the assets on behalf of clients, they wouldn’t be able to invest in their own funds or those run by firms such as Blackstone Group LP and KKR & Co. The proposed rules may alter Wall Street’s role in private equity, where banks and investors commit money to buy companies, real estate and other assets. Banks also invest with buyout firms to help deepen their lending relationships. “In a world where there is less capital available for private equity and hedge funds, this will take out another source of funding,” said Bruce Ettelson, head of the fund- formation group at law firm Kirkland & Ellis LLP in Chicago. JPMorgan may seek to divest its OneEquity Partners private- equity unit, according to a person familiar with the New York- based bank. OneEquity Partners manages $8 billion in direct investments, with holdings that include TV Guide. The rules may affect Goldman Sachs’s principal investment group, which includes the New York-based company’s stake in Industrial & Commercial Bank of China Ltd. and real estate. The group reported revenue of $1.17 billion last year. In addition, Goldman Sachs’s global special situations group makes principal investments within the firm’s fixed-income, currency and commodities business. Representatives of the banks declined to comment.

What’s next for Obama in the fight “for Main Street” and “against Wall Street?”  Here’s an interesting – albeit slightly snarky – quote from this morning’s NY Times:

“In its latest effort to accelerate the Making Home Affordable program, the Obama administration plans to revamp its $75 bln program to stem home foreclosures next month by potentially including direct cash assistance or additional payment grace periods. According to a mortgage industry consultant, “They are turning this from a legitimate program to try to save people who have the ability to hang on their homes into one that say, forget the willingness and ability to pay, lets just postpone foreclosures.”

ANF initiated Hold at DBAB.  AMD -6% on earnings.  DBAB ups BAS, DLM.  CNXT +10% on earnings.  ERIC higher on earnings.  FCX cut at CSFB.  FSC commences 7M share offering.  IBKR -7% on earnings.  ISRG +7% after beating by 24c.  JCI beats and guides higher (+7%).  NAT announces 4M share offering.  NRG to replace JAVA in S&P500.  SLM cut at Ladenburg.  SYNA beats but guides lower.  X removed from Conviction Buy List at GSCO.  BofAMLCO ups ELP, JWN, LTD.  CITI ups JPM.  JEFF ups EDE.  MSCO ups SPRD.  OPCO ups IGT.  BofAMLCO cuts DTV, ENI, EOC, PLCE, ZLC.  CITI cuts AEIS, AMAT, ATMI, BRKS, ENTG, KLAC, NVLS.   UBSS cuts VLY.  KBWI cuts KEY.  HOG reports first loss in 16 years and trades lower. 

Asia lower across the board, led by -2.5% from JapanEurope down roughly 1% at the moment.  USD -5bps.  Oil -50bps.  Gold -95bps. 

Brightpoint News:  

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

S&P 500 PreMarket (last/% change prior close/volume): 
INTUITIVE SURGIC         328.72  +7.96% 13881
JOHNSON CONTROLS     31.05    +7.63% 56560
AMERICAN CAPITAL        3.84      -6.34%  30040
INTL GAME TECH            21.34    +5.64% 6100
ADV MICRO DEVICE        8.50      -5.45%  799677
WILLIAMS COS INC        21.60    -4.51%  460
MBIA INC                       5.02      -4.2 %  2780
IMS HEALTH INC            20.70    -3.9 %  6000
SLM CORP                     11.35    -3.9 %  4355
GOOGLE INC-CL A           560.41  -3.87%  164132
FREDDIE MAC                1.26      -3.82%  171339
GENERAL ELECTRIC        16.63    +3.81% 6283639
CAPITAL ONE FINA         41.14    -3.65%  71904
FREEPORT-MCMORAN    73.80    -3.25%  285244
HUNTINGTON BANC        4.39      -3.09%  617645
HARLEY-DAVIDSON         24.80    -3.05%  277325

Today’s Trivia:  Atlanta, Georgia - 1886…Pharmacist John Pemberton creates the first vat of…what?

Yesterday's Answer:   Ulysses’ faithful dog was named Argos.     

Best Quotes:   “Where will the score go from here? Well, we will have to see - but I am certain of the game plans:

1.       Wall Street will try to scare the hell out of the American citizenry with threats of what this could do to their stock market, jobs, and children

2.       Main Street will try to cry to the referee on  a 10% unemployment rate and a Piggy Banker chowing down on the rate of return on their savings accounts

Scare and whine tactics. It's going to be the Super Bowl of political bubbles, and Obama Needs A Win!

We've cornered the market on front row seats for this one. We'll be in it to win it with a daily risk management view of all the moving parts. For now, we remain bullish on the US Dollar and bearish on Gold. Rather than supporting an unreasonable and unsustainable view of ZERO percent rates of return on Main Street's savings accounts, we currently have a ZERO percent allocation to Commodities in our Asset Allocation Model. Everything, however, has a price.

As prices and player performance in this new game change, we will. After seeing Tuesday's +1.3% Massachusetts melt-up, and yesterday's -1.9% Main Street melt-down, does macro matter? The fans apparently think it does, and we think you should too. So let's get our real-time risk management game faces on and get at it.”


“We Won’t Break You Up, Break Yourself Up.

The White House claims they don’t want to bring back Glass Steagall, but if they are successful, that is essentially  what they are doing.  For the past year Volcker has been asking anyone who will listen to bring back Glass Steagall, and it’s not a bad idea.  In the decade that Glass Steagall has been gone, the stock market had its worst decade long performance on record.  While  it is hard to link the causality, we know we can’t blame its regulations for our ills today.  In 1935 JPMorgan broke into JPMorgan and Morgan Stanley, both fine institutions that have survived and thrived over the decades.  If US Steel-TCI can repeat itself, there is no reason this history can’t repeat itself as well.  The end result would be the less risky institution would garner a higher multiple, the more risky a lower multiple, you still have the same assets.  Another option the institutions have is to turn their proprietary trading operations into Hedge Funds and market them to clients and likewise do the same with Private Equity.  Interestingly, though then these institutions won’t have skin in the game. 

Eliminating Risk Also Creates Risk

The real risk created by the Governments vitriolic approach is if banks clamp down.   Jamie Dimon warned last week he believed most banks would be overcapitalized by mid 2010 due to regulatory fears.  In short, banks will remain conservative in lending, so as to not fall short of new capital requirements.  The approach the President is taking only proves Dimon is likely correct, that does not help the recovery.  On that note where does venture capital fit into this process, it is just as risky as the other businesses, but seeding entrepreneurs appears somewhat nobler, even though you can earn bonuses there as well.

The other question is where do capital requirements and leverage ratios wind up?  Evidently not where they were in 2007, but will they be current levels or tighter levels?  In the unchartered territory that we are in, the only guide that comes to mind is the CFTC’s very recent reform of position limits in the energy market.  Using 2008 and 2009 as their sample only 3 Crude players would have exceeded position limits during that time and 1H of 2008 was pretty bubbly.  Making them tighter than the levels to which financial institutions have corrected them today and post stress test, would be a pro-cyclical response and another risk. 

It is hard to draw assumptions on a one sentence policy.  It raises the uncertainty bar, but the primary determinant of banks stock performance in 2010 will still be when and where credit losses peak.  There are also a number of non-losers out there, smaller banks and institutions like Wells Fargo who focus almost solely on Commercial banking businesses. One thing investors have is time, it will take a year to craft (if the votes are there) and based upon Barney Frank’s comments there should be 3-5 years to implement it.”

-- Mike O’Rourke, BTIG

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