Tuesday, January 26, 2010

Morning Note...

*Please note I will be attending a conference the next two mornings and Tyler will send out a morning note in my place*

Futures -40bps this morning as global concerns over China’s stimulus withdrawal, political uncertainty ahead of tomorrow’s State of The Union, uncertainty over the fate of Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner, and sovereign wealth concerns (Greece – see quote section below for more, Portugal) all continue to weigh on the broad markets.  Asia was down roughly 2% across the board last night, and Japan’s credit was downgraded by S&P.  Additionally, UK GDP ticked higher, formally signaling an exit from its longest recession on record, but fell short of consensus estimates.  In corporate news, AAPL (Apple) is trading higher premarket after its earnings beat last night (+50% profit, +32% revenues), and TXN (Texas Instruments) is trading lower despite its beat.  VZ (Verizon) trading is mixed after posting earnings and further job cuts, and JNJ (Johnson & Johnson) is lower after its profit dropped ~20%.  OPCO is positive on the banking sector this morning.  In economic news, this morning’s CaseShiller Home Price data was in-line for the most part and has minimally impacted markets.  Later today, we’ll see Consumer Confidence and the November House Price Index at 10am.  In other news, Franklin Templeton’s Mark Mobius is bullish on Brazil (Bloomberg headline:  “Brazil at 25% Discount to Global Stocks Becomes Mobius Favorite”) and BofAMLCO made positive comments on Brazil’s potential in 2010 as well. 

Despite a fair amount of data thus far this week, market volumes – while higher than the 30-day average – have not matched levels from late last week.  It would appear many investors are waiting for resolution on the Bernanke vote, tomorrow’s FOMC decision, and President Obama’s first State of the Union address Wednesday night.  [Others speculate that Geithner is being set up for failure as he testifies on the AIG bailout tomorrow because of the President’s recent interactions with Paul Volcker.]  It will be interesting to see how the President’s “tough talk” on the “Wall Street fat cats” plays out in Thursday market action.  Playing devil’s advocate, could he say anything that causes buyers to rush in?  [According to Bloomberg news, he will call for a three-year freeze on spending for many domestic programs in an effort to reduce the deficit by $10B in 2011.]  Granted, a stellar Q4 GDP number on Friday – along with in-line Durable Goods Orders and Initial Jobless Claims – has the potential to steady markets.  But for the moment, markets continue to feel heavy.  After all, given the uncertainty out there, what’s the rush to step in and buy?  Howard Marks, who is of the best writers out there (not to mention one of the best investor), made a similar point in his most recent letter (dated January 22nd): 

It's clear from the behavior of the markets that something has been goosing investment performance, since the best gains have been seen in the fundamentally riskiest assets. Part of it is general easing of the excessive risk aversion and fear of a year ago, and part is a justified rebound from too-low prices. But certainly near-zero interest rates have played a major part.

In short, I worry that the growth in jobs in the recovery will be slow, and that unemployment and underemployment will remain stubbornly at higher levels than in the past. That doesn't bode well for either the short-term cyclical recovery or the long-term outlook.

My goal in this memo isn't to express a forecast. I know no forecast - and certainly not mine - is likely to be correct. What I do want to do is caution that the considerable risks I see may be less than fully appreciated by those setting asset prices today. The greatest market risks lie in failure of the macro economy to live up to the expectations embodied in today's prices.

The uncertainties discussed above tell me today's distribution of possibilities has a substantial left-hand (i.e., negative) tail, probably greater than at most times in the past. The proper response should be to discount asset prices, allowing a substantial margin for error. Forecasts should be conservative, yield spreads should incorporate ample risk premiums, valuation parameters should be below the long-term norms, and investor behavior should be prudent.

GMO’s Jeremy Grantham’s January 21st letter is also making the rounds:

Grantham reiterated his forecast for “seven lean years” for the economy. He said investors should “under-weight” stocks because the Standard & Poor’s 500 Index, which closed today at 1096.78, is above what he believes to be its fair value of 850. “The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful,”  Grantham wrote in his letter. “Equity markets almost always peak when rates are low.”

OLN trades higher on earnings.  Bank of America Merrill Lynch ups DEI, Barclays Capital ups LXK, BMO Capital ups AA, Citi ups AMLN, Credit Suisse ups PLXS, Jefferies ups CSUN, CTXS, SOLF, SPWRA & STP, JPMorgan ups CNH, Oppenheimer ups AMAT, CFR, CMA, HBAN, KEY, PNC, PVTB, SLXP & WAL, Pritchard ups CXPO, Rafferty ups BMC, RW Baird ups CLC & TXN, UBS ups ARD, CLR & CXG, Morgan Stanley cuts PXP, RW Baird cuts TSCO, UBS cuts JCI.  DAL misses by 3c.  EMC beats by 3c.  PLXT beats by 8c.  PRXL beats by 4c.  SHW beats by 19c.  TRV beats by 63c.  VLTR beats by 13c.  VMW beats by 5c.  WFT misses by 9c.  ZION beats by 38c.  ZRAN beats by 4c. 

Asia lower overnight.  Europe slightly lower thus far.  USD +50bps.  Oil -145bps.  Gold -80bps. 

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
SHERWIN-WILLIAMS       63.23    +7.31% 185100
WEATHERFORD INTL      16.48    -7.05%  1455422
TELLABS INC                  6.25      +5.93% 729127
US STEEL CORP             53.05    -5.66%  1533716
ZIONS BANCORP            18.85    +5.19% 109966
REGIONS FINANCIA        6.25      -4.58%  307419
TRAVELERS COS IN        50.90    +4.11% 38966
BJ SERVICES CO            21.12    +3.83% 1020
ASHLAND INC                 41.10    +3.71% 10989
LEXMARK INTL-A            26.44    +3.69% 2456
CITRIX SYSTEMS           42.59    +3.5 %  18562
BAKER HUGHES INC        46.11    +3.41% 52625
AMERISOURCEBERGE      28.00    +3.28% 15082
EMC CORP/MASS           17.45    +3.01% 1741467

Today’s Trivia:  At 759 square miles, what is the largest US city in terms of geographic size?

Yesterday's Answer:   Russia and Japan rank #1 and #2 among G8 nation’s suicide rates. 

Best Quotes:   “There have been many reasons put forward for the recent pullback in global markets. We’ve heard that it’s because of Chinese tightening, US regulatory reform, excessive optimism and the distinct absence of bears in the market at the start of the New Year. But Greece has featured very high on the list and is the primary reason for the weakening Euro vs. the USD. Greece has been an issue for the last few months, with a budget deficit running at 12.7% of GDP and the significant financing it will need to shore itself up in 2010. BAML estimate that $30bn of Greek government debt will need to be rolled over between April and June this year alone. As a result, since last August Greece CDS has widened from 100bps to a record high of 350bps last week. Yesterday the Greek government issued debt for the first time since being downgraded by the major rating agencies in December. They sold EUR8bn of debt in the market at a yield some 0.3pps above similar Greek government debt of the same maturity in order to ensure the auction’s success. The deal was well oversubscribed and the Greek CDS fall 9bps to 329. This demonstrated the hunt for yield that investors pursue in the short term but over the medium to long term feedback from our Rates desk suggest that most investors remain cautious. As yesterday proved, Greece can issue debt but coupons are inflated. The higher the cost of refinancing debt becomes, the greater the pressure to be fiscally prudent as interest costs mount. Ultimately, we don’t believe that Greece is likely to default and they will tighten fiscal policy sufficiently to carry them through.”  --BofAMLCO Strategist

“Good Morning - Market is trying to fight, although it appears to be on the ropes.   The over all weakness can be attributed to the reports that the People's Bank of China is indeed pushing ahead with the reserve requirement increase it announced last week.   APPL is back in the green this morning after chopping around post record numbers, maybe the sole reason the market isn’t off more.   The over all psychology of the markets has definitely changed over the past two weeks.   We clearly no longer hurdle landmines with ease.  I expect rallies to be sold, a defensive tact will be in place. The consistent change of policy coming for the government has made market unstable again.   It appears Bernanke will be safe from execution, but do we think Geithner will be spared?  Tomorrow's AIG hearings might seal his fate.  The witch hunt continues.”  --trader note

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