Friday, January 29, 2010

Morning Note...

Futures surge 70bps higher this morning on a much better than expected Q4 US GDP number.  Even the bears and the cynics - who were expecting a high number from one-time government stimulus injections – have to be impressed with +5.7% vs. the expected +4.7% reading (which marks the fastest pace of expansion in six years).  Personal Consumption (remember that the consumer makes up 2/3rds of GDP) was also better, at +2% vs. +1.8% expected.  Always beware the revision ahead, but for now this number is surprising, and lends some stability to a market fettered with uncertainty.  With this Q4 reading, Obama’s State of the Union, the FOMC decision, and the Bernanke confirmation (no matter how shaky) in the rear view mirror, markets certainly have a lot to digest this weekend.  Action today leading into the weekend could be very telling – markets have obviously felt “heavy” of late, and a “sell the rally” mentality has prevailed.  By 2pm today, we should have some idea as to whether or not that trend will continue.  In other words, with so much of this week’s unknowns now behind us, the market is relatively free to trade “on its own merits” today…so will investors again sell the rally and trim risk into the weekend, or will optimism reign?  There is one caveat to all the positivity around today’s GDP number, however:  Be careful what you wish for.  By that I mean that data that is too good or a surge in job growth next week would add to interest-rate-hike pressures.  And if rates go up, this market will certainly face further headwinds.  To that end, comments from China central banker Zhu Min are making the rounds this morning, causing some concern:

China's deputy central bank chief Zhu Min warned that tighter US monetary policy could spark a sudden outflow of capital from emerging markets, evoking the 1990s Asian financial crisis.  A rapid withdrawal of funds would not only cause volatility in the currency exchange markets, but could also generate currency moves similar to those during the Asian crisis of over a decade ago.  "Capital flows - it's a real risk this year for the economy," Zhu Min told participants at the World Economic Forum's annual meeting in Davos.  Mr Zhu noted that investors are increasingly borrowing the cheap US dollar, and investing the borrowed funds in emerging markets, where interest rates are higher, and therefore generating a better return than saving in the dollars.  This phenomenon called carry trade in the US dollar is a "massive issue today," said Mr Zhu.  "It's bigger than the Japanese yen carry trade 12 years ago," he said.  However, if the United States were to tighten its lax monetary policy, making borrowing more costly, funds could then flow out just as suddenly from emerging markets, back into the US market.  This could cause a collapse in emerging markets' currencies, and spark a repeat of the 1997-1998 Asian financial crisis.  Then, the Japanese yen was cheap and investors were borrowing it and investing in South-east Asian economies, fueling strong growth in the region.  But as exports slumped amid a global demand slowdown, speculators began attacking the South-east Asian currencies, believing that they were overvalued.  Thailand was first to crack and it abandoned its fixed exchange rate and float its currency against the US dollar.  Other currencies followed suit and crashed under crippling debt levels and amid soaring interest rates.  "It's what we learnt from the Asian financial crisis. Because the yen went back to the Tokyo market," said Mr Zhu. "Everyone is concerned about the direction which the capital flow will move. It's an absolute real risk for the year," he said.  He also defended China's stance on the yuan, saying that a stable yuan was crucial.  "It's very important to have a stable yuan particularly in this very volatile market," he said.  Beijing has been under fire for deliberately undervaluing its currency.  However, Mr Zhu said that a stable yuan was "good for China, it's also good for the world."  (London Telegraph)

In corporate news, MSFT is trading 2.5% higher on better than expected earnings.  AMZN (+3%) also reported 13c better and added upside guidance, while HON (-3%) also reported better but trades lower. Finally, toy-maker MAT (+1.5%) is trading higher on earnings.  In other news, concerns over default in Europe continue, moving from Greece to now Spain and Portugal.  A weakening Euro ($1.39, below the key $1.40 level) – down 8% vs. the USD from early December – is symptomatic of those concerns.  Additionally, India moved to increase bank reserve levels to 5.75% from 5%, which is similar in scope to China’s recent actions.  In political news, it’s worth noting that yesterday’s Bernanke confirmation was the “least supportive” of a Fed Chairman since Paul Volcker won an 84-16 vote in 1978.  Politicians continue to amaze, however, and this political science major’s view is that most dissenters enjoyed the wave of “popular revolt” initiated by Senator Jim Bunting (anti-Bernanke all along) to simply log a free (in the sense that they knew it would never be enough to unseat him) “tough on Wall Street” vote aimed at appeasing their constituency.  If one examined the rolls, I would imagine most dissenters were those facing narrowing polls ahead of mid-term elections and those spooked by the recent Scott Brown victory in Massachusetts.  Additionally, this seemed more of an exercise in “showmanship” than anything, in the sense that – if Bernanke was not reconfirmed – any incoming replacement would be even more beholden to Congress (and thus less objective) as a result of the Bernanke vote, thereby achieving the exact reverse of what would have been intended.  Thus there was no way Bernanke was not being reconfirmed. 

JNPR beats by 6c.  PMCS higher on earnings. TSRA trades lower on earnings.  GSCO ups LBTYA. RHI higher on earnings beat.  SNV earnings beat and BERN upgrade. MXIM higher on earnings.  B. Riley & Company ups COHR, Bank of America Merrill Lynch ups BKD, BMO Capital ups MEOH, Deutsche Bank ups ORLY, FBR Capital ups URBN, Goldman Sachs ups WMT, Janney Capital ups SASR, JMP Securities ups MPW, JPMorgan ups CBT, MAN & SNDK, Sandler O’Neil ups ISBC, Thomas Weisel ups CAH, B. Riley & Company cuts NPBC, Barclays Capital cuts TII & TX, FBR Capital cuts FII & UBS, RW Baird cuts ABFS, Wells Fargo cuts KSP.  ALV higher on earnings.  HSBC ups DAI.  CPSI earnings miss.  COHR higher on earnings.  FII misses by 2c.   

Asia lower overnight.  Europe over 1% higher.  Oil +80bps.  Gold -30bps.  USD +40bps. 

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
JUNIPER NETWORKS       26.30    +7.39% 345725
AVERY DENNISON           35.35    -7.22%  22200
SANDISK CORP              26.71    -7.19%  359862
FIFTH THIRD BANC         12.71    +3.67% 111803
PACCAR INC                  36.50    +3.6 %  849
HONEYWELL INTL           38.41    -3.54%  137990
CA INC                          23.10    +3.36% 796
TERADYNE INC               9.80      +3.27% 17000
EASTMAN CHEMICAL      58.80    +3.19% 500
INTL GAME TECH            19.40    +3.03% 300

Today’s Trivia:  In this extremely poor city of 10 million people, 60 different languages are spoken, and the Hooghly river flows. Which city is it?

Yesterday's Answer:   2% of US theatre screens are IMAX. 

Best Quotes:  “NEW YORK (Reuters) - A majority of U.S. senators on Thursday voted to confirm Ben Bernanke for a second four-year term at the head of the Federal Reserve.

KEY POINTS: * A total of 70 senators voted to confirm, with 30 voting against. * Bernanke has been credited with steering the U.S. economy through a wrenching financial crisis but is also under fire for policies that set the stage for the turmoil. * He has encountered the stiffest opposition the Senate has put up in the three decades it has voted on nominees to head the U.S. central bank.



"I would breathe a sign of relief that it is over. I really think that a lot of people failed to realize the significance of all the Congressional stonewalling on the Fed's independence and the perception of the Fed's independence, and the complexity that this could have created in the conduct of monetary policy.

"It is something that should not have been this political. The criticism that the Fed is getting is sort of like criticizing the fire department for kicking down the door to save a house that is burning down, saying 'they should not have kicked down that door'.

"I'm glad that it is over and I'm also glad that we have got people like Ben Bernanke that don't just throw up their shoulders and say to heck with it."


"Bernanke gets reconfirmed but also gets a vote of low confidence. The 70-30 split highlights the lack of a cooperative spirit in Washington. Politics has reached new lows with respect to confirming the Fed chairman. This was a low vote of confidence because of the 30 who voted against to abstained. The spread was quite large! Congress appears to be distancing itself from the financial crisis and putting most of the blame on Ben Bernanke and Geithner."


"I think it was expected. You could tell that it was going to happen probably a day ago. I don't think that it will have much effect on the (stock) market.

"I think the market will cycle right past the Bernanke vote and focus on Amazon and Microsoft earnings.

"He's going to take further bashing by the politicians, but I don't think it's going to affect the market."


"This is very good news. It gets rid of probably the biggest worry of all for many investors, particularly foreign investors. They've been worried because they see Congress starting to interfere with the independence of the central bank. And the conclusion they draw, and me too, is, 'There goes the currency, the dollar.' You trust the central bank or you don't. This confirmation takes that that uncertainty away for many."


"We pretty much were figuring by yesterday that he had enough support to get through. It is a good thing because you have a level of uncertainty taken away.

"(In the longer run) he's firmly in the camp of wanting to keep stimulus in place until we have firm signs that the economy isn't going to reverse course. I think it's a good thing for the shorter end of the yield curve and for a steeper yield curve. But I also think he's in the camp that the stimulus will go when he believes recovery is firmly in place."


"The market had already factored in that he was going to be confirmed. The news has been positive since the weekend, of key bi-partisan support. I think he continues his job the same way he's been running the Fed.

"As a personality he doesn't want to get involved in the political arena although in anyway he's been forced to. I think he's inclination is do the best job for the economy as the data warrants. It would have been huge event had it (the confirmation) not happened."


"Paul Volcker got 84 votes when he was voted in for his second term. Alice Rivlin got 57 votes when she was nominated for vice chairman of the Fed. There have been politics in the process before, but this has been the worst electoral showing of any Fed chairman in memory. These things are getting more political so the new normal may be not 90 votes, but 60 or higher."


"I see little reaction on the forex markets after (Ben) Bernanke's confirmation. Despite the hurdles, most expect him to be confirmed. In that sense, it is old news and fully priced in most currency pairs. The surprise, and the impact, would have been much larger if he wasn't approved."


"I don't think it was a big surprise but I think it was a big relief. Markets hate uncertainty and it's nice to get this out of the way. This takes one issue off the table."


"The market priced this in, but there had been some fear of a bad re-run similar to when the TARP was voted down for the first time at the height of the financial crisis. But this time the Administration knew there was discontent and they had a week to prepare."

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