Friday, February 26, 2010

Morning Note...

Futures essentially flat this morning after markets reversed nicely post-European close yesterday.  News is relatively light as much of the northeast gets belted by another round of snowstorms.  In U.S. economic news, the Q4 2009 GDP revision was better-than-expected, at +5.9% vs. the prior +5.7%.  Overseas, UK GDP rose higher than expected to +0.3% vs. the +0.1% expectation.  WSJ front page story discusses traders making career bets against the Euro.  According to Reuters, the Greek PM made comments to the effect that “the worst fears about Greece’s economy have been confirmed.”  Asian stocks were generally higher as Korean manufacturing confidence was higher, Japanese industrial production was higher, and India’s finance minister predicted 10% growth there.  Emerging market currencies and commodities are higher as a result.  In corporate news, AIG is trading down roughly 8% on their disappointing quarterly earnings release.  Last night, GPS beat estimates and raised their dividend.  Also, M&A activity continues in “fits & starts,” as private equity firm Thomas H. Lee acquires CKR, which own Hardee’s and Carl’s Jr., for $11.05/share ($619M total).  BCAP notes the deals of late:  obviously CCE was the M&A focus yesterday and privately-held Kettle Foods (potato chips) was sold last night to DMND for $615mm in cash.  So far, M&A over the past few months has included:  CHTT, BARE, THS/Sturm, CCE, SLE divestitures (to PG and ULVR), KFT/CBRY, Nestle/KFT Pizza, FMX, DMND/Kettle, FGXI.  Chicago Purchasing Manager’s Index is due at 9:45am.  February UMichigan Consumer Confidence is due at 9:55am, and January Existing Home Sales are set for release at 10am.  Note that today is month-end.  Keep an eye on the Euro, which continues to reflect pan-European sentiment.

I must admit that one of my greatest fears trading from Miami is “lack of feel” as it relates to NYC, which we’d all agree is the financial capital of the world.  Living in New York, I used to guess at what the markets would do from the mood on the subway, the feel of the city, or the weather.  Sounds silly, I know, but a dark gloomy day in NYC does seem to affect markets sometimes.  So, you can imagine my fear (no matter how “unbalanced” they may seem) when trading from sunny Florida each day.  However, as I sit in our NY office today, I can tell you – based on the amount of snow dumped here yesterday and this morning – that The City has a “sleepy” feel.  Thus don’t be surprised – as people dig out and drag themselves to work – if markets have a particularly sleepy start this morning.  (And, for what it’s worth, there are definitely fewer morning research emails in my inbox than normal.)  On that note, he’s an interesting anecdotal observation:  New York is a mess.  This is no blizzard, but I have seen more snow be much less disruptive here.  So what’s missing?  Plows… Why?  My first and most paranoid thought has been “wow…NYC and NYS really are in financial trouble…maybe there’s no overtime being paid…maybe there’s not enough gas for the plows…”  Of course, they may also be standing down and waiting for more snow later.  I’m not sure, and this is idle speculation at best…but the lack of municipal clean-up right now may be telling a bigger story than we know.

JPHQ ups LAMR.  OPCO ups VTAL.  UBSS ups EPB.  CITI cuts DYN, BARE.  GSCO cuts PETM, DPS.  STFL cuts CIEN.  PIPR cuts ORA, ORCC.  UBSS cuts EQY, PALM, MOT, TCO.  AGO higher on earnings.  ATHN lower on earnings and BARD, JMP downgrades.  GSCO ups AZN.  BIOS higher on earnings.  DBAB ups CHU.  CNP lower on earnings.  CROX -15% on earnings.  DECK beats and trades higher.  DRYS -5% on earnings. FCN misses by 2c.  LYG lower on impact of impairment charges.  NAVG lower on earnings.  NVTL misses and guides lower.  OVTI beats by 1c.  RST +12% on earnings.  SD misses by 7c. 

Asia mixed but generally higher.  Europe roughly 1% higher.  USD -5bps. Gold +30bps. Oil +90bps.

S&P 500 PreMarket (last/% change prior close/volume): 
AMERICAN INTERNA       25.25    -8.22%  1381665
FLUOR CORP                  43.10    -4.33%  47165
GAP INC/THE                 21.09    +3.43% 39773
PPG INDS INC                 62.68    +2.65% 100
CENTERPOINT ENER       13.74    -2.55%  5300
CARNIVAL CORP             34.96    -1.96%  32993
SOUTHWESTRN ENGY     43.78    +1.84% 1126
M&T BANK CORP            75.28    -1.70%  700
MOTOROLA INC             6.74      -1.61%  56737
BALL CORP                    53.94    +1.52% 188

Today’s Trivia:  A human’s “goosebumps” originated – like most things – with our primate ancestry.  What purpose did goosebumps serve in the animal kingdom?

Yesterday's Answer:   The 14 punctuation marks in English grammar are period, comma, colon, semicolon, dash, hyphen, apostrophe, question mark, exclamation point, quotation mark, brackets, parenthesis, braces, and ellipses.

Best Quotes:  “Here we go again.  Is there enough in the tank to get us to break out?  Equity strategist keeps belting out that the S&P should be in the 1200 range given the 4q09 EPS and current interest rates.  God bless him.   The hiccups in Europe will likely dent the European GDP, but globally it shouldn't have the big of an impact.  Lets face it appears to be all about China, and whether or not the US can keep from the double dip. (not sure if that is off the table yet).   Jamie Dimon’s comments last night should be taken as a positive.  JPM’s comments in regards to credit cards appears to signal that the upper echelon is still healthy and spending.   Reserves will continue to remain high, and CRE foreclosures will go up. AMG data showed Equities recorded their 2nd week in a row of inflows over 2.5bln.   If the market can stage a rally expect those numbers to continue to go up.   1112 is the month high.”  --trader note (BofAMLCO)

Thursday, February 25, 2010

Morning Note...

Futures -1% this morning and drifting lower on a weaker EUR and a stronger USD ahead of a potential downgrade of Greek debt (and renewed fears over Spain) and weaker-than-expected European consumer confidence.  Europe is trading down 1% on average, and Asia was mixed overnight.  In economic news, there was some positive news on the Durable Goods front, but the influence of unemployment looms larger as futures sold off on the 8:30am release.  Initial Jobless Claims were worse than expected, at 496k vs. the 460k expectation.  Continuing Claims were 4.62M vs. the 4.57M expectation.  January Durable Goods Orders surprised to the upside, however, at +3.0% vs. +1.5% expected.  Further, the December reading was revised upwards to +1.9% from the prior +0.3%.  However, excluding transportation, orders actually slipped 0.6%, which disappointed relative to the expected 1% increase.  In corporate news, KO (Coca-Cola) announces plans to acquire the North American enterprises of its bottler, CCE (Coca-Cola Enterprises).  Bernanke speaks at 9am before the Senate Banking Committee on the U.S. economy and monetary policy.  Note that we saw the SEC formalize new short-sell rules yesterday and we saw the lowest new home sales data on record. 

The broad market continues to hover within a 1050-1150 trading range, and by all accounts volumes remain on the light side.  From a trading perspective there is simply not much to say – for the moment, conviction is lacking.  What’s the next catalyst?  Maybe state and municipal defaults here in the U.S.  ResearchEdge had some thoughts on this topic this morning:

From a longer term perspective, Analyst Darius Dale wrote a great note yesterday titled, Domestic Pigs, regarding burgeoning state deficits, that includes a series of data points that should not be ignored.  If you would like a copy of this fine note and to trial our subscriber service, email us at To paraphrase the note:

"A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them. 

Currently, 41 States' pension programs are less than 10% funded.  In addition, only 5% of the $587 billion liability for current and future retiree health care and other non-pension benefits is currently funded.

Unfortunately for State governments, purging the balance sheet is only a temporary fix. Across the country, State governments are facing lawsuits from municipalities school districts outraged by budget cuts.

So with their backs against the funding wall, States must find a cumulative $18.8 billion to balance their budgets in remaining months of the current fiscal year and an additional $53.6 in fiscal 2011."  

To be fair, some astute Governors realize the crisis they are facing and are both acknowledging and addressing it.   Most specifically, newly elected Governor Christie told mayors and local officials yesterday in New Jersey to prepare for state aid cuts on a massive scale to address New Jersey's estimated $11BN deficit.  According to Governor Christie:

                        "At some point, there has to be parity between what's happening in the real world and what's happening in the public sector world."

We like what we see and hear from Governor Christie.  State deficits are front and center for us as a macro risk and Governor Christie, at least, is trying to be the one Governor who won't be "falling short" in addressing this macro risk.

On a similar note, I saw Nassim Taleb (“The Black Swan”) speak yesterday at a conference in New York.  Great speech, and the major take-away (nothing new here...) is the seemingly endless whirpool of government debt we now find ourselves in as a nation.  Will all this end well?  I walked out the room vowing to research the lowest debt-to-GDP nations and to move my family there… not a cheerful talk. 

PALM cuts forecasts.  BofAMLCO ups CLH.  CSFB ups FR.  DBAB ups SOL, STP, TSL, YGE.  CITI cuts FITB.  MSCO cuts PALM.  OPCO cuts ANDS.  PIPR cuts GME, PSYS, TRI.  ANDS beats by 6c.  BBI reports inline and Janney downgrades.  CBEH guides higher.  KO to acquire CCE.  CRM beats by 1c.  DT beats estimates.  ESRX beats by 7c.  LTD beats by 3c.  NKE added to Conviction Buy list at GSCO.  PCS beats by 3c.  RBS reports better-than-expected.  REV misses by 10c.  SIRI beats and guides inline.  TQNT beats by 1c. 

Asia mixed overnight.  Europe down roughly 1%. USD +30bps.  Gold -50bps.  Oil -2%. 

S&P 500 PreMarket (last/% change prior close/volume): 
COCA-COLA ENTER        24.90    +29.82%           5114973
INTERPUBLIC GRP           5.7700  -15.40%            5700
EXPRESS SCRIPT           95.65    +9.0 %              174417
DYNEGY INC-A                1.5500  -7.19%              192857
GAMESTOP CORP-A        17.7300 -5.99%              131856
HOST HOTELS & RE       10.9600 -5.76%              5535
SAFEWAY INC                22.2500 -5.32%              3550
CENTURYTEL INC           33.8000 -4.20%              19646
BRISTOL-MYER SQB       25.7000 +4.01%             2000
COCA-COLA CO              53.0000 -3.92%              315153
SUPERVALU INC             14.7600 -3.34%              2000

Today’s Trivia:  There are 14 punctuation marks in English grammar.  Can anyone name half of them?

Yesterday's Answer:   The strongest muscle in the human body is the jaw muscle.  Additionally, there’s a correction from yesterday

Best Quotes:  “In a January 13th Nightly Business Report interview, NY Fed President Bill Dudley noted that the Fed’s “exceptionally and extended” language indicated rates would not rise for at least six months.  To be precise, Dudley stated “What I want to stress is extended means at least six months.  It could be a year from now or two years from now.  It depends on how the economy develops.”  That is a strong statement considering he is the Vice Chairman of the FOMC.  “Exceptionally and extended” had already become the watch words in FOMC statements, now they have become the hallmark of any Federal Reserve communiqué to send the  clear message that FOMC policy has not changed.  Every time the phrase appears, investors reset the calendar for easy policy for a minimum of 6 months from the latest appearance date.  Considering the wide variety of programs and policies involved in this easing cycle, it is good that the Fed has identified a tag line that clearly identifies its intentions.  As a result, investors will be looking for this phrase anytime they are uncertain about the status of monetary policy.  Also, the first shift  in the phrase will signal to investors that the probability of tightening is rising. 

The phrase once again appeared today in Chairman Bernanke’s prepared testimony to the House Financial Services Committee and will be spoken again tomorrow in front the Senate Banking Committee.  The Chairman successfully allayed fears that the latest “technical adjustments” from the Fed were not tightening moves.”  --Mike O’Rourke, BTIG

Wednesday, February 24, 2010

Morning Note (Tyler)...

Futures flat this morning ahead of Ben Bernanke’s congressional testimony today and tomorrow.  Unemployment will be the main topic that legislators will inquire about- in particular, how Fed policy can assist small to mid-sized businesses who continue to struggle in the current environment.   Regardless of the answer, Congress is sure to throw more money at the problem in the form of complex legislation.  The Senate is scheduled to vote today on a $15 bln bill that gives tax breaks to businesses who hire those that are unemployed for longer than 60 days.  Many market analysts have been speaking lately about how ‘Career Risk’ becomes the ultimate factor in investment decisions.  These types of legislation are merely the political form of career risk, where legislators hope to please there constituents right before the next election season.   Is this really how we want to solve these problems by throwing more money at it and hope it goes away?  Why not try to PRODUCE something where there is DEMAND to create jobs?  Everything is just looking more and more artificial to me.  I know you’ve heard it a thousand times….

The consumer confidence number sent the market into a tailspin yesterday and here is what one of the consumer confidence board member’s said:

Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (Feb. 1983, 17.5). Consumers' short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending.

One thing that stuck out to me was the mention of ‘short term outlook’.  As I hear more and more about ‘short term outlook’ in the economy, I can’t help but question where all of the ‘wise-men’ went?  It seems this generation of Americans are constantly looking for that next short-term victory to satiate our animal instincts like some John Steinbeck novel.  From this macro perspective, I’d want to be long the VIX. As any unforeseen negative data like consumer confidence is twice as detrimental as it used to be. 

In other news, Greece is playing a game of “chicken” with its 10-yr bond sale this week.  Citi ups OKS, Credit Suisse ups FPL, MPG, Goldman Sachs ups EOG, Morgan Stanley ups UA, Deutsche Bank cuts STEC, Goldman Sachs cuts APA, Oppenheimer cuts NBL.  Harvard Professor Ken Rogoff says, “China’s economic growth will plunge on a debt fueled bubble”.

Asia down -1% overnight.  Europe mixed.  USD -20bps.  Oil -20bps.  Gold -80bps. 

S&P 500 PreMarket (last/% change prior close/volume): 
H&R BLOCK INC  19.7300 16.48    -16.47%
AUTODESK INC  25.6600 27.39    +6.74%
MILLIPORE CORP            88.8700 91.20    +2.62%
MATTEL INC      21.8000 21.28    -2.39%
GENWORTH FINANCI      15.2600 15.60    +2.23%
COMCAST CORP-A         16.1400 15.80    -2.11%
STATE ST CORP            45.8600 44.90    -2.09%
KB HOME           16.2200 16.55    +2.03%
DENBURY RESOURCE      13.5800 13.85    +1.99%
MBIA INC           4.8100  4.90      +1.87%
FPL GROUP INC  46.8000 47.15    +1.84%
AMERICAN INTERNA       26.7600 27.25    +1.83%
RANGE RESOURCES        50.6300 49.77    -1.7 %
EXPEDITORS INTL          36.9100 37.49    +1.57%
EOG RESOURCES           89.9100 91.28    +1.52%

Today’s Trivia:  What is the strongest muscle in the human body?

Yesterday's Answer:   Handball is the 3rd most popular sport in Germany.

Best Quotes:  “No one… and we truly mean no one… had been expecting these figure to drop this severely, for the other consumer confidence indicators that we pay heed to such as the Acnes weekly figures had been weak, but they had not been “this” week, nor had the monthly figures from the University of Michigan.” -Gartman

Tuesday, February 23, 2010

Morning Note...

Futures -35bps this morning as solid earnings from U.S. retailers Home Depot (+1%) and Sears (+2.5%) counterbalance lower earnings overseas from European financials (Commerzbank -6%, Raiffeisen -10%) and weaker-than-expected German consumer confidence.  Shanghai was down another 70bps last night, giving China a -1.2% total since re-opening after the New Year’s holiday.  On the sovereign risk front, there was speculation out of the Al-Ittihad newspaper overnight that Dubai’s government had allocated roughly $5 billion to Dubai World, thus quelling some default concerns there.  On the other hand, sovereign credit levels were wider this morning as a Bloomberg headline indicated Greece might bail on their proposed bond offering (4:55am: *GREEK DEBT CHIEF SAYS NEW BOND DEAL `NOT ON THE CARDS').  The U.K.’s Mervyn King said this morning that we would not be opposed to reinstating quantitative easing and may have revived some “double-dip recession” fears there.  The CaseShiller Home Price Index will be released at 9am today, and Consumer Confidence will post at 10am.  Recall that - including the $8 billion 30-year TIPS auction yesterday - the Department of Treasury will auction approximately $125 billion of new securities this week.  The issuance includes $44 billion in 2-year Notes today, $42 billion in 5-year Notes on Wednesday, and $32 billion in 7-year Notes on Thursday.

It’s worth mentioning that volumes remain very light, and yesterday was one of the slowest days of the year.  The market seems to have a pre-FOMC release “wait and see feel” ahead of Bernanke’s testimony Wednesday and Thursday, but don’t we all already know what he’s going to say?  Interesting to note that the #3 most-read story on BBERG this morning is about Harvard’s Ken Rogoff warning of sovereign default risk ahead.  This is nothing new, but it’s interesting how everyone’s year-end “2010 will be the year of sovereign default” has stalled somewhat.  (We have seen some weakness, but do investors truly think Greece, Spain, Ireland, et al will be neatly contained?  Of course, ResearchEdge makes the solid point this morning that Spain, Greece, and the UAE are already down 12% YTD and this may all be priced in.).  UBS’ Art Cashin also mentions this topic in his morning note:

The End Of The Euro? – In this morning’s FT, Gideon Rachman has an op-ed on some potentially dire consequence of the Greek Crisis. Here’s how he began:

As Greece’s financial crisis rumbles onwards, it has become commonplace to argue that the roots of the problem stretch all the way back to the design of Europe’s single currency. Actually, it is worse than that. The Greek crisis is about the very basis on which European unity has been built for the last 60 years. It threatens not just the euro but the entire edifice of the European Union.

The risk for Europe now is that if the EU does not move forward politically in response to the Greek crisis, it will move backwards – and the long process of European integration could start to unravel.

The EU has always proceeded by creating economic “facts on the ground”, which were intended to trigger political effects. Ever since the 1950s this has worked admirably, as a modest coal and steel community turned into a common market and finally into a Union of 27 nations, with its own parliament, supreme court and foreign policy.

Rachman then goes on to detail some of the history and early aspirations of the European Union. He examines some structural changes that might firm up the Union in this and future crises. He does not end on a very upbeat note, however.

The traditional EU method could only work when the political changes prompted by earlier economic decisions did not seem deeply controversial or unfair to ordinary voters. But the kind of political integration required by the euro affects ordinary citizens at a very basic level – since it involves big choices about taxation and spending.

As a result, it exposes a truth that ardent pro-Europeans are very reluctant to acknowledge. Most citizens of the
EU still feel far more attached to their own nation than to the Union. “Europeans” are much less willing to bail each other out than they are to bail out their own fellow countrymen. West Germany spent billions to turn around East Germany. But there is little sign that the Germans are willing to spend further billions to turn around Greece – with the spectre of similar crises to come in Spain and Italy. The Germans may feel very “European” in principle. But when they are asked to start writing large cheques to support a bankrupt Greek state, they start to feel strangely German again.

As for the Greeks, they too have counted among the most ardently pro-European people in the Union. But the price of any EU bail-out of Greece is likely to be savage austerity measures, overseen by officials sent in from Brussels. That is likely to feel more like colonisation than a voluntary “political union”. So what happens now? It is possible that Greece may yet muddle through this crisis. But, in a world of rapidly rising sovereign debt, the next euro-crisis might only be months away. At that point, the members of the European single currency will once again be asked how much they are willing to do (and to pay) to help each other out. If the answer is still, “not very much”, the euro-area might begin to shed some of its weaker members.

But the consequences could go well beyond the single currency. The EU would have a crisis of confidence and the likely result would be that other powers it has acquired, on everything from immigration to social policy, would come into question. There is more than money at stake in the Greek crisis.

Those are some of the concerns that surround the challenge of the Greek crisis. Like the mortgage crisis, it is unlikely to be contained.

BCAP ups SNI.  JEFF ups LAMR.  ARM announces 15M share secondary.  OPCO cuts AUO.  JEFF cuts BRCD on earnings.  CBI lower on earnings.  CPB cut at DBAB.  UBSS ups CPN.  CVA lower on earnings miss.  BCAP cuts DISCA.  FSLR makes cautious comments.  OPCO cuts GLW.  HD beats estimates.  HLS misses by 13c.  HP to replace RX in S&P500.  JWN misses by 2c.  Scotia cuts LPX.  MELI misses by 1c.  UBSS cuts MIR.  NDSN beats by 10c.  BofAMLCO/MACQ cut PALM.  RSH beats by 1c.  WL files for $250M offering.  XNPT beats by 20c. 

Asia mixed overnight.  Europe slightly lower across the board.  USD +20bps.  Oil -150bps.  Gold -20bps. 

S&P 500 PreMarket (last/% change prior close/volume): 
COMPUWARE CORP        7.49      +3.17%             200
OFFICE DEPOT INC         6.85      +3.01%             35200
AIR PRODS & CHEM        72.00    +2.97%             100
MBIA INC                       5.06      +2.85%             72270
NOVELL INC                   4.80      -2.44%              1800
CORNING INC                 17.38    -2.14%              22570
SEARS HOLDINGS           97.50    +1.92%             16126
MEDTRONIC INC             42.91    -1.72%              4415
FREDDIE MAC                1.23      -1.6 %              8404
CAMPBELL SOUP CO       32.97    -1.58%              2900
H&R BLOCK INC              19.85    -1.54%              4400

Today’s Trivia:  Name the 3rd most popular sport in Germany, behind soccer and Formula 1 Racing.  According to the WSJ, its athletes earn more than $1mm per year in prize money and sponsorships.

Yesterday's Answer:   Belgium was the third nation to establish passenger rail service (1835). 

Best Quotes:  “Good Morning -  The reports out of Home Depot, and Lowe's should be encouraging.   The Case Shiller Home price Index report, could be a rallying event.   The German IFO number(German confidence number) saw its first down tick in 11 months, but they've been hit with the worst winter in 14 years.  Earning stories continue to be good.  Technically the markets are still constructive.  1104.90 is the 50 day moving average, still holding support.   There has been a starting gun of M&A activity.  Speculation and actual mergers should provide and underlying bid.   So why aren't we rallying?  The lack of conviction and flow makes it difficult to get revved up about the prospects of the market.   Like the winter months there seems to be a cloud hanging over the market.   Politics appears to be the ever present cloud.  We are back to healthcare.  Back to taxation.  Back to hording of cash.    Back to a standstill.   Watch the large cap banks, they seem to be gaining as a place to put money. Still under owned.  We’ll have a couple of indicators to sift through this morning. At 9 am, the Case-Shiller Home Price Index is released and the consensus is looking for a 0.1% MoM increase in December after a 0.2% increase in November. At 10 am, the Conference Board releases in consumer confidence index for February and the market is looking for a modest decline to 55.0 from 55.9 last month.”  --trader note

“Market has experienced a short term bounce, but at this point we are expecting the short/medium term downtrend to resume. Reasons for this include: being in late stages of easy monetary policy, outlook for globally rising tax rates, peaking US GDP growth rate, 7.8mm homes either late or in foreclosure, oper exp have been slashed already, china growth is uncertain, and uptrend since march has been broken.”  --BCAP “trading call”

Monday, February 22, 2010

Morning Note...

Futures +40bps this morning as markets digest a slightly weaker USD, a looming Greek debt offering some time this week, China’s return following its New Year’s Holiday, a large oil services sector deal in SLB for SII for $11 billion (merger Monday is back?), in-line earnings from Campbell’s (CPB), and an upside earnings surprise from Lowe’s.  LOW is trading 2% higher and also made bullish comments on consumer behavior.  The SLB/SII deal is stock-for-stock, as SII shareholders receive 0.7 shares of SLB per SII share and the merger values each SII share at a +22% premium to Friday’s close.  Overseas, Japan surged nearly 3% and Hong Kong traded up 2.5%, but Shanghai was down 50bps after taking a week off.  Recall that the most recent Chinese tightening (in the way of increased reserve requirements) was announced after the China market close on February 12th thus making last night it’s first chance to react to that news.  Markets are also buoyed by Fed Chairman Bernanke’s expected testimony this week, as he is expected to reassure Congress that our low interest rate monetary policy will remain in place for some time.  He’ll be on the Hill starting at 10am Wednesday to deliver his snow-postponed semi-annual testimony.  This week we’ll get plenty of economic data, including home sales & prices (CaseShiller tomorrow, new home sales Wednesday), durable goods (Thursday), initial jobless claims (Thursday), GDP (Friday), and personal consumption (Friday).  In Europe, this week’s debt offerings will be closely watched – Belgium today, Portugal Wednesday, Italy Thursday and Greece somewhere within…   In other news, WSJ’s Heard on the Street column in positive on bank stocks and Barron’s was positive on the DRD/WAG deal. 

Volumes remain light even with the return of Chinese markets after their holiday, and concerns abound that this “lack of conviction” despite higher global markets creates greater risk of a sizeable pullback ahead.  According to BofAMLCO’s Chief U.S. Market Analyst MaryAnn Bartels:

The message to take away from our comments this morning are that Stocks rallied from extremely oversold readings and cleared resistance to open a test of S&P 500 1130-1150. Marginal new highs are possible but this rally lacks conviction.  Volume remains extremely light.  This correction is completed but the intermediate indicators point to deeper correction later in the year.

Further, if you are feeling particularly bearish, see below for recent comments out of Asia from both Marc Faber (Gloom, Boom & Doom Report) and respected Asia-Pacific analyst Christopher Wood (CLSA):

U.S. Stocks to Fall, Faber Says; Wood Doubts Recovery 2010-02-22 11:44:03.997 GMT By Masaki Kondo and Mike Firn
Feb. 22 (Bloomberg) -- U.S. stocks will probably fall this year, according to investor Marc Faber, and the country’s economy won’t face a “normal” recovery as job cuts dent consumer spending, said CLSA Asia-Pacific Markets’ Christopher Wood. Faber advised investors to buy U.S. stocks on March 9, 2009, when the Standard & Poor’s 500 Index reached its lowest level since 1996. The gauge rallied 64 percent since then to 1,109.17 and the Dow Jones Industrial Average gained 59 percent as more than $700 billion in government spending boosted the economy. “I would look at the market to close probably a bit lower than it started the year in 2010,” Faber said today in an interview before a speech at the CLSA Japan Forum in Tokyo. “Equally, I don’t think we have a huge downside risk. If the Dow and the S&P dropped, say 15-20 percent, in other words the S&P towards 900, I think there would be more stimulus and more quantitative easing.” The U.S. unemployment rate dropped to 9.7 percent in January, the Labor Department said on Feb. 5, owing in part to the federal government hiring temporary workers to conduct the 2010 census. Wood, an equity strategist at Hong Kong-based CLSA, said an increase in lower-paid temporary workers will be “very damaging” to U.S. consumer confidence. “I don’t believe in a normal U.S. recovery,” Wood told reporters today at a briefing in Tokyo during the CLSA Japan Forum. He recommended investing in gold and in stocks related to emerging Asian markets. “The endgame will be a systemic, public-sector debt crisis in the Western world, leading to debasement of Western paper currencies, leading to the end of the U.S. dollar-peg standard,” Wood said. “Long-term investors only need to own Asian equities, Asian assets, gold and gold-miner stocks.” Faber, who publishes the Gloom, Boom and Doom report, correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 climbed 10 percent between then and its record of 1,565.15 seven months later. “I would imagine it’s conceivable that the market makes another marginal new high into April, and that the second half of the year is not very rewarding,” Faber said today.


Asia mixed (Oz, Japan, HK up; China down).  Europe mixed to slightly higher.  USD -5bps.  Oil +5bps.  Gold -30bps. 

S&P 500 PreMarket (last/% change prior close/volume): 
INTERPUBLIC GRP           7.62      +7.17%             600
SMITH INTL INC             40.40    +7.16%             9185618
SCHLUMBERGER LTD      60.35    -5.56%              3949375
DYNEGY INC-A                1.70      +3.03%             29450
SPRINT NEXTEL CO        3.58      +2.58%             116485
WALGREEN CO               35.73    +2.5 %              15620
WEATHERFORD INTL      17.00    +2.41%             28634
AES CORP                     12.47    +2.38%             9200
BOSTON SCIENTIFC       7.87      +2.34%             6500
LOWE'S COS INC            23.60    +2.03%             1065040
MATTEL INC                  22.22    +2.02%             1000

Today’s Trivia:  After the U.S. and the U.K., what nation was third to establish passenger rail service in 1835?

Yesterday's Answer:  Thomas Jefferson was the first President inaugurated in Washington, DC.   

Best Quotes:  “A Greek Recue Package? – Over the weekend, Der Spiegel carried a story that the German government was cobbling together a package to address the looming Greek crisis. The rumors are that the package may be in the form of loan guarantees. As we projected when the crisis arose, it could take the form of Germany and others backing the 22 billion in Euro bonds that Greece will need to refund in April and May. Using backing in the package would mean no initial outlay from the rescuers. It would also allow Greece to do the refunding at a “normal rate” instead of a panic premium. That seems to be the current thinking. Some currency traders speculate that a rescue package may not rescue the Euro so readily. They think that, with so many ailing members, the ECB will be forced to keep rates low longer than other central banks.”  --Art Cashin, UBS

Friday, February 19, 2010

Morning Note...

Futures are -30bps this morning but have rallied off the early “Fed tightening” lows as CPI data – in contrast with yesterday’s “hot” PPI – indicates little in the way of inflationary pressure.  Month-over-month Consumer Prices were +0.2% (flat against the prior reading) vs. the +0.3% expectation.  Ex-Food & Energy, the result was -0.1% vs. the +0.1% expectation.  Year-over-year Consumer Prices were +2.6% vs. the prior +2.7% and the +2.8% expectation.  Year-over-year ex-Food & Energy was +1.6% vs. the +1.8% expectation.  USD strength is also back in play following the Fed’s 25bps Discount Rate hike (more on that below), and that may weigh on equities.  Consumer Confidence is due at 10am and recall that today marks options expiry.  As a result, expect larger than normal volumes at the open and close.  In earnings news, CBS is trading down 5% after reporting in-line results, and DELL is also down 5% after beating estimates by 1c.  Solar giant FSLR beat by 13c and guided in-line, but us trading down 8% on several downgrades.  On the positive side, INTU beats by 6c and guides higher as the stock trades up 6% pre-market.  JCP also trades up 4% on an earnings beat.  In other corporate news, the WSJ reports that SLB is in talks to buy SII.  Overseas, UK retail sales dropped more than 2x what economists had forecast, largely due to poor January weather, i.e. shopping conditions.  Note that the markets may briefly pause at 11am, as golf-crazed Wall Street stops to watch the Tiger Woods news conference. 

All the talking heads are clamoring this morning over the Fed’s Discount Rate hike at 4:30pm yesterday.  Everyone has an opinion.  Considering the view here from the cheap seats, I would argue that it’s a “non-event-to-slight-positive,” if anything.  First, the Discount Window doesn’t amount to much, and it appears to be a largely symbolic move by the Fed that merely announces, “we’re awake.”  Second, I have my doubts as to whether the government will ever be able to get stimulus withdrawal correct, but this type of clear, calculated, well-thought-out maneuver that indicates less government intervention in the marketplace rather than more reads as a net positive to me.  I don’t often do this, but amidst all the write-ups this morning, I thought Mike O’Rourke’s (BTIG Chief Strategist) was best, so I am basically including it in its entirety:

Over $87,731,000,000 Served.

That is the current amount of outstanding borrowings at the Federal Reserve’s Discount Window - $87.7 Billlion.  Those borrowers are just  about the only market participants who will be influenced by today’s surprise move by the FOMC.  The simple fact is that any institutions still borrowing at the Discount Window have bigger problems than the extra 25 basis points the Fed is charging.  Needless to say, the timing of this move is a surprise, although the move itself was telegraphed just over a week ago.  Now we better understand Chairman Bernanke’s urgency to get his testimony out there last week, despite the blizzard.  “Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate.”  It looks like “before long” translates to 8 days.  Last month, the NY Fed President told us that “extended period” means 6 months.  Before this process is complete, we will be able to publish a Fed timeframe dictionary.  We will keep an eye out for a translation of dissenter Kansas City Fed President Hoenig’s “some time” timeframe for low rates, which was disclosed yesterday in the release of the January FOMC minutes.

The Fed Chairman wanted to provide a “heads up” to the market regarding “normalization” policy, since it was such a large component of the FOMC minutes released yesterday.  Clearly, the FOMC did not want to wait until the Chairman’s rescheduled testimony next week.  As we noted last week, unless you are a bank in trouble, the Discount Rate is symbolic.  The Fed Chairman was clear to note in his testimony that the raise in the Discount  rate “should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.”  In the January FOMC minutes, the Fed highlighted why it wants to restore the 100 basis point spread, explaining “Setting the spread reflects a balance between two objectives: encouraging depository institutions to use the discount window as a backup source of liquidity when they are faced with temporary liquidity shortfalls or when funding markets are disrupted, and discouraging depository institutions from relying on the discount window as a routine source of funds when other funding is generally available.”  This theme of getting banks to find other sources of funding appears to be repeating in Fed commentary.

The Fed also made certain that the surprise move was accompanied by some explanation.  Less than 2 hours after the Fed increased the Discount Rate from ½% to ¾%, Fed Governor Elizabeth Duke addressed the move in a prepared speech:

“Earlier today, the Board announced that we had approved an increase in the discount rate, and that we are shortening the typical maturity for primary credit loans to overnight. With these changes, we expect that banks will use private sources for normal funding and only use primary credit as a backup source of funds. As I mentioned earlier, the discount rate is the rate we charge banks that borrow at our discount window. It is not the rate we target for monetary policy purposes. I'd emphasize that the changes are simply a reversal of the spread reduction we made to combat stigma and like the closure of a number of extraordinary credit programs earlier this month, represent further normalization of the Federal Reserve's lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses.”

The Fed will now be able to morally claim it is taking action (in contrast with 2003-2004, but then the spread remained intact at 100 basis points throughout).  The reality is that the action will have little influence on the economy.  Some will say a tightening of any kind is tightening, but even if you take a bucket of water out of a pool, the pool is still full.  This pool is still very full.  By way of example, consider not too distant history in 2007.  Despite the move that ensued over the next couple of months (which was one of the most misguided rallies in history), it was clearly a mistake for investors to buy the market because the Fed cut the Discount Rate on August 17, 2007.  For similar reasons, we believe it is a mistake to sell the market because the Fed has increased the Discount Rate.

KBRO cuts CAN.  APOL earnings miss but increases buyback to $500M.  ARUN beats by 1c.  MSCO cuts ATW.  CBS lower on in-line earnings.  DELL beats by 1c.  ECLP beats by 5c.  HUN beats by 39c.  INTU beats by 6c.  JCP beats by 2c.  LIZ upped at KEYB.  NANO misses by 2c.  CSFB cuts PXD.  SCHW upped at GSCO.  BofAMLCO reinstates WFT at Buy and ups VTR.  CITI ups WBMD.  FBRC ups ADBE.  JPHQ ups GGC.  MSCO ups ESV & RIG.  BofAMLCO cuts WIN. 

Asia lower overnight.  Europe slightly higher and off the session lows.  USD +15bps.  Oil +35bps.  Gold -35bps.

S&P 500 PreMarket (last/% change prior close/volume): 
SMITH INTL INC             37.95    +13.79%           1526632
APOLLO GROUP-A           54.65    -11.07%            619488
INTUIT INC                    32.85    +8.34% 129087
J.C. PENNEY CO              27.42    +5.62% 521162
CBS CORP-B                  13.06    -4.74%  19994
DELL INC                       13.75    -4.71%  2246523
IAC/INTERACTIVEC        20.91    -4.48%  1600
SCHLUMBERGER LTD      63.38    -3.69%  163464
WEATHERFORD INTL      16.27    +3.11% 101529
ELI LILLY & CO               33.35    -3.08%  265
LIZ CLAIBORNE               6.15      +3.02% 3850

Today’s Trivia:  Who was the first President inaugurated in Washington, DC?

Yesterday's Answer:  The 1790 census totals indicated a population of 3.9M. 

Best Quotes:  “Fed Statement:  Like the closure of a number of extraordinary credit programs earlier this month, [discount lending] changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee.  That says it all, and that is all that the Fed wanted the market to understand: this is not... repeat NOT… a tightening move of any kind” –Gartman

For the bears, here’s the scary BBERG story of the day:

Buffett’s ‘Dangerous Business’ Ensnares Municipal Bond Insurers
2010-02-19 05:00:00.6 GMT By Christine Richard and Darrell Preston
     Feb. 19 (Bloomberg) -- Forewarned bankruptcies linked to infrastructure projects from Las Vegas to Harrisburg, Pennsylvania, may prove Warren Buffett’s conclusion that insuring municipal bonds is a “dangerous business.”
     Ambac Financial Group Inc., the second biggest bond insurer, faces as much as $1.2 billion in claims if a judge in Nevada allows Las Vegas Monorail Co., which runs a train connecting the city’s casinos, to reorganize in Chapter 11 bankruptcy. The City Council of Pennsylvania’s state capital shelved a plan to sell taxpayer-owned assets to meet payments on
$288 million of debt used for an incinerator funded in part with bonds insured by a unit of Bermuda-based Assured Guaranty Ltd.
Harrisburg is weighing a possible bankruptcy filing.
     With state tax collections last year through September showing the biggest drop since at least 1963, as measured by the Nelson A. Rockefeller Institute of Government in Albany, New York, local governments are seeking concessions from creditors of public projects, including bond insurers. The moves further threaten companies backing $1.16 trillion of public debt that already face $11.6 billion of claims on collapsed securities backed by mortgages.
     “It is a worst-case scenario if the dynamics of the municipal bond market change,” said Rob Haines, an analyst who covers the bond insurance business at CreditSights Inc., an independent research firm in New York. “The companies have modeled in virtually no losses.”

                        Insurer Reserves

     Ambac, MBIA Inc. and Assured Guaranty, the three largest bond insurers, have set aside 0.04 percent of the total public finance debt they insure, or $520 million, to pay claims on municipal securities, according to regulatory filings by the companies.
     Local governments are struggling with depressed property values and sales, 9.7 percent unemployment and a slowdown in consumer spending that has cut tax revenue.
     Last year, 183 tax-exempt issuers defaulted on $6.35 billion of securities, according to Miami Lakes, Florida-based Distressed Debt Securities Newsletter. That’s up from 2008, when
162 municipal borrowers failed to meet obligations on $8.15 billion of debt. In 2007, 31 of them defaulted on $348 million of bonds.
     “In the past, things had a way of getting worked out,”
said Jim Ryan, an insurance analyst with Morningstar Inc. in Chicago. “States might have stepped up and helped out, but bottom line is that the states are in trouble.”