Monday, February 8, 2010

Morning Note...

Futures flat to slightly higher (+25bps) this morning as the Northeast digs out of the snow and the markets continue to digest last week’s jobs data and earnings, and investors watch Europe for signs of Greek default and China for signs of tightening.  It’s worth noting that most of the move into the bell late Friday was attributed to rumors of a Greek bailout over the weekend, which failed to materialize.  Light news day overall… CVS reported in-line earnings, L missed, cigarette-maker LO reported lower profits, and toy-maker HAS beat estimates.  Additionally, CIT named John Thain as CEO.  Fed Chairman Ben Bernanke will be on the Hill Wednesday and he’ll be grilled on the forthcoming (so they tell us…) U.S. exit strategy.  $81B of Treasuries will come for auction this week.  (Interesting to note that The High Tech Strategist pointed out that increased appetite for U.S. riskless assets is coming from the U.K. while China has been a net seller – albeit small – of Treasuries.)  Not much news came out of the G7 meeting this weekend, other than a canned statement in support of the Greek plan to reduce deficits there.  In other news, Tim Geithner claimed over the weekend that the U.S. would “never” lose its AAA rating.  Alan Greenspan was on “Meet the Press” and said a U.S. economic recovery is “going to be a slow, trudging thing,” and that he “would get very concerned” if stock prices continue to fall.  Overseas, the CEO of Cheung Kong Ltd. said on Bloomberg Television that the HK property market has risen too fast and buyers must look out for a bubble.  He added “the rise is a bit unusual…there should be a correction at some point.”  Looking ahead, we’ll get U.S. Trade Balance details Wednesday, Advance Retail Sales Thursday, and Eurozone GDP and Industrial Production Friday.  Thursday also brings Initial Jobless Claims and Continuing Claims.  Further, recall that Chinese New Year begins on February 14th this year. 

Just to shake things up on a quiet Monday, much has been made of how small Greece actually ranks on a global scale.  It’s a good point, and toward that end, it makes one wonder, whither the U.S. states like NY and CA whose economies do actually rank high on the global scale?  Whither the municipalities?  Here’s a good quote from Fred Hickey that I read over the weekend:

I don’t think that investors understand that the most fiscally irresponsible major industrialized country in the world (other than the U.K.) is the United States.  The European Central Bank (ECB) never cut short-term interest rates to zero and didn’t engage in rampant money printing (quantitative easing), as the U.S. and the U.K. did.  The current euro crisis was triggered when the ECB announced it was pulling back its emergency financing (the first to do so).  The ECB is enforcing fiscal discipline on some of its most profligate countries (PIIGS – Portugal, Ireland, Italy, Greece, Spain).  Those countries are being forced to drastically cut spending levels and increase taxes to rein in the deficits.  No such fiscal discipline is occurring in the U.S.  California (and other states) is begging for billions of dollars more in assistance and the monster-sized Obama federal budgets for 2010 and 2011 are loaded with wasteful government spending and even more “stimulus” packages.  Even in the worst case – if Europe somehow unraveled – it would likely sink the world economy – causing the Fed to step up its printing.

Here’s another mention of municipalities, from Bloomberg news late Friday afternoon:

Feb. 5 (Bloomberg) -- The $2.8 trillion municipal bond market is a bubble about to burst, as housing and technology did in the past 10 year, said Michael Aronstein, the money manager whose Marketfield Fund returned 31 percent in 2009 by betting correctly on commodity-price swings. Lulled by ready access to low-cost credit, politicians have piled up unsustainable debt service that the public will soon demand they stop paying, he said. Bankers are selling municipal bonds based on unrealistic assumptions of population and revenue, and will be held accountable when they can’t be repaid, he said in an interview. “I think we’re getting quite close,” he said of the collapse of the municipal market. “You’ll see people trying to withdraw money from the municipal bond funds. The big risk comes when you start seeing the tightening credit cycle.”  Aronstein, who manages the $102 million Marketfield Fund and is chief investment strategist at Oscar Gruss & Son Inc. in New York, recommended buying credit default swaps on debt issued by California, the U.S.’s lowest-rated state. Municipal finance faces a collapse because the public sector is relying on “unlimited access” to credit, Aronstein said. That access will dry up as the cost of debt service begins to consume unmanageable shares of government budgets, prompting taxpayers to demand cuts in bond payments. “There’s always a feature in the economy that lives off its credit,” he said, citing the technology and housing sectors. “The next phase of it is government. They’re operating under the same kind of illusion of infallibility and unlimited access to credit.” To mitigate future public excesses, Aronstein said, legislation should be enacted that would hold elected officials to the same standards of fiduciary accountability and conflict of interest restrictions as money managers, he said.

Overseas banks (AIB, BCS, ING, LYG) are all lower on potential Greece exposure.  CVS reports 78c, in-line with expectations.  HAS reports $1.09 vs. 82c.  MSCO ups HD, NWL.  HS beats by 6c.  Barron’s positive MOT.  CSFB ups PCU.  GSCO initiates TSS with Sell.  BARD ups WGO.  BMOC ups JWN.  CITI ups AZO.  CSFB ups WY.  FBRC ups WFSL.  JEFF ups ARAY, CME.  JPHQ ups TMK.  BERN cuts HK.  BMOC cuts RBA.  CSFB cuts LRN.  JPHQ cuts DNB.  BARD cuts ARG.

Asia mixed overnight.  Europe roughly 50bps higher on average.  Oil +25bps.  Gold +125bps.  USD -20bps. 

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
HASBRO INC                  33.55    +8.93% 134052
CVS CAREMARK COR      32.88    +5.83% 505411
CIT GROUP INC              32.00    +4.07% 84473
MOTOROLA INC             6.63      +3.59% 122951
NEWELL RUBBERMAI       13.84    +3.59% 17100
TORCHMARK CORP         45.38    +2.93% 2744
E*TRADE FINANCIA        1.50      +2.74% 388404
FANNIE MAE                  .996      +2.68% 3998
JDS UNIPHASE               7.75      -2.02%  20570

Today’s Trivia:  What American organization was founded on this date in 1910 and is celebrating its 100th anniversary?  (Hint…another organization that shares a variation of the iconic Fleur de Lis is also in the news today.) 

Yesterday's Answer:  According to Men’s Health Magazine, Fresno is the “drunkest” U.S. city, and – get this – Boston (!!) is the least.  (As I said Friday, my money is on Bostonians just being that much better than other cities at hiding it…)

Best Quotes:  “Cocktail Napkin Charting – As noted above, the late Friday reversal rally was primarily the result of rumors of a Greek rescue package. There were also technical contributors to the bounce. The S&P made its intra-day low at 1044. That’s its 200 day exponential moving average. Both Walter Murphy and Stock Market Cycles had listed 1043 as a probable target (darn good call). Friday’s lows will be a critical testing area on any future pullbacks. If they are violated, things could turn very ugly although some see more support at 1030/1035. For today, the napkins suggest early support in the S&P may be around 1048/1052 with the backup 1040/1043. Resistance looks like 1070/1074 and then 1080/1085. We need to be careful because the Friday bounce may have
released enough of the oversold to allow the bears another shot.”  --Art Cashin, UBS

1 comment:

  1. In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy (probably inevitable, large US cities at least are already contemplating insolvency, ten idividual states may well follow) would reflect badly on the "state of the Union" as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn't commit themseves to bonds of longer maturity and that's the beginning of the end.