Tuesday, February 9, 2010

Morning Note...

Futures surge +1% this morning on positive earnings releases in the U.S. and speculation of an ECB-led bailout of Greece.  Rumors are swirling overseas as ECB Chair Jean-Claude Trichet returns from Australia to Europe early in anticipation of a special February 11th meeting widely believed to settle the fate of Greek sovereign debt.  While an ECB spokesman says the travel change was purely due to logistics “because there was some concern that he would not catch a connecting flight and therefore miss the EU summit,” the EUR has strengthened and the USD weakened on the possibility of a Greek bailout.  (Further, watch for a potentially swift snap-back in the Euro currency…according to Susquehanna “traders and hedge funds have bet nearly $8B against the euro in the largest ever short position of the currency. Concerned about a eurozone debt crisis, traders have built up more than 40,000 contracts against it.” Additionally, according to Bloomberg news, European Commission President Jose Barroso actually said “investors would be wrong to bet against the euro.”)  Major U.S. companies KO and MCD delivered positive news this morning – KO reported in-line earnings and is trading ~$1 higher while MCD announced that same-store-sales rose 2.6%.  To the down side, last night, ERTS posted in-line earnings results, but the stock is down ~8% in early action on lowered forward guidance.  In other corporate news, Toyota issues a second apology along with its Prius recall.  [Of course, this begs the critical question, isn’t the plural of Prius “Prii?”]  Wholesale inventory data is due at 10am today.  Recall that Fed Chairman Bernanke testifies before Congress tomorrow.  See quote section below for more details. 

Our federal government is closed for a second day as a result of the 30-inch snowfall in the Washington, DC area.  [insert your favorite “things will probably run better” or “maybe this is how we can reduce the deficit” joke here.]  Obama today will meet with Republican and Democratic leaders in a “Bipartisan Health Summit” to “review the best ideas from both parties in order to move forward with passing reform.”  Of course, there has been some speculation that he will perhaps table health care reform to tackle the deficit instead.  Job growth obviously remains the critical focus in Washington, and that typically starts with small businesses and small business lending.  Capital Economics, out of Toronto, has some thoughts on that this morning:

The contraction in bank loans shows no sign of abating even though the economic recovery is in full swing. Since peaking in October 2008, the value of all loans and leases at US commercial banks has contracted by $630bn, or 8.6%. To some extent, the decline still reflects the recession-related drop in demand last year. Nevertheless, it is worrying that demand is still falling six months after the recession ended. More worrying still is the evidence that supply constraints are playing an important role in this contraction. 

What makes the contraction in lending even more remarkable, and possibly alarming, is that it has happened despite the Fed's efforts to boost liquidity through its large-scale purchases of Treasury securities and agency MBS. In theory, commercial banks could have used those reserves to more than double the size of their loan books. Those asset purchases will be completed within the next couple of months. What happens then is anyone's guess. The debate has centred on what impact the end of the purchases will have on interest rates, but the impact on the quantity rather than the price of credit could be the bigger story. There is a good chance that the contraction in bank credit will accelerate, which might eventually prompt the Fed to resume its asset purchases.       

The banking levy and reforms recently proposed by the Obama administration may have unintended effects on the supply of bank credit as well. The problem with a tax like this is that, although it is being levied on the liabilities side of banks' balance sheets, it could constrain the growth in assets, in particular loans, as well.

LCAV reports -19c/share vs. -49c/share estimates.  HAR beats by 33c and beats on revs.  HIG beats by 11c and guides in-line.  BofAMLCO ups MON.  CSFB ups PETM, KMX.  FBRC ups SAP.  GSCO ups XCO.  JPHQ ups FTNT, SNWL, WBC.  MSCO ups CAT, IR, ROK.  BARD ups PSB.  WEFA ups LAMR.  BofAMLCO cuts VOLT.  CITI cuts APD.  JEFF cuts TMRK on earnings miss.  JPHQ cuts WBSN. 

Asia mixed overnight.  Europe +25bps on average.  USD -30bps.  Oil +1%.  Gold +70bps. 

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
ELECTRONIC ARTS         16.03    -8.35%
HARMAN INTL                38.20    +7.61%
DEVELOPERS DIVER        8.79      +5.52%
COVENTRY HEALTH        23.60    +5.17%
NYSE EURONEXT            23.65    +5.11%
IAC/INTERACTIVEC        22.15    +4.68%
PRINCIPAL FINL              21.32    -3.92%
RANGE RESOURCES        48.13    +3.64%
CATERPILLAR INC           52.60    +3.58%
COGNIZANT TECH-A       45.25    +3.45%
NOBLE CORP                  40.20    +3.24%
WYNDHAM WORLDWID   21.33    +3.19%
GAMESTOP CORP-A        19.07    -3.15%
MASSEY ENERGY CO       39.45    +3.11%

Today’s Trivia:  Name the only vegetable or fruit that is never sold frozen, canned, processed, cooked, or in any other form except fresh.

Yesterday's Answer:  The Boy Scouts of America was founded on February 8th, 2010. 

Best Quotes:  “The markets are also gearing up for Chairman Bernanke’s House Financial Services Committee testimony about unwinding the Fed’s emergency programs.  A look at the Fed’s Balance sheet shows that the majority of the targeted emergency programs enacted throughout 2008 have wound themselves down in the manner the Fed predicted.  That temporary targeted liquidity was subsequently replaced by the Fed’s purchase of Treasuries and Mortgage Backed Securities.  The Treasury purchases were completed in October, and the MBS purchases will be completed next month.  As it turns out, St. Louis Fed President James Bullard said in an interview today that the Fed could start testing the waters on selling assets in the second half of 2010.  What is noteworthy here is that Bullard has been a dove and the primary advocate of keeping the program alive as a permanent policy tool.  Bullard has been optimistic about the recovery, so his comments today do not conflict with his view on the economy, but nonetheless, it was surprising to hear.  We believe the overwhelming majority of liquidity the Fed has pumped has been left at the Fed by banks as excess reserves and has failed to make it into the economy.  Despite the liquidity pump, excess reserves continue to grow and M2 Money supply is only up 1.75% year over year, indicating to us the deflationary pressures still loom.”  --Mike O’Rourke, BTIG

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