Wednesday, February 10, 2010

Morning Note...

Futures flat this morning, and well off their highs, as conflicting information continues to dribble out of Europe regarding a potential Greek bailout. According to the latest from Bloomberg news, “German Finance Minister Wolfgang Schaeuble said aid to Greece may extend beyond guaranteeing loans, according to an official who attended a briefing for lawmakers on the eve of a European Union summit that will be dominated by economic issues.”  As a result, the yield on the Greek 10-year note fell as much as 55 basis points, the most since at least 1998, and the two-year note yield tumbled as much as 98 basis points.  In corporate news, DIS is trading lower pre-market despite an earnings beat last night.  China’s search engine giant BIDU is up nearly 10% on earnings.  Telecom giant Sprint is down 5% after missing both earnings and revenue estimates.  Coca-Cola Enterprises (CCE) beat estimates by 2c and Dean Foods (DF) is down 6% on earnings.  In economic news, the US trade balance for December showed a $40.2B deficit, which is higher than the $35.8B deficit forecast.  It is marks a move lower from November’s $36.4B deficit.  In other news, while Fed Chairman Bernanke’s House Financial Services Committee testimony (on the Fed’s stimulus exit strategy) continues to be postponed due to snow in DC, but his prepared statements will be released at 10am and have the potential to move the market.  Additionally, results of the $25B ten-year notes auction are due at 1pm today.   Further, at 1:20pm Fed Governor Fisher speaks in Dallas on the US economy. 

Not sure if anyone caught yesterday’s Wall Street Journal front page story on FNM and FRE, but it seemed to describe a powder keg of risk and politicization that came across as downright frightening.  This is not news news, by any stretch, but it’s worth posting a few paragraphs that caught my eye:

Together with the FHA, [FNM + FRE] fund nine in ten American mortgages.  Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.

By using Fannie and Freddie for [its] initiatives, the white house doesn't have to go to congress for funding.  The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.

The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.

Assistant Treasury Secretary Michael Barr says that because Fannie and Freddie are "owned by taxpayers in the middle of the biggest housing crisis in 80 years," it would be unrealistic to expect the companies wouldn't be used to help stabilize the market.  He says the administration's actions have been "prudent" and "consistent with tax payer protection."

So let me get this straight…the proverbial US housing market stops with FNM & FRE...9 in 10 home mortgages are backed by these GSEs...and they are now more politicized than ever and subject to use (or abuse) by an incumbent administration to perhaps quell whatever midterm election fires need quenching...  Is this going to end well?  Can't we see where this is headed?  Major risk in essentially one place with major political risk associated with it…  If this were a movie wouldn't you be yelling ("no, no, don't go in the basement alone") at the screen right now?

For the gold bugs out there, options shop Susquehanna posted some useful thoughts on skew this morning:

For those who monitor the price of Gold to derive some kind of market sentiment, the following might be useful:  60day put skew has steepened considerably over the past month.  What does this mean?  For the past year or so, skew in the GLD options has been tilted towards the calls; that is, the out of the money calls were consistently priced at a higher volatility than the out of the money puts.  And as the price of Gold used to come in, call skew steepened – or held steady.  Recently though, the GLD put skew has steepened.  While the option market has almost always seemed to account for “higher gold prices,” that is no longer the case.  This time around, demand for puts has increased on the way down.  So again, what does all this mean?

            A)      if you are bullish of Gold here, the GLD calls look more attractive versus the puts than anytime since late 2008 / early 2009

B)      if you think Gold has bottomed for the short term (or long term), selling puts might be an appropriate play – again, this is because the put premiums have increased.

C)      if you want to get long GLD here, I like long call / short put risk reversals.  Ex.  Buy 1 GLD Mar 108c vs selling 1 Mar 103p for near even money.  The trade gets you long .74deltas and would move quickly in your favor if your thesis was correct.

SUSQ positive GOOG and MSFT vs. YHOO and AOL.  CSFB ups HAR.  CSFB/JEFF upgrade ADBE.  BIDU +9% on earnings beat last night.  JPHQ ups BTU, ETR, GET.  BofAMLCO ups DELL.  CPST up 10% on earnings.  DIS beats by 9c and reports revs in-line but trades down 2% premkt.  EOG lower on earnings.  FWLT upgrade at DAVN.  JPHQ cuts MEE.  MT -5% on revenue miss.  NTGR hisher on earnings.  OPEN beats by 7c and BofAMLCO upgrades.  RNWK and VIA/B to separate Rhapdosy into independent company.  S misses by 15c and misses on revenues.  BofAMLCO ups TIF.  TSRA to replace FIF in S&P SmallCap 600 on Feb 18th. UBSS ups VE.  TWPT cuts VTAL.  BARD ups APD, ZBRA.  WEFA ups AINV.  PIPR cuts TLVT. 

Asia higher over night.  Europe +1% on Greek bailout talk.  Gold -35bps.  Oil -20bps.  USD +33bps.

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
DEAN FOODS CO            16.62    -5.78%  105377
MICRON TECH                8.65      -4.74%  1393858
SPRINT NEXTEL CO        3.48      -4.66%  4439764
EOG RESOURCES           90.50    -4.27%  46640
NEW YORK TIMES-A       12.10    +3.68% 47746
ADOBE SYS INC              33.50    +3.68% 100261
WYNDHAM WORLDWID   22.00    +3.68% 5030
GANNETT CO                 14.45    +3.44% 1400

Today’s Trivia:  Given their sheer volume, 99% of the living space on Earth is found in the oceans… so what is the average depth of our oceans?  And how deep is its deepest point, the Marianas Trench?

Yesterday's Answer:  The only vegetable or fruit that is never sold frozen, canned, processed, cooked, or in any other form except fresh is lettuce.

Best Quotes:  “SPH futures settle cheap and saw the consecutive four day streak of new short positions broken. U.S. rallied yesterday and overnight global equity markets are rallying off the European officials comments they may help Greece deal with its budget deficit issues. Have a look at the front page of today’s Wall Street Journal, “Europe Weighs Rescue Plan.” According to the WSJ, Germany is considering a plan with its EU partners to offer Greece and other troubled euro-zone members loan guarantees. Portugese debt auction seems to be in good shape with $13b in demand for the $3b offering, books are closed right now and we're waiting for results. Yesterday, we saw 5:1 advancers to decliners with better up volume than we've seen in some time. The gains were broad-based, with eight of the ten sectors posting gains of 1.0% or better.  Leading the way were the basic materials (+2.8%), oil and gas (+2.0%) and consumer goods (+1.7%) sectors.  Treasuries sold off as risk appetite made a comeback. The 10-year Treasury yield rose 8bps to close at 3.64%. In the FX market, the dollar index sank 0.6%. So the only catalyst that can move this market is the results on these sovereign debt issues over the next couple of days(Italy Friday, Ireland Tuesday, Spain next Thurs) . Trading band in SPH is between 1058.00-1077.00. Selling rallies is still the game plan. Have a good one.”  --trader note

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