Tuesday, February 16, 2010

Morning Note...

Happy “Fat Tuesday”… Futures +50bps this morning as strength in global commodities, USD weakness, and bullish news in global financials outweigh the continuing “Greek tragedy.”  In corporate news, Barclay’s is up over 10% on its earnings release.  JPM is reportedly near a deal to acquire RBS’s Sempra units for $1.7B.  Further, other earnings are mixed this morning, as retailer ANF beats and trades up nearly 2% pre-market, food giant KFT is down 2% pre-market, and pharmaceutical giant MRK is down 1%.  In economic news, Empire Manufacturing surprised to the upside this morning, at 24.91 vs. the expected 18, signaling growth in New York and parts of New Jersey and Connecticut

It’s worth noting that despite no clear resolution to the Greek debt dilemma – including some negative sentiment coming from Germany (see quote section below) – futures remain higher this morning.  Admittedly, that’s a bit of a surprise, but set against that backdrop, perhaps Gold +2.5% this morning makes sense… Looking ahead, this week brings heavy earnings in tech (ADI, AMAT, HPQ, NVDA, NTAP Wednesday and DELL Thursday), retailer earnings (ANF this morning, WMT Thursday, and JCP Friday), and European financials earnings (BCS today, ING/BNP Paribas Wednesday, SOcGen, AXA, Swiss Re on Thursday).  Additionally, there is a European Finance Ministers meeting in Brussels today, although all reports indicate there won’t be a public aid package announced for Greece out of this meeting.  We’ll get master trust data from the credit card companies later today, and the most recent FOMC meeting’s minutes will be released tomorrow.  In terms of economic data, we’ll get a read-through on inflation with Thursday’s PPI release and Friday’s CPI.  China will be quiet all week given the New Year Holiday there, and Congress is on recess until next week. 

Note that the $787 billion stimulus package celebrates its one year anniversary tomorrow… In hindsight, will historians point to that date as “America turning the corner” or “America sowing its own seeds of destruction?”  Over the course of the weekend, I came across multiple references to the recent work of economists Carmen Reinhart and Kenneth Rogoff on U.S. debt levels.  The quote below is from a US Equity Strategy piece from CSFB, and it was echoed in Friday’s WSJ op-ed from Stanford economist Michael J. Boskin titled “When Deficits Become Dangerous:”

In a paper titled “Growth in a Time of Debt” that will be published in the May 2010 American Economic Review, professors Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University provide some possible answers.  Their analysis is based on data for forty-four countries spanning about two hundred years.  The dataset they work with incorporates 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements and historic circumstances.  What Reinhart and Rogoff find in their analysis is very sobering given the current budget position of the United States government.  Right now, gross government debt equals 84% of GDP.  That puts us in a “better” position that Japan or Greece, but a less favorable one than the UK or Germany

More importantly, the United States appears to be uncomfortably close to a level of debt relative to the size of the economy that has historically been associated with a significantly slower growth profile.  Reinhart and Rogoff find little, if any, relationship between economic growth with government debt at “normal” debt levels.  But when gross public debt exceeds 90% of GDP, median growth rates are more than one percent lower than otherwise for advanced economies.  Average (mean) growth rates are more than two percentage points lower.

Unfortunately, these results make intuitive sense.  As government debt climbs to unusually high levels, two things happen.  And neither one of them is “growth positive.”  First, austerity budgets become the order of the day – taxes get raised and government employment and spending gets cut.  (This is already happening at the state level in the United States.)  And second, interest payments on the government debt rise rapidly, “crowding out” more productive types of government activity and/or forcing tax rates higher than would otherwise be the case.

Boskin adds:

The Obama budget take the publicly held debt to 73% and the gross debt to 103% of GDP by 2015, over this precipice.  The president’s economists peg long-run growth potential at 2.5% per year, implying per capita growth of 1.7%.  A decline of one percentage point would cut this annual growth rate by over half.  That’s eventually the difference between a strong economy that can project global power and a stagnant, ossified society.

Such vast debt implies immense future tax increases.  Balancing the 2015 budget would require a 43% increase in everyone’s income taxes that year.  It’s hard to imagine a worse detriment to economic growth. 

ANF trading higher on earnings.  MSCO cuts GPS.  CITI ups the telecom sector to Market Weight as it believes earnings estimate revision trends should turn positive.  BofAMLCO ups NIHD, CPT, EQR, ESS, UDR, AIV, BRE.  CSFB ups DBK, ADBN.  DBAB ups RNR, STO.  GSCO ups LEN, KBH, ADSK, GET.  HSBC ups FM.  JEFF ups HCP.  JPHQ ups ALL, GSK.  UBSS ups PM, DLTR, TGT.  GSCO cuts PHM, PNK, PENN, MWA.  BERN ups CMI, MRO.  WEFA ups EP.  IHG trading lower on -19% net profit.  MSCO cuts JCP.  Barron’s positive ORCL.  PMI lower on earnings.  WEFA ups QSII.  ING raises RTP tgt.  MOKE ups SNV.  TRA to be acquired by Yara for $41.10/share.

Asia higher overnight (note China is closed all week).  Europe is trading roughly 50bps higher on average.  USD -33bps.  Oil +175bps.  Gold +250bps. 

S&P 500 PreMarket (last/% change prior close/volume): 
CONVERGYS CORP         12.58    +6.61% 1000
CINTAS CORP                23.00    -6.5 %  6644
INTL GAME TECH            18.95    +4.81% 1001
SEMPRA ENERGY            51.70    +4.49% 500
WASTE MANAGEMENT    33.25    +4.46% 1912
AMERICAN CAPITAL        3.31      -4.34%  2013
EL PASO CORP               10.45    +3.98% 6174
ALLEGHENY TECH           43.98    +3.7 %  100
WEYERHAEUSER CO       40.84    +3.29% 700
AUTODESK INC              25.01    +3.26% 8210
DARDEN RESTAURAN      40.26    +3.26% 47975
FREEPORT-MCMORAN    76.00    +3.15% 175396
FOREST LABS INC          30.00    +3.09% 185
TRANSOCEAN LTD          85.90    +3.02% 44572
COMCAST CORP-A         15.80    +3.0 %  2800

Today’s Trivia:  Name the most populous city to ever host the Winter Olympics. 

Yesterday's Answer:  Amherst/Williams is one of college basketball’s oldest and best rivalry games…  

Best Quotes:  ““Which brings us to a poll this past weekend in Bild am Sonntag – a leading German newspaper – of the German people which showed a stunning 67% are unwilling to give any of their tax money to Greece to aid that nation in restoring its fiscal circumstances, and that 53% are now willing to toss Greece out of the Union.”        – The Gartman Letter

“Companies Pull Most Bond Sales Since ‘07 Crisis: Credit Markets  2010-02-16 10:53:17.609 GMT By Bryan Keogh
Feb. 16 (Bloomberg) -- Companies are pulling bond sales at the fastest pace since the credit markets seized up 2 1/2 years ago on concern that the inability of European governments to trim their budget deficits will threaten a global recovery. At least 16 borrowers including Montreal-based airplane maker Bombardier Inc. and Italian betting company Snai SpA have postponed or withdrawn $7.3 billion of debt sales over the past month, according to data compiled by Bloomberg. That’s the most since more than 50 were canceled in the months after financial markets began to freeze in July 2007.”               --Bloomberg News

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