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”

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