Thursday, February 25, 2010

Morning Note...

Futures -1% this morning and drifting lower on a weaker EUR and a stronger USD ahead of a potential downgrade of Greek debt (and renewed fears over Spain) and weaker-than-expected European consumer confidence.  Europe is trading down 1% on average, and Asia was mixed overnight.  In economic news, there was some positive news on the Durable Goods front, but the influence of unemployment looms larger as futures sold off on the 8:30am release.  Initial Jobless Claims were worse than expected, at 496k vs. the 460k expectation.  Continuing Claims were 4.62M vs. the 4.57M expectation.  January Durable Goods Orders surprised to the upside, however, at +3.0% vs. +1.5% expected.  Further, the December reading was revised upwards to +1.9% from the prior +0.3%.  However, excluding transportation, orders actually slipped 0.6%, which disappointed relative to the expected 1% increase.  In corporate news, KO (Coca-Cola) announces plans to acquire the North American enterprises of its bottler, CCE (Coca-Cola Enterprises).  Bernanke speaks at 9am before the Senate Banking Committee on the U.S. economy and monetary policy.  Note that we saw the SEC formalize new short-sell rules yesterday and we saw the lowest new home sales data on record. 

The broad market continues to hover within a 1050-1150 trading range, and by all accounts volumes remain on the light side.  From a trading perspective there is simply not much to say – for the moment, conviction is lacking.  What’s the next catalyst?  Maybe state and municipal defaults here in the U.S.  ResearchEdge had some thoughts on this topic this morning:

From a longer term perspective, Analyst Darius Dale wrote a great note yesterday titled, Domestic Pigs, regarding burgeoning state deficits, that includes a series of data points that should not be ignored.  If you would like a copy of this fine note and to trial our subscriber service, email us at To paraphrase the note:

"A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them. 

Currently, 41 States' pension programs are less than 10% funded.  In addition, only 5% of the $587 billion liability for current and future retiree health care and other non-pension benefits is currently funded.

Unfortunately for State governments, purging the balance sheet is only a temporary fix. Across the country, State governments are facing lawsuits from municipalities school districts outraged by budget cuts.

So with their backs against the funding wall, States must find a cumulative $18.8 billion to balance their budgets in remaining months of the current fiscal year and an additional $53.6 in fiscal 2011."  

To be fair, some astute Governors realize the crisis they are facing and are both acknowledging and addressing it.   Most specifically, newly elected Governor Christie told mayors and local officials yesterday in New Jersey to prepare for state aid cuts on a massive scale to address New Jersey's estimated $11BN deficit.  According to Governor Christie:

                        "At some point, there has to be parity between what's happening in the real world and what's happening in the public sector world."

We like what we see and hear from Governor Christie.  State deficits are front and center for us as a macro risk and Governor Christie, at least, is trying to be the one Governor who won't be "falling short" in addressing this macro risk.

On a similar note, I saw Nassim Taleb (“The Black Swan”) speak yesterday at a conference in New York.  Great speech, and the major take-away (nothing new here...) is the seemingly endless whirpool of government debt we now find ourselves in as a nation.  Will all this end well?  I walked out the room vowing to research the lowest debt-to-GDP nations and to move my family there… not a cheerful talk. 

PALM cuts forecasts.  BofAMLCO ups CLH.  CSFB ups FR.  DBAB ups SOL, STP, TSL, YGE.  CITI cuts FITB.  MSCO cuts PALM.  OPCO cuts ANDS.  PIPR cuts GME, PSYS, TRI.  ANDS beats by 6c.  BBI reports inline and Janney downgrades.  CBEH guides higher.  KO to acquire CCE.  CRM beats by 1c.  DT beats estimates.  ESRX beats by 7c.  LTD beats by 3c.  NKE added to Conviction Buy list at GSCO.  PCS beats by 3c.  RBS reports better-than-expected.  REV misses by 10c.  SIRI beats and guides inline.  TQNT beats by 1c. 

Asia mixed overnight.  Europe down roughly 1%. USD +30bps.  Gold -50bps.  Oil -2%. 

S&P 500 PreMarket (last/% change prior close/volume): 
COCA-COLA ENTER        24.90    +29.82%           5114973
INTERPUBLIC GRP           5.7700  -15.40%            5700
EXPRESS SCRIPT           95.65    +9.0 %              174417
DYNEGY INC-A                1.5500  -7.19%              192857
GAMESTOP CORP-A        17.7300 -5.99%              131856
HOST HOTELS & RE       10.9600 -5.76%              5535
SAFEWAY INC                22.2500 -5.32%              3550
CENTURYTEL INC           33.8000 -4.20%              19646
BRISTOL-MYER SQB       25.7000 +4.01%             2000
COCA-COLA CO              53.0000 -3.92%              315153
SUPERVALU INC             14.7600 -3.34%              2000

Today’s Trivia:  There are 14 punctuation marks in English grammar.  Can anyone name half of them?

Yesterday's Answer:   The strongest muscle in the human body is the jaw muscle.  Additionally, there’s a correction from yesterday

Best Quotes:  “In a January 13th Nightly Business Report interview, NY Fed President Bill Dudley noted that the Fed’s “exceptionally and extended” language indicated rates would not rise for at least six months.  To be precise, Dudley stated “What I want to stress is extended means at least six months.  It could be a year from now or two years from now.  It depends on how the economy develops.”  That is a strong statement considering he is the Vice Chairman of the FOMC.  “Exceptionally and extended” had already become the watch words in FOMC statements, now they have become the hallmark of any Federal Reserve communiqué to send the  clear message that FOMC policy has not changed.  Every time the phrase appears, investors reset the calendar for easy policy for a minimum of 6 months from the latest appearance date.  Considering the wide variety of programs and policies involved in this easing cycle, it is good that the Fed has identified a tag line that clearly identifies its intentions.  As a result, investors will be looking for this phrase anytime they are uncertain about the status of monetary policy.  Also, the first shift  in the phrase will signal to investors that the probability of tightening is rising. 

The phrase once again appeared today in Chairman Bernanke’s prepared testimony to the House Financial Services Committee and will be spoken again tomorrow in front the Senate Banking Committee.  The Chairman successfully allayed fears that the latest “technical adjustments” from the Fed were not tightening moves.”  --Mike O’Rourke, BTIG

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