Wednesday, March 31, 2010

Morning Note...

Futures are -40bps this morning on the back of a weaker-than-expected ADP Employment Change for March.  +40k jobs was expected, but -23k was announced, putting the “red hot” expectations ahead of Friday’s Official Change in Nonfarm Payrolls in doubt.  A jobs gain of +185k is expected Friday, yet “whisper numbers” indicate a gain of as much as 250k jobs could be announced.  Note that it is month- and quarter-end today, and the cover story of the Wall Street Journal discusses the end of the Fed’s mortgage-buying program:  “With Fed’s Massive Mortgage-Buying Spree Ending Today, Market Seeks New Drivers.”  Recall that we’ll see weekly Initial Jobless Claims (week ending March 27th) and Continuing Claims (week ending March 20th) tomorrow morning.  Further, auto sales data for March will be announced throughout the day tomorrow and ISM Manufacturing data will be released at 10am.  In corporate news, HON raised guidance for both Q1 and full-year 2010.  Overseas, the Bank of Ireland trades higher on news of a capital raise.  Eurozone employment data was in-line, inflation readings were slightly hotter-than-expected, German employment was better, and UK confidence was slightly worse.  In political news, Obama plans to announce off-shore drilling here at home, which – when combined with recently announced expansion of nuclear energy programs – indicates a continued push away from Middle Eastern oil.  Concerns over Greece continue, as the FT reports that the recently auctioned Greek bonds trade lower:  Greece still has big problems,” said a senior banker. “The Greek bond syndication was very disappointing. Investors still do not have faith in Greece and are only prepared to buy the bonds for higher yields.”  Additionally, Bloomberg news reports that Greece plans to sell a global bond in USD in the next two months to help raise ~$16B. 

Given the light news on this holiday week and the focus on jobs and the “true U.S. economy,” I thought I might share some anecdotes on this topic.  Miami offers a smattering of conflicting data.  This caught my eye yesterday:

Forty-two percent of condos for re-sale in Miami-Dade, Broward and Palm Beach County are distressed, meaning more than 22,000 units are bank-owned or in short sale, according to a report by Bal Harbour-based Condo Vultures. The proportion is significantly weighted toward short sales, with around 3,600 bank-owned properties up for re-sale and almost 19,000 short sales. According to the report, 36 percent of these units are under contract waiting to close. Miami-Dade leads all three counties with 10,900 distressed condos up for re-sale. (TheRealDeal)

On the other hand recent events such as Art Basel (December ’09), the Miami Boat Show (late January) and the Winter Music Conference (last week) have all indicated a steady uptick in attendance and revenue.  Year-over-year, the change is notable.   Last year I was unaware that these events even took place.  This year, the traffic and the overall presence of these events was significant.  So is “the consumer back?”  Another anecdote:  In speaking to a self-employed friend in New Jersey recently, he indicated that his business (car wash) was probably worth half what he paid for it a year ago and that volume was down 50%.  In his words, “Atlantic City is dying…NJ teachers without tenure are all being let go…and 14 cops in my town just got laid off!”  You can imagine my surprise, given the “uptrend” one sees here in Miami.  Clearly he wasn’t lying, as I caught this story right after we spoke:

March 30 (Bloomberg) -- New Jersey Governor Chris Christie’s job approval skidded almost 10 percentage points after he proposed cuts to education and municipal aid in his $29.3 billion budget for the coming year, according to a Fairleigh Dickinson University poll.

On the heels of that, here’s an Interesting story from the USA Today… due to the dire financial condition of state and municipalities, the normal 5-10mph cushion on speed limits is apparently off the table as the police get stricter in an attempt to spur revenue.  As a result, “70mph in a 65 zone” is no longer safe – you may see a ticket for going 68mph!  Finally, add to all this the following story from yesterday:

March 30 (Bloomberg) -- Downtown Manhattan, where demand for office space began to surge three years after the 9/11 terrorist attacks, is about to lose its spot as the best- performing U.S. market. Vacancies may exceed 14 percent of the area’s 87 million square feet by late 2011, empty space that’s equivalent to four Empire State Buildings and the highest rate since 1997, according to property broker Cushman & Wakefield Inc. That doesn’t include the 4.4 million square feet of offices in two towers now under construction at the World Trade Center site. Those are scheduled for completion in 2013. “The amount of space that’s potentially going to come to the market will increase availabilities and put pressure on pricing,” said Kenneth McCarthy, Cushman’s head of New York- area research. “It will be quite awhile before it can be absorbed.”

“What’s going to happen with those big blocks is that they’re going to sit on the market for a while, because to divide them up and make them smaller and more marketable involves a huge capital investment, and a lot of landlords can’t afford it,” said Ruth Colp-Haber, a partner at Wharton Property Advisors Inc., a New York-based brokerage that represents tenants.  “The question is, when is the demand going to come into the economy?” Haber said. “Most don’t see demand returning till the end of 2011. The real estate cycle moves slowly.”

The picture only seems to get more muddled…so will the “real economy” please stand up?  Are current valuations justified?  Is the current rally off the March 2009 lows still justified?  Stay tuned…

Finally, in case you missed it yesterday, here’s the story on the latest call from PIMCO’s Bill Gross:

March 30 (Bloomberg) -- This may be the best news for stocks in a long time: Bill Gross, who manages the world’s biggest bond fund, says the 30-year bull market in fixed-income securities is ending. Though Gross, who runs Pacific Investment Management Co.’s $214 billion Pimco Total Return Fund, would never tell you to buy stocks, isn’t that what he means?  Pimco, which Gross co-founded, more or less said as much in December. It announced the Pimco Global Opportunities Fund, which will invest in stocks, though it also will buy bank loans, junk bonds and distressed securities. Stocks should be due for better times after a decade that featured the dot-com crash followed by the more recent Wall Street-induced credit crunch. The market certainly has picked up in the last 12 months. The benchmark Standard & Poor’s 500 Index is up more than 70 percent from its recession low a year ago this month. Stocks have improved along with the American economy, which grew 5.6 percent in the fourth quarter as corporate profits jumped 8 percent. Favorable news continues. Shares of U.S. Steel Corp., a backbone-industry company, have climbed almost 50 percent since Feb. 4. Apple Inc., maker of iPods and iPads, may hit $300 from its current price of about $232, Credit Suisse Group AG said Friday.

Bid ‘em Up… Starbucks Corp., the ubiquitous coffee-shop chain, last week announced its first dividend as a public company. Takeovers are heating up, boosting prices of target companies. Prudential Plc and MetLife Inc. will pay a total of $51 billion for insurance assets of U.S. government-controlled American International Group Inc.
Contrarians might sense that a long run for stocks is coming. At least until Gross spoke, investors were pouring money into bond funds, thinking first about safety after the most recent stock market debacle -- and, of course, missing the recent spurt in shares. So far this year, investors have placed about $89 billion with bond managers, according to Emerging Portfolio Fund Research Inc. That was about five times the rate in the first quarter a year ago. If investors sour on bonds, that amount of money will funnel into stocks. Bond investors are nervous because interest rates are rising, reducing the market value of their securities. The yield on the benchmark 10-year U.S. Treasury note stood at 3.86 percent yesterday, up from about 2 percent in December 2008.

Deficit Worries… Rates reflect the flood of Treasury bonds being sold to cover the U.S. budget deficit, which hit $1.4 trillion in fiscal 2009. Investors also worry about the inflationary effect of increased government spending. Higher interest rates and increased inflation can hurt stocks too -- eventually. But that day may be a long way off while rising yields and falling bond prices are here and now.

DRIV raised at FBRC.  WSJ/Barron’s cautious on VZ after news of CDMA iPhone yesterday – defends T and bullish on AAPL.  ERIC wins $1.3B network deal in India.  MWE announces 4M share offerin.  ONP prives 3M share offering at $8.25/share.  SAI misses by 1c.  UL upgrade at BofAMLCO.  SunTrust cuts FDP.  PIPR cuts PSYS.  BARD cuts AEC.  WEFA cuts SAI.  DBAB cuts ARMH.  BLAR ups OZM. 

Asia lower overnight.  Europe down roughly 50bps on the aggregate.  USD -55bps.  Oil +160bps.  Gold +110bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
FORD MOTOR CO           12.84    -3.31%  23045418
DYNEGY INC-A                1.28      -2.29%  13950
OMNICOM GROUP           39.01    -2.18%  1600
CABOT OIL & GAS          37.37    +1.99% 100
ADOBE SYS INC              35.00    -1.91%  200
LSI CORP                       6.21      -1.9 %  4130
GENZYME CORP              51.56    -1.83%  996
ANHEUSER-SPN ADR       49.83    -1.81%  2400
PEABODY ENERGY           44.85    -1.8 %  14374
MEMC ELEC MATER        15.24    -1.74%  2100
HONEYWELL INTL           45.72    +1.71% 21825
LINCOLN NATL CRP         29.57    -1.7 %  472
MBIA INC                       5.85      -1.68%  3475
EASTMAN KODAK           5.80      -1.53%  500

Today’s Trivia:  Aside from Iraq and Afghanistan, what is the next largest recipient of U.S. aid in the world?
Yesterday's Answer:  The tallest statue in the world – at over 400 feet – is the Spring Temple Buddha in Lushan, China
Best Quotes:  “It was another slow trading session in the U.S. markets.  The S&P 500 attempted an early rally but the move quickly ran out of gas as the Dollar began to strengthen.  The IMF lowered Germany’s growth forecast for this year and next year, which fueled additional Euro weakness and kept a lid on the lackluster action in the S&P 500.  For 2010, the IMF reduced the German GDP forecast from January’s forecast of 1.5% to 1.2% and the 2011 forecast was reduced from 1.9% to 1.7%.  The IMF sighted slower than expected export growth and “continuing banking fragilities.”  We recognize the IMF is simply catching up to the market, but it is interesting to see how they quantify the situation.

“Simulation exercises suggest that German banks could suffer significant losses from commercial real estate investments in the U.S. and Spain, and more generally from exposures to Southern Europe.  The simulations also suggest that a reassessment of risks associated with claims on Southern Europe could have a large impact on capital flows within Europe, as German (and also French) banks would significantly reduce their foreign claims to restore capital ratios.”

The IMF breaks down the “Geographical distribution of Foreign Claims on International Banks,” for Germany, France, the United Kingdom and the United States.  By a wide margin, the United States has the least exposure in Southern Europe, with only $118.5 Billion of its $2.58 Trillion in foreign claims.  The U.K. has the second lowest exposure at $236 Billion of its $3.69 Trillion in foreign claims.  German bank exposure is $523 Billion of $3.46 Trillion and French exposure is $781 Billion of $3.57 Trillion.  Based upon those stats, it looks like the downgrade of French growth should be in process. 

There is a touch of irony here.  In his memoir, Treasury Secretary Paulson recounts an episode during the Bear Stearns meltdown when Deutsche Bank CEO Joseph Ackermann asked why Deutsche should do business with any U.S. investment bank.  There is no doubt, Ackermann gets high marks for exercising good judgment, on the other hand, his tact was reminiscent of Bear Stearns during the LTCM crisis in 1998.  Earlier this month, Ackermann found himself lobbying for a Greek rescue commenting “If we can’t stabilize the country, then the next problem after Greece would be the banks.”  Ackermann also stated that “If it really comes down to a question of rescue or no rescue, I’m convinced it should be a rescue.”

--Last night’s note from BTIG’s Mike O’Rourke

Tuesday, March 30, 2010

Morning Note...

Futures are flat to slightly (+5bps) higher this morning on a relatively light news day.  Emerging markets are higher on global economic recovery sentiment, and the euro is up against the USD on news of a bank bailout in Ireland (see more on that below).  Additionally, Greece successfully placed EU5 billion of 7yr notes yesterday, and their first day of trading today will be closely watched.  According to Bloomberg:

Greece’s prospects of raising 35 billion euros ($47 billion) of debt this year to avoid a bailout from the European Union may depend on how investors receive the nation’s seven-year bonds on their first day of trading. Greece’s 5 billion euros of notes fell after the country sold the securities yesterday without offering a yield premium over existing debt. The government got 6 billion euros of orders for the notes, compared with 15 billion euros for the 10-year bonds it issued on March 4, when it offered an extra 32 basis points, bankers involved in the deals said. “The market will be looking to see how this deal performs over the next few days, which is the real test,” said Georg Grodzki, head of credit research at Legal & General Investment Management in London, which oversees more than 300 billion pounds ($449 billion) of assets. “Greece needs to set the stage for its next issue and it won’t be a good signal if the spreads move out on this new seven-year issue.” Prime Minister George Papandreou’s government must raise as much as 10.5 billion euros by the end of May if it’s to avoid re-igniting the budget crisis that prompted the EU to step in with a rescue plan March 25. Yesterday’s sale was Greece’s first since EU leaders drafted the financial safety net. Greece’s Public Debt Management Agency said in January it needs to raise 53 billion euros of bonds in 2010. It has sold 18 billion euros so far.

In corporate news, the WSJ is reporting that AAPL is developing a CDMA phone for summer launch that is compatible with VZ’s network.  AAPL, QCOM, VZ, and S are trading higher pre-market on that news, while RIMM and T are trading lower.  Additionally, instrument company Danaher (DHR) raised Q1 guidance.  Note that earnings season (already?) is set to kick off April 12th with Alcoa.  CaseShiller Home Price data is due at 9am, and Consumer Confidence is due at 10am.  Recall that in addition to facing month- and quarter-end this week, investors must consider that the Fed’s quantitative easing is due to end March 31st as well.  According to Bloomberg News, all will be well, as private investors will take over what the Fed has started:  “The Federal Reserve’s completion this week of its program to buy $1.25 trillion in mortgage bonds probably won’t mean significantly higher U.S. home loan rates as investors return to the market, replacing the Fed.”  Whether that is actually true or not remains to be seen… 

In Ireland, the government effectively bailed out troubled banks today, agreeing to back stop toxic real estate loans.  Note that AIB down is 10% this morning on that news.  The guys at Hedgeye posted some thoughts on this topic this morning:

This Irish stock market story gets more interesting by the minute. In the last 48 hours, this country that the short sellers called a PIG in February has started to go down again. For the week-to-date, Irish stocks are flashing what we call a regional negative divergence (underperforming other countries in both the European region), and its doing so on very bad long term news.

The isn't "new" news, per se, but everything has a price. Timing, when the long term TAIL of a "Bad Bank" plan (taking over toxic loans from dysfunctional lenders) like Ireland has imposed on their citizenry can obviously wreak some havoc on your stock portfolio. If you don't invest alongside government-leaked inside information, your best path forward in Ireland is to wake-up every morning and understand when they are going to double down again on government debt.

“Dublin Down” is maybe a cute way of saying what happened yesterday in the Irish banking stocks, but there is nothing cute about this, ladies. Dublin based Allied Irish bank was down -17% yesterday on fears that the unknown is known again. After receiving over 7 Billion Euros in government support, Allied Irish could need as much as another 7.7 Billion Euros ($10.4B dollars) and the Irish government to take as much as a 70% stake in the company...

If you want to wrap all of these massive price moves in Ireland's stock market around your head and consider what could happen to US stocks from here (if indeed the Irish continue to be a lead indicator for global leverage disease coming back into focus), you might want to get yourself a pint.

Regular readers of this note know that I am a big fan of the 2008 book Are We Rome? by fellow Amherst grad Cullen Murphy.  As such, you can imagine my delight at reading this morning’s Bloomberg editorial on that very topic by a guy named Mark Fisher.  The full text is in the quote section below and I would encourage you to read it, but here’s a tease:

Unless the government creates a massive jobs program, cuts spending and taxes, and gains control of the national budget and the balance of payments crises, we should fear for our future.  Unless our fellow Americans relearn the value of hard work, no government plan stands a chance. Once the world realizes that the U.S. is the new Rome, the traditional tenets governing asset correlations will no longer hold, and we can expect a breakdown in traditional stock-bond portfolio theories.  Since paper assets are ultimately shoved down to zero, expect hard assets to benefit -- especially gold, energy and grains -- along with commodity-related equities. The name of the game going forward -- let’s say the next five years -- will be buying ahead of whatever China and other developing nations are trying to accumulate and diversifying away from the U.S.

It actually sounds pretty similar to what I posted in this space from Gloom, Boom & Doom’s Marc Faber yesterday… Regardless, as much as I like reading this stuff and welcome the comparisons to Ancient Rome, it’s worth noting that I have not made a cent on any such related trading strategies to date.  (Unless you count gold, but that’s a permanent P.A. fixture)  As always, the lesson remains:  the market can be wrong for a lot longer than most individuals – and funds, even – can stay solvent…

BofAMLCO ups HL.  JPHQ ups WLK.  BofAMLCO cuts DWA.  BCAP cuts GENZ.  JPHQ cuts BWY.  OPCO cuts TNDM.  Roth cuts GNVC.  OXM beats by 5c.  Geithner makes positive comments about AIG.  WEDC to be acquired by Microsemi for $7/share.  LDK misses by 9c and guides in-line.  DAI denies rumors it may sell Maybach brand.   WSJ reports that TM will license Prius technology to Mazda. 

Asia higher overnight.  Europe mixed but leaning slightly lower.  USD slightly lower.  Oil flat.  Gold -20bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
DANAHER CORP             80.90    +4.56% 900
DYNEGY INC-A                1.32      +3.94% 5000
QUALCOMM INC             42.88    +2.68% 71592
VERIZON COMMUNIC      31.18    +2.4 %  571465
WHOLE FOODS MKT       37.00    +2.35% 4510
AMERICAN INTERNA       35.17    +2.09% 43969
APPLE INC                     237.11  +2.03% 280180
WEATHERFORD INTL      15.90    +1.6 %  5550
AT&T INC                      26.10    -1.55%  435080

Today’s Trivia:  What is the tallest statue in the world?
Yesterday's Answer:  Sandy Springs, GA - UPS; Vinings, GA – Home Depot; Purchase, NY - PepsiCo; Issaquah, WA - Costco. 

Best Quotes:  “U.S. Decline, Sloth Look a Lot Like End of Rome: Mark Fisher 2010-03-30 01:00:00.2 GMT

March 30 (Bloomberg) -- Historians cite the late second century as the turning point of the Roman Empire, when the once- proud, feared society began its descent into infamy. As the ruling class was undermined by civil wars and attacks by outsiders, the Romans’ respect for law and social institutions began to erode. In the end, a combination of political and economic mistakes led to the empire’s downfall. The U.S. today is a mirror image of the Roman Empire as it tipped into chaos. Whether we blame our bloated government, a greedy elite or a lethargic population, the similarities between the two foreshadow a gruesome future. The Roman economy grew fat from the plunder of conquered territories and the added productivity offered by new lands. The waning of expansionism didn’t bode well for the empire. While the U.S. ascended quite differently, it also used its position as a superpower to fuel economic expansion. Because the country had the strongest military and economy in the post-World War II era, the U.S. dollar became the de facto global reserve currency, ensuring endless competitive advantages -- which have vanished in the last decade. Americans have become less productive while relying more on social safety-net programs such as Medicare, Medicaid and Social Security -- and now expanded health-care insurance. Worse, like the ancient Romans, a sense of entitlement has replaced the drive and motivation we once championed. With easy access to abundant government handouts, it’s no wonder so many jobless people have stopped looking for work.

Bread and Circuses…  In the fifth century, the Roman political elite began searching for ways to distract its population from the hopelessness at hand. Bread and circuses postponed the ultimate fall. The tactic stopped working when people realized their bread tasted stale and sensed the true scope of the impending disaster. The U.S. government’s version of bread offerings proliferated throughout the fiscal crisis, in which collapse was averted only by a massive financial bailout and an endless supply of paper money, along with the rest of the seemingly endless sustenance being shoved down America’s throat. Meanwhile, the administration hasn’t yet tackled the most pressing issue: job creation. Given the current state of the labor market, American workers can’t possibly provide enough tax revenue to support the government’s swelling debt. Even more unsettling is the government’s inability to fix the financial crisis. After a stream of stimulus programs and bailouts, the Federal Reserve continues to print enormous quantities of dollars and buy the nation’s debt.

California Like Greece…  Many state governments are in even worse shape. With California’s 10-year debt currently yielding about 4.5 percent (municipal debt typically yields less than 10-year Treasuries, which now yield about 3.9 percent), the state poses the same sort of danger to the U.S. that Greece does to the European Union. If the federal government decides to bail out California, what happens when Michigan and New York start demanding the same treatment? The burden of underfunded pension liabilities will cause states’ budget deficits to further balloon. Since defined state benefit plans assume an unrealistic 8 percent rate of return -- zero percent, at best, is more likely -- we can only imagine the catastrophe to come once states have to make good on their obligations. As our society becomes increasingly immobile and sits on the couch doing nothing but surfing the Internet, using iPhones and watching “Jersey Shore,” the hopelessness of the situation becomes clear.

Fear Mounts…  Unless the government creates a massive jobs program, cuts spending and taxes, and gains control of the national budget and the balance of payments crises, we should fear for our future.  Unless our fellow Americans relearn the value of hard work, no government plan stands a chance. Once the world realizes that the U.S. is the new Rome, the traditional tenets governing asset correlations will no longer hold, and we can expect a breakdown in traditional stock-bond portfolio theories.  Since paper assets are ultimately shoved down to zero, expect hard assets to benefit -- especially gold, energy and grains -- along with commodity-related equities. The name of the game going forward -- let’s say the next five years -- will be buying ahead of whatever China and other developing nations are trying to accumulate and diversifying away from the U.S.

The China Factor…  Consider the trading relationship between the U.S. and China. When the U.S. funnels its unfinished products to China, the Asian nation is able to send back manufactured goods -- thanks to its abundant supply of cheap labor -- in return for dollars. While the American people are busy tinkering with their newly manufactured playthings, the Chinese continue to use their new wealth to buy energy and commodity assets. Thus, China and the other developing countries that are amassing dollars, euros and pounds basically play a game of global hot potato, trying to pass the potato -- worthless paper currencies -- to others in exchange for energy, water and valuable food assets. As China continues to thrust its dollars at all things commodity-related, it’s hard not to laugh when hearing President Barack Obama speak about trying to identify “environmentally sound” opportunities in energy.

Meltdown Ahead…  It’s only a matter of time before the mechanism that has allowed the government to sustain its trade deficit for longer than it should have -- similar to the Asian dollar peg of the 1990s -- causes a simultaneous decline in the U.S. currency, asset prices and the economy. Once people begin to realize that their paper currencies, stocks and bonds are all garbage, we can expect a meltdown. Although it may be too early to predict an impending collapse in paper assets and an immediate need to acquire hard assets, it’s clear that we’ve reached a turning point. The ship has begun to sink. As I await a global re-set of asset values and prices, I will continue to monitor the swelling federal and state tax revenue levels, the rising animosity between Main Street and Wall Street and the progress made by commodity-hungry nations as they continue to eat our lunch.  While I continue to hope for the best, it’s far wiser to prepare for the worst.”

(Mark Fisher, author “The Logical Trader,” is the founder of MBF Asset Management LLC. The opinions expressed are his own.)

Monday, March 29, 2010

Morning Note...

Futures are 25bps higher this morning largely on the back of better-than-expected economic data in Europe.  European Confidence and UK consumer lending both beat expectations, while UK mortgage approvals were lighter than estimated.  Further, the UK had its outlook reiterated at “negative” by the S&P, and its credit rating was maintained at AAA.  S&P also stated that it expects to review the long-term rating and outlook again once 2010 Parliamentary elections are past.  Note that Greece plans to come to market with a 7-year EU5 billion bond offering this week.  Obviously, this will prove a critical test of the market’s confidence in the recent IMF-EU rescue package for Greece.  In Russia, a Subway terrorist attack during the rush hour took the lives of 39 people.  This was the worst terrorist attack in Russia since 2004.  In China, stocks rose ~2% overnight despite further tightening commentary from the Chinese government.  It’s shaping up to be an interesting week ahead.  Given the Jewish holidays today and tomorrow, and Good Friday at week’s end, how will volumes and trading action shape up ahead of month- and quarter-end on Wednesday?  Have most funds positioned themselves accordingly?  Or could we see some “window-dressing” or “tape-chasing” in the days ahead?  Further, the jobs data release on Friday looms large – most pundits expect further signs of economic recovery in the way of job growth for March.  Recall that equity markets will be closed Friday, but that the bond market will be open.  Also, we’ll get March auto sales data throughout the day Thursday and the CaseSchiller home price index is due on Tuesday.  In corporate news, APOL is trading higher on earnings pre-market, and we’ll get earnings from RIMM and MU on Wednesday.  Further, the London Telegraph speculates on a merger between VZ and VOD. 

Rising bond yields caught everyone’s attention last week.  BTIG posted the following summary:

A “good” sell-off?  Recent trends, namely a rising stock market, a stronger dollar, and weaker Treasuries, suggests that Treasuries are selling-off for the “right reasons” (i.e. rising growth expectations and a desire for more risky assets).  If the Treasury weakness was occuring coincindent w/a weaker dollar/rising gold and a sluggish stock market, then budget deficits and inflation could be more of the culprit.

Here are some interesting quotes pulled from my weekend reading… in general, the overall takeaway is decidedly “cautious” on equity markets:

Grant's has been, and remains, bullish on the economic recovery, but we see more risks than rewards in most stocks and bonds.  Cash yields nothing, or less, we know.  But it does come in handy when there's something to buy.  That there will be something to buy in some market and at some juncture, we have no doubt.  It's nature's way. 

In 1973, Benjamin Graham set out seven criteria for stock selection by the defensive investor. Little did he suspect that he was thereby devising one of those tests that everybody flunks. The criteria were these:(1) adequate size (an S&P 500 stock, for instance); (2) a current ratio of at least 2:1; (3) 10 consecutive years of net profits; (4) 20 years of uninterrupted dividend payments; (5) earnings growth in the previous 10 years of at least 33%; (6) a price-earnings ratio no higher than 15:1; and (7) a price-to-book ratio no higher than 1.5:1. One could combine the final two criteria in one ratio: P/E times P/B of less than 22.5.

At intervals, Grant's has screened for stocks that meet these exacting requirements. In the issue dated Dec. 12, 2008, we found eight: Pfizer Inc., Nucor Corp., Cooper Industries Inc., Cintas Corp., Tiffany & Co., Archer Daniels Midland Co., Molex and RadioShack Corp. An equal weighting of the eight, purchased on that date,would have de-livered a total return of 48.5% through March 12. It was a very simple thing to do, providing one had never picked up a newspaper or turned on a computer to observe that, by the early-2009 lows, one's value-armored, margin-of-safety- protected picks were down by 26%.

And today? Only one stock makes the Graham grade. Archer Daniels Midland is trading at13.1 times trailing earnings (9.5 times the 2010 estimate) and 1.24 times book, to yield 2.1%.

Marc Faber's most recent Gloom, Boom & Doom Report discusses his recommendation of a new book by Tony Boekh called The Great Reflation.  According to Boekh, "the unprecedented attempts underway to reflate the economy open a new chapter in financial experimentation, one that creates great uncertainty and risk for everyone, but also opportunity."  Says Faber, "Under the Great Reflation, I suppose that investors will need to be positioned most of the time in assets such as equities, real estate, commodities, and precious metals.  I have deliberately decided to distinguish between commodities and precious metals, because I believe that precious metals will increasingly be looked upon as an alternative to cash deposits and money market funds, whereas commodity prices will continue to be driven more by genuine demand and supply factors than by monetary factors."

I also noted something interesting from last Friday’s Gartman Letter – here’s a contrarian take on China and Renminbi appreciation:

We have long maintained that Beijing cannot allow itself to appear to have bowed to American demands on the question of her own currency, nor would the US bow to demands made of it by China. The question of a nation's currencies value is either a sovereign question, or one left to the market to decide.

What we wish to warn here this morning is that the Left may have it all wrong regarding the potential for the Renminbi only to rise once it floats, for something completely different may well develop. We suggest that the Left consider the fact that so much capital has gone to China for plant and equipment over the course of the past twenty years, and has been locked up there, that when the curtains are drawn down and the Renminbi is freely floated, there may be billions upon billions of Renminbi that flee the country looking for shelter elsewhere. We can actually make the case that the Renminbi shall fall precipitously a few weeks after the float is finally announced, as "locked up" investors move their capital to the US, or Canada, or Indonesia, or anywhere the dismay and embarrassment of the Left.  'tis just a thought, but the theory is universal that the Renminbi has only one direction to move when it is floated and that is upward, and we wish to suggest that it just might be otherwise.

VRSN downgrade at JEFF.  BTM upgrade at JPHQ.  BARD ups CVGI.  AIB lower on issues regarding capital requirements.  APOL beats by 3c.  PCP upgrade at GSCO.  ThinkEquity positive ahead of MU earnings.  BELM to be acquired by Avnet for $7/share.  EOG upgrade at RBCM.  VTIV may be up for sale. 

Asia mixed overnight but China +2%.  Europe mixed but leaning slightly lower.  USD -25bps.  Oil +79bps.  Gold +62bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
APOLLO GROUP-A           65.05    +6.15% 49844
SOUTHWESTRN ENGY     39.55    +4.91% 32685
INTL FLVR & FRAG         47.25    +3.5 %  2300
MICRON TECH                10.77    +2.67% 129205
SUPERVALU INC             16.61    +2.4 %  750
AMERICAN TOWER-A      42.63    +2.35% 2100
ITT CORP                      53.96    +2.31% 1100
LENNAR CORP-CL A        18.70    +2.19% 4300
CINTAS CORP                28.52    +2.15% 500
VIACOM INC-B               34.00    +2.13% 600
INTERCONTINENTAL       108.755 -2.09%  200
AMERICAN INTERNA       34.92    +2.08% 102525
SLM CORP                     12.84    +2.07% 150
EOG RESOURCES           91.41    +2.03% 4850
FREEPORT-MCMORAN    80.76    +2.01% 53588

Today’s Trivia:  A few more interesting company HQs…name the company associated the following headquarters:  Sandy Springs, GA; Vinings, GA; Purchase, NY; Issaquah, WA
Yesterday's Answer:  Redmond, WA - MSFT; Espoo, FINLAND - NOK; Bentonville, AR - WMT; Leiden, NETHERLANDS - IKEA; Round Rock, TX - DELL; Framingham, MA - SPLS. 

Best Quotes:  “Almost every major global equity market is higher as signs of "re-risking" continue; our S&P futures are close to the overnight highs.

Rising Treasury yields seems to have replaced Greece/EU as the next catalyst for a return to volatility.  Greece announced overnight its pricing 7 year bonds 310 bps over swaps (relatively cheap).  Consensus is they wouldn't announce this deal so soon if they couldn't get it done.

Rising Treasury yields, on the other hand, are beginning to weigh on equity investors as the 10 year is at its highest level since June '09.  There are two schools of thought by equity PM's on if this is a good/bad thing-

-  Bulls- rising yields on bonds are healthy and a sign of underlying macro improvement, and 4% is where we were pre-crisis, so this is normal and healthy.

-  Bears- the reason for higher yields is the flood of debt being issued, not underlying macro strength.  Investors are demanding higher rates to swallow our debt.  And rising rates potentially makes bonds more appealing than stocks (poor reasoning I think given Bond funds have already seen $110B inflows YTD vs. $2B domestic equity per ICI)

A few stats on the market's strength of late

-  S&P up for the fourth straight week, up 5.6% over that time.
-  the S&P has now gone 24 straight sessions without a 1% correction (Barrons)
-  Corporations ended '09 with 11.4% of assets in cash; the view is investors will demand this to be used for A) buybacks and B) deals.
-  89% of the S&P is above it's 50 dma, 96% of the financial sector is.

ISM and nonfarms on Friday; the nonfarm bogey continues to creep higher (currently 200k job gains).  Obviously equity markets will be closed, but the bond market is open Friday.”

--RBC trader note

Friday, March 26, 2010

Morning Note...

Happy Friday… Futures are slightly higher (+25bps) this morning as the Greek/Euro drama continues and perhaps comes to resolution.  As one trader & sports fan astutely noted this morning, this whole process is reminiscent of Brett Favre and his “will he/won’t he” continual dance with retirement.  So here’s the latest:  yesterday’s sell-off was sparked by comments from ECB President Jean-Claude Trichet that IMF involvement in the Greek solution would be “very, very bad.”  This weakened the euro currency, boosted the USD, and weighed on US equities, particularly dollar-denominated metal and energy sectors.  Overnight, Eurozone officials appeared to reach a deal on assistance for Greece in the form of a joint Euro-states/IMF arrangement.  Thus, now Trichet is saying he is “entirely content” with the joint EU-IMF deal and that he is “extraordinarily happy that the government of the Euro area was able to find a workable solution.”  He added: "I am confident that the mechanism decided today will normally not need to be activated and that Greece will progressively regain the confidence of the market."  Well there you go.  In US economic news, this morning’s final GDP revision settled Q4 growth at +5.6% quarter-over-quarter, which is lower than the +5.9% estimate.  Q4 Personal Consumption settles at +1.6% vs. the +1.7% estimate.  Note that U of Michigan Consumer Confidence is due at 10am today.  In corporate news, ORCL posted lighter-than-expected net income and earnings per share for the third quarter.  RadioShack (RSH) is higher pre-market on a NY Post article that speculates the company will be sold or may merge with Best Buy (BBY).  In news out of Washington, DC, the Obama Administration is to unveil an extension of Treasury and FHA programs aimed at further stemming foreclosures.  In Asia, there are a series of items out of China that I have taken directly from JPM Morning Research:

In China, a slew of headlines crossing overnight - 1) an adviser to the country’s central bank wrote in an opinion piece published today in the government-backed China Daily that “China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes,” 2) China’s central bank may “soon” raise its reserve ratio requirement for the third time this year to further drain liquidity, the China Securities Journal reported today, citing unnamed analysts, 3) China industrial company profit accelerated in the first two months of the year, and 4) China bank lending in March may hit 1 trillion yuan ($146 billion), a significant jump from 700.1 billion yuan in February, the China Securities Journal reported on Friday.

Looking forward, note that the Official Nonfarm Payrolls for March and the Unemployment Rate will be posted on a holiday – Friday, April 2nd (Good Friday).  I honestly can’t remember that happening, and markets should certainly be coiled one way or another for Monday April 5th’s trading.  I assume most traders will take some cue from Asian market action Sunday night April 4th.  We shall see.  Note that Osama bin Laden is back in the headlines today:

WASHINGTON - In a 74-second audio message released on Thursday, Osama bin Laden threatened to kill any Americans held by Al Qaeda if Khalid Shaikh Mohammed, the chief planner of the Sept. 11 attacks, is executed. American counterterrorism officials said they thought the recording, addressed to the American people and broadcast on Al Jazeera television, was authentic. Mr. bin Laden denounced the United States for imprisoning Qaeda members, "first and foremost among them the holy warrior and hero, Khalid Shaikh Mohammed," according to a translation by the Middle East Media Research Institute in Washington. "The White House declared that it wanted to execute them," Mr. bin Laden said. "The day the United States makes this decision, it will have made the decision to execute those of you who fall prisoner to us."

TIBX beats by 2c and acquires Netrics.  JPHQ ups NOK.  APP lower on earnings.  FINL beats by 13c.  SOMX prices 6M shares at $8.25/share.  PALM higher on BMOC upgrade.  BBY cut at FBRC.  FDP initiated Hold at CANT.  Washington Post reports that VZ is seeking limits on the FCC’s regulation of the internet.  CPWM is higher on earnings and increased fwd guidance.  JPHQ upgrades RIMM, COH, ANN, MNI, PGR, URBN.  COWN ups THQI.  Janney ups CAKE, PFCB.  CSFB ups SOLR, TSL.  JPHQ cuts BKE, CWTR, ROST.  UBSS cuts AUO, LPL.  WSJ “Heard on the Street” positive on COP. 

Asia higher overnight.  Europe slightly lower.  USD -45bps.  Oil +77bps.  Gold +44bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
PROGRESSIVE CORP       19.80    +6.51% 8239
RADIOSHACK CORP        23.20    +6.42% 30686
FIRST HORIZON NA        14.30    +3.17% 107374
MGIC INVT CORP            9.20      +3.14% 9000
VULCAN MATERIALS       49.69    +2.96% 200
HUNTINGTON BANC        5.65      +2.73% 44908
INGERSOLL-RAND           35.45    +2.69% 499
GENZYME CORP              52.30    +2.29% 23208
COACH INC                    39.55    +2.2 %  1400
TITANIUM METALS         16.25    +2.07% 1887
TENET HEALTHCARE       5.94      +2.06% 7540
AK STEEL HLDG              22.95    +2.05% 12005

Today’s Trivia:  Name the major companies associated with the following headquarters – Redmond, WA; Espoo, FINLAND; Bentonville, AR; Leiden, NETHERLANDS; Round Rock, TX; Framingham, MA
Yesterday's Answer:   Prior to 1972, Sri Lanka was known as Ceylon.   

Best Quotes:  “New York Helicopter Commute for $200 a Day Signals Revival 2010-03-26 04:00:00.0 GMT By Esmé E. Deprez

March 26 (Bloomberg) -- Liberty Helicopters Inc. is offering to fly weary commuters from New Jersey to Manhattan for about $200 a day, saving them 14 hours in traffic a week and signaling that Wall Street may have seen the worst of the recession. As many as six people at a time will travel above the Statue of Liberty, Governors Island and the Verrazano-Narrows Bridge during the trip of about 20 miles (32 kilometers) from Port Monmouth, New Jersey, to landing pads at West 30th Street and Pier 6 near Wall Street. Weekend service starts tonight and weekday runs begin next month. Liberty has already been approached by 150 potential clients after about a month of advertising, Patrick Day, a pilot and vice president of charter marketing, said in an interview in the cabin of a twin-engine Dauphin at the carrier’s base in Linden, New Jersey. The interest may reflect how far Wall Street has bounced back, said Robert Grotell, an independent transportation consultant in Port Jefferson, New York. “When an economy turns sour, corporate air transportation seems to be one of the first things that’s affected, and it’s usually one of the last things to come back,” Grotell said in a telephone interview. Corporate clients are responsible for about one-third of helicopter traffic in the New York area, which slid as much as 30 percent in 2009 from a year earlier, he said. “Maybe the economic turnaround is well under way,” Grotell said.

Liberty offered a commuter service in the 1990s. By the early 2000s it had evolved into a charter service with clients booking entire helicopters instead of single seats. Recently, Day started receiving requests for single-seat rides. The majority are Wall Street traders and people in the garment industry, he said. Day, who sports Prada aviator sunglasses and a black- leather bomber jacket with the company insignia, said he expects the service to grow from two daily flights each way to as many as five by May. He has hired six pilots to meet demand, bringing the total to 31. Volume may increase as much as 15 percent this summer after returning to pre-recession levels in March, he said. “People are starting to reserve their helicopters now for the summer earlier than they have in years past,” Day said. “Things are starting to look good again.” While other helicopter charters offer trips to the airport or the outer reaches of Long Island, Liberty’s daily commuter service faces no direct competition, according to Smith. Liberty, which will make about a $200 profit on each full commuter flight, is counting on the service to market the rest of the charter business, Day said. “You have guys that are getting overwhelmed on a Friday in June and they just can’t deal with the traffic,” Day said. “At 4 o’clock, I have a helicopter right there.”