Wednesday, March 3, 2010

Morning Note...

Futures are slightly higher (+20bps) this morning on relatively light news.  The ADP employment change was in-line with expectations at -20k, although the prior reading was revised from -22k to -60k.  Greece unveiled plans to reduce its deficit ahead of either a bond offering or an EU bailout, or both.  According to Bloomberg,

Greek Prime Minister George Papandreou’s government approved an additional 4.8 billion euros ($6.6 billion) of deficit cuts as he tries to convince European allies and investors that he can tame the region’s biggest budget gap. The package, half spending cuts and half revenue measures, includes higher tobacco, alcohol and sales taxes, said Deputy Citizen Protection Minister Spyros Vougias after a Cabinet meeting in Athens to pass the plan. The government will also cut by 30 percent three bonus salary payments civil servants receive at holiday times, a move unions warned would spark new protests. Papandreou said after the meeting that the decision was “difficult” but necessary for “the survival of our country and our economy.” The premier risks a backlash at home by agreeing to greater austerity measures after the European Union demanded more cuts before allies would come to Greece’s aid. The announcement comes as Papandreou prepares to meet Germany’s Angela Merkel on March 5 and French President Nicolas Sarkozy on March 7 to discuss Greece’s financing woes. Greek bonds advanced for a fourth day on the prospect the new measures might lead to EU help.

It will be interesting to see how the Greek populace accepts higher taxes and reduced benefits, and the cynic in me sees it as a test-case for similar US tax hikes – or other austerity measures - to come…  In economic news, the ISM non-manufacturing index (i.e. the service index) is due for 10am release.  Additionally, the Fed’s Beige Book will be released at 2pm.  Note that tomorrow brings Initial Jobless (week ending Feb 27th) and Continuing Claims (week ending Feb 20th), and that Friday brings the official Change in Nonfarm Payrolls and the Unemployment Rate for February.  BTIG posted an interesting note on this topic yesterday:

Can the market shrug off a bad Feb. Employment number?  Feb payrolls will be overwhelmed by weather effects and  suggests mkt participants look at Feb 2003, Jan 1996, and March 1993 storm episodes for comparisons. Avg miss from median est in these months was -240k.

In corporate news, COST reported weaker-than-expected and is trading lower premarket.  Last night Elliott Associates bid $5.75/share for NOVL, or $2 billion total.  Retailer BIG is trading slightly higher on earnings, and BJ is looking lower on their earnings release.  Phillips-Van Heusen is in talk to buy Tommy Hilfiger for $4 billion. 

If you’re feeling bearish, I noted the following from a recent edition of Weldon’s Money Monitor ( that was cautious on Brazil and Argentina.  Did you know, for example, that the Argentine peso is trading below its 2002 crisis levels?

…we tiptoe through the global macro-monetary mine-field, uncovering an increasing number of landmines just waiting to be detonated.  From Russia , to Brazil, to China, to Eastern Europe, to the UK and US, to the core EU…from Anglos, to BRIC(s) and PIGS…we sense a whopper of a crisis brewing, as TOO MANY nations reveal ominous debts and deficits, a contraction in money supply and bank lending, diminished trade, sizable idled output capacity…

…which is putting intensified pressure on a host of global currencies…including one of the most nefarious devaluation “perps” ever known.  Argentina’s peso has depreciated beyond its 2002 devaluation-crisis low…fade to black, crisis coming…

ANN cut at Jesup.  BIG beats by 3c.  BJ misses by 1c.  OPCO ups BX.  COST misses by 2c.  GSCO adds DAN to Conviction Buy.  BofAMLCO ups ETN.  HOV higher on earnings.  JAKK beats by 4c.  BofAMLCO cuts JBHT.  Cramer positive JDSU.  NFLX downgraded street-wide.  PAY beats by 3c.  London Times reports some shareholders unconvinced of wisdom over AIG AIA purchase.  SPLS cut at GSCO. 

Asia mixed overnight.  USD -23bps.  Gold +5bps.  Oil +55bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
NOVELL INC                   6.12      +28.84%           19492533
COSTCO WHOLESALE     58.95    -3.96%              303673
BIG LOTS INC                 35.05    +3.27%             70055
JDS UNIPHASE               11.38    +2.43%             20005
AES CORP                     11.45    +1.87%             200
WEATHERFORD INTL      16.98    +1.74%             3300
AKAMAI TECH                27.92    +1.71%             4450

Today’s Trivia:  This has been the coldest winter on record in Miami since…when?

Yesterday's Answer:   Morocco celebrates its independence from France on March 2nd.    

Best Quotes:  “The China Myth.

One of the predominate themes over the past year has been that the China is attempting to diversify away from the Dollar.  This is true but it appears as though such a shift is easier said than done.  In the middle of February, the Treasury’s International Capital (TIC) flow data for December was released.  It was noted that China’s holdings of U.S. Treasury obligations had dropped to $755.4 Billion, down from its peak of $801.5 billion in May of last year.  What has frequently been overlooked is that a large degree of this “selling” is the result of China allowing U.S. T-Bills to mature.  China’s holding of T-Bill’s was $210 Billion back in May, and their Long Term (maturities >1 year) Holdings of U.S. Treasury obligations was $591 Billion.  During the course of 2009, China opted to let the majority of the T-Bills mature.  Who can blame them when yields were practically zero percent?  In the December data, T-Bill holdings were down to $69.7 Billion.  In turn, that means that between the May peak in China holdings and December, the nation added $95 Billion in Long Term Holdings.  The significance of that fact is that with deficit concerns here in the U.S., it is far more important to sell long term debt and T-Bills should not have an issue finding buyers.  Over the course of the past year, the United States rolled out its average maturity to 4.58 years from 4 years approximately a year ago (which is still short of the historic average of 5.5 years).  Treasury’s 2001-2006 hiatus from selling long bonds was a mistake.

The story does not end with the fact that China’s Long Term Holdings have increased as T-Bills have matured.  Late Friday afternoon, Treasury released the preliminary re-benchmarking of the TIC data as of June of last year.  As a result, China’s holding of Treasury obligations did not peak at  $801.5 Billion in May as previously believed.  It peaked at $940 Billion in July.  In July, China’s holdings of U.S. T-Bills stood at $167.5 Billion, leaving China’s Long Term holdings of Treasuries at $772 Billion.  The same flows apply, as such, the same maturity of T-Bills has occurred.  So as of December, China’s total holdings of Treasury obligations was $894.8 Billion, and subtracting the $68.7 Billion in T-Bills leaves Long term Holdings at $826 Billion.  Yes, it is true that China has reduced its exposure to U.S. T-Bills lately, but it turns out that it owns 20% more Long Term U.S. obligations than anyone suspected last Thursday.”   --Mike O’Rourke, BTIG

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