Friday, March 5, 2010

Morning Note...

Futures are +60bps this morning as the February Change in Nonfarm Payrolls came in better-than-expected (-36k vs. -68k/e) and the Unemployment Rate dipped to 9.7% from 9.8%.  Additionally, across the pond Greece successfully completed a bond offering and the EU warms to some type of follow-on bailout (BBERG:  Greek Aid Plans Said to Be Considered by EU Officials After Merkel Rebuff).  Additionally, German Manufacturing Orders for January surged following December’s sharp decline.  In Asia, the Bank of Japan pledged to fight deflation there and China’s Premier Wen predicted 8% growth in China yet made cautious comments regarding speculation in China’s housing sector and “latent risk” to Chinese banks.  And here at home the House approved a $15 billion jobs bill aimed at stimulating private-sector job creation.  In corporate news, WMT increased their dividend 11% and COF was cut at Goldman Sachs. 

Regarding this morning’s jobs data… the Administration had us all keyed up (Larry Summers “pre-announcement”) for a horrible “weather-related” jobs number, and the proposed “spin” was that the Fed would have to continue to leave interest rates at near-zero levels.  Thus, a poor jobs number was expected to read positive for the markets.  (A bit of genius from the Obama Administration, no doubt.)  Of course, with the better-than-expected number we saw this morning, does that mean a rate hike is coming and the market should view this as a negative??  We can’t have it both ways…so which is it?  For the moment, the bulls are winning the argument.  Of course, while the headline jobs number was bullish, the “underemployed rate” still remains troubling.  Here’s a quote I pulled directly from the site five minutes ago: 

Among the marginally attached, there were 1.2 million discouraged workers in February, up by 473,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Note that yesterday was the 3rd slowest trading day in 2010.  Will volumes pick up with the February jobs data behind us?  Or are we already looking to the oft-mentioned March revision?  In political news, financial regulation continues to creep its way toward “the Hill”…look for additional headlines there.  In other news -- Riot police, rocks, and tear gas in Greece…not good.  Two cops shot in an “attack” on the Pentagon overnight…also not good. 

Incidentally, I loved ResearchEdge’s morning commentary yesterday, but there simply wasn’t room to post it then.  Here’s a teaser, and I would encourage you to read the full version in the quote section below for a very broad reframe for the current state of affairs (which, just as the forest through the trees, some of us on the “front lines” could use from time-to-time):  The financial crisis was born out of a pattern of accumulating hidden risks in the system, coupled with an increasing complexity of the financial system around the world. Never before have we had so much complexity and so much ignorance as to what is going on. After more than two years of trying to fix the system, some corporations are slightly better off, but the reality is that nothing has changed.

BCAP ups CWTR.  JEFF ups CEG, CPN, PEG.  CSFB cuts CMED.  JEFF cuts ED, SO.  MSCO cuts WBD.  SUSQ cuts ASH.  AIB/IRE higher on talk of “asset disposal” overseas.  BOOM misses by 5c.  CIEN upgrade at COWN.  ARST misses by 1c.  CNXT prices 14M shares at $4/share.  GSCO cuts COF.  ERII misses by 1c.  GPRE prices 5.5M shares at $13.50/share.  MRVL beats by 3c.  OSG announces 3.5M share offering.  MACQ ups PT.  SOLF lower on earnings.  JPHQ ups TIVO.  VE higher on earnings.  GSCO cuts WEN. 

Asia higher overnight.  Europe +1% on average.  USD +20bps.  Oil +150bps.  Gold +10bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
CIENA CORP                  14.35    +2.72% 202073
INGERSOLL-RAND           33.95    +2.32% 11923
AES CORP                     11.58    +2.3 %  1600
APPLE INC                     215.42  +2.24% 643941
CONVERGYS CORP         12.87    +2.22% 1715
CAMERON INTERNAT      44.22    +2.22% 422
RANGE RESOURCES        50.74    +2.2 %  4000
AGILENT TECH INC         32.96    +2.17% 52000
US STEEL CORP             57.84    +2.12% 165258
JDS UNIPHASE               11.59    +2.11% 19900
AMERICAN CAPITAL        4.40      +2.09% 18900
WILLIAMS COS INC        23.00    +2.0 %  74440

Today’s Trivia:  A little Greek flavor for you this morning…Why is the Greek flag blue and white?  What does the white cross represent?  Why are there 9 stripes?

Yesterday's Answer:   In IM parlance, NBD =  no big deal…LMAO = laughing my @ss off…AFAIK = as far as I know…IMHO = in my humble opinion…PMBI = pardon my butting in.  Given the way language is trending, how long until these words are in the dictionary?

"We can't solve problems by using the same kind of thinking we used when we created them."
-Albert Einstein

We have been in a recession since December 2007 and what has changed? Ok, George Bush is no longer in office, but Barack Obama has not been able to solve anything, largely due to a screwed up political system and corrupt politicians. That's the obvious answer....

The financial crisis was born out of a pattern of accumulating hidden risks in the system, coupled with an increasing complexity of the financial system around the world. Never before have we had so much complexity and so much ignorance as to what is going on. After more than two years of trying to fix the system, some corporations are slightly better off, but the reality is that nothing has changed.

For the last two days I have found myself writing about structural problems which are hard to ignore, and some are worse than others.

First, consumers account for more than 70% of GDP, yet growth in personal consumption cannot be sustained without growth in inflation-adjusted income. Short-term benefits can be gained through debt expansion, but consumer credit continues to contract, and disposable consumer income is not keeping up with inflation. This is a long-term structural problem, and until it is addressed, there can be no sustained economic recovery.

Second, the most recently revised GDP report revealed another structural problem as current trends are not sustainable. Private inventory growth accounted for 4%, or 67%, of the revised 5.9% annualized growth in 4Q GDP.

Third, Washington has dug a very big hole and there is no real insight on how to deal with the issues, and now the politicians and Washington's "Groupthink" is begetting speculation that is potentially unhealthy. More importantly, the federal government or "the system" appears to be accumulating more hidden risks which could end up leading to an "extreme improbable event." At Hedgeye Risk Management, we call that "TAIL" risk.

As a financial analyst, I have learned that all of the real juicy stuff can be found in a company's footnotes. I'm not claiming to have read all of the 2009 Financial Report of the U.S. Government, but the footnotes and the statement of the comptroller general of the United States are alarming. Anybody reading them would come to the conclusion that the US government is a short.

Consider the report's covering Statement of the Comptroller of the United States, the overseeing accounting authority, where "material" questions are raised in terms of the valuation of the bailout liabilities and assets. According to, Gene L. Dodaro, Acting Comptroller General:

"The economic recession and the federal government's unprecedented actions intended to stabilize the financial markets and to promote economic recovery have significantly affected the federal government's financial condition. The resulting substantial investments and increases in liabilities, net operating cost, the unified budget deficit, and debt held by the public are reported in the U.S. government's consolidated financial statements for fiscal year 2009. Because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Further, the ultimate cost of these actions and their impact on the federal government's financial condition will not be known for some time."

Or how about this one....

"Certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work resulted in conditions that prevented us from expressing an opinion on the fiscal year 2009 and 2008 financial statements other than the Statements of Social Insurance. "

The internal controls of the US Government are so bad the books can't have an official opinion from the Comptroller of the United States.

The US government is spending money it does not have, it can't balance the books and the most read story on Bloomberg over the past eight hours is "Germany Snubs Greek Aid Plea as Protest Snarls Athens Traffic."

How Germany and the EU end up dealing with Greece has broad implications for the other troubled countries in Europe. I get that. Europe has a real big problem and it's called leverage and leverage is bad. The US has a leverage problem too and we don't have the internal controls to know where all the problems are. The US fiscal issues don't stop with the US government as there are many individual states (see for the details) that are nearly bankrupt and have funding issues too.

Despite the current policies of the US government, the willingness of foreigners to fund our problems has been unwavering. However, it's worth note that yesterday the Dollar Index experienced its biggest one day drop since December 1, 2009 and has now fallen five of the last six days. Unfortunately, it's seems that the US could be headed toward one of those extreme improbable events.

When a company can't balance its books that is a real problem, but it's ok for the US government to not have a handle on the numbers? Something does not add up.

Howard Penney, ResearchEdge   

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