Monday, March 8, 2010

Morning Note...

Futures are flat to only slightly higher this morning despite Monday M&A (AIG selling Alico unit to MetLife for $15 billion), tightening global CDS spreads (the Markit iTraxx Crossover Index dropped 10bps to the lowest spread in six weeks, indicating stability in Greece & Dubai, just to name two “at risk” states), better-than-expected MCD comparable store sales (+4.8% vs. +3.9%), and supportive EU-Greek comments from French PM Sarkozy.  Interesting to note that – despite this positive news flow – markets remain flatish.  I loved this quote from the Barclay’s retail sector desk at 7:30am:  S&P 500 futures and European equities are both flat as the story about "Hurt Locker" getting 6 Oscars has gotten more "reads" on Bloomberg than French President Nicolas Sarkozy pledging support for Greece.  It's a quiet morning. 

On the other hand, here is some “short-term” trader talk (from BofAMLCO) that actually scares me a bit:  There is very little new news out there, and that is a positive.  The quicker we can put Greece and Dubai in the review mirror, the fast we can ascend to growth.  Yikes.  Beware the rush to put these things “in the rear view” mirror…recall that it was just around the time that the Bear Stearns March 2008 collapse faded into the mirror that a gaping chasm opened in the road ahead of us and nearly swallowed us whole.  You’ve all heard the Greece/Dubai “canary in the coalmine” theory before, but don’t let boredom or redundancy temper your judgment.  Just because something is repetitive, it doesn’t mean that it’s de facto wrong…

Looking forward, I think Morgan Stanley’s “Week Ahead” piece accurately describes the current landscape:

The majority of our clients remain stubborn bears, admitting equities may rally higher in the short term, but point out they did the same in late Q3 2007 in similar bearish sentiment, before turning in early 2008. Concern over the known unknowns(Chinese MP tightening and sovereign credit risk) and unknown unknowns(government policy) is keeping positions hedged, underweight  and the pain trade higher. Our global head of emerging market strategy, Jonathan Garner thinks its more likely than not that we test SPX 1,150 level sometime this week, Chinese inflation data is the next potential hurdle on Thursday(3/11).

For the bulls, here is Mike O’Rourke’s Sunday night commentary:

It is hard to argue that the February jobs report released on Friday was anything but positive.  Last week we expressed concern about the Equity market getting too far ahead of itself giving a “pass” to the February data due to weather.  Overall, most reports have been good relative to expectations and exhibited few ill effects from weather.  If there was any weather suppression in the data, it should simply provide an added boost to March.  The S&P 500 continued to run after pushing the “buy stop” level of 1110 we noted on February 25th.  The rise is deserved and we believe this action will lead to an attempt to surpass the rally highs registered in January.  In short, the jobs report in combination with the other economic data indicates the recovery remains on track.  In addition, with the anniversary this week of the bear market lows, the sharp March 2009 rally gains will begin to drop off one year charts.  That drop off, together with the considerable time spent hovering around 1100 since October, will set up a healthy technical picture that is primed to commence the next leg of the rally once the January highs are overtaken.

For the bears, here’s a little Fred Hickey (High Tech Strategist):

Note that [Greece’s] humongous deficit is only slightly less than the US’s current budget deficit in percentage terms (nearly 11% of US GDP).  The biggest difference is that Greece, as a member of the EU, cannot print money (euros) to pay off its debts, while the US and UK can print money out of thin air (as they have been doing in prodigious amounts), with their so-called quantitative easing programs. 

After discussing austerity measures recently announced in Greece, he adds:

European leaders (particularly the Germans) have required such dramatic action before they will even consider offering any financial support.  EU economic and monetary affairs commissioner Olli Rehn told the Greeks this week: “This is a crucial moment for the future of your country.  No member of the eurozone area can live permanently beyond its means.  Either you keep your debt under control or your debt starts controlling you.” Those are wise words.  Someone should send them to the US Congress and President Obama.

M raised to Buy at Soleil.  YHOO upped at JMPS.  BCAP ups SRE.  GSCO ups X.  JPHQ ups ADCT.  BofAMLCO cuts PRGO.  DBAB cuts CBEY.  GSCO cuts AKS.  JEFF cuts MFA.  WEFA cuts CCI.  CMM higher on earnings.  FBRC cuts FITB.  TWPT ups GMO.  Cramer positive GNTX, JCG.  BMOC ups RIMM.  FBRC cuts RSO.  SEIC upped at Janney.  Daimler to sell $430M Tata Motors stake. 

Asia higher overnight.  Europe flat to slightly higher.  USD -30bps.  Oil +80bps.  Gold flat.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
METLIFE INC                  40.65    +4.45% 200343
AMERICAN INTERNA       29.15    +3.81% 1210957
CIENA CORP                  15.45    -3.5 %  118786
US STEEL CORP             60.80    +3.23% 264985
WYNDHAM WORLDWID   23.25    -3.17%  13500
APPLIED MATERIAL         12.62    +2.69% 215196
DTE ENERGY CO             44.00    -2.31%  300
MACY'S INC                   20.90    +2.2 %  12434
H&R BLOCK INC              17.05    +2.16% 9481
AK STEEL HLDG              24.36    -2.09%  78287

Today’s Trivia:  What is the lowest grossing Oscar-winning film of all time?

Yesterday's Answer:   The Greek flag is called "Galanolefci" which means "blue and white". Originally it was blue with a white diagonal cross. The cross is now situated in the upper left corner, and symbolizes the Christian faith. Blue is the color of the sea, and Greece being a seafarers country, it could hardly have any other colour. Blue is also a lucky colour, which will ward off evil according to superstition. White is the color of freedom, and that is something the Greeks hold very dear after years of enslavement under the Turks. The nine stripes each symbolize a syllable in the Greek motto of freedom: E-LEY-THE-RI-A-I-THA-NA-TOS, which translates Freedom or Death.

Best Quotes:  Comstock Partners, Inc. -- Why the Rally Can't Be Sustained -- March 04, 2010

In our view the strong rally off last year's March low is a contra-cyclical move within a secular bear market that started in March 2000.  We have been undergoing a major credit crisis, followed by severe decline in income, a collapse in asset prices and record debt.  A number of detailed studies have shown that economic recoveries following such events are of short duration and extremely weak at best.  Despite massive efforts at stimulation, we see no reason why the outcome this time will be any different, and the evidence so far supports this view.   The economy is going through a process of deleveraging debt that is creating strong headwinds against a self-sustaining recovery.

The major drivers of previous economic recoveries in the post-war period have been housing and consumer spending that was spurred by easy credit conditions.  Those drivers are just not working this time around.  Despite the herculean efforts of the Fed and the White House, credit still remains tight.  Bank loans are down 27% from a year earlier while consumer credit is down 4%, the most since World War II.  Although the monetary base has soared over the last 15 months, M2 money supply is down 0.3% and MZM money supply is down 4.2% annualized over the last three months.  The strong growth of GDP in the 4th quarter was mostly due to a return to more normal inventory levels while real final sales remained weak.  Consumer spending has picked up a bit, but only in comparison to the extremely low level of a year earlier.  In the period ahead consumers will continue to be restricted by high unemployment, tight credit conditions, sub-par wage increases, lower net worth and the need to raise savings rates and pay off debt.  

A number of factors that helped growth in the past year will no longer be operative in the year ahead.  The cash for clunkers program temporarily spurred auto sales, which have reverted back to sluggish sales levels.  The housing credit for first-time home buyers goosed housing demand for a while, but the extension of the program does not seem to be having the same effect, and, in any event, ends on April 30th.  Furthermore the Fed's $1.25 trillion program to purchase mortgages ends on March 31st.   As we pointed out in our comment two weeks ago economic momentum already seems to have peaked in the 4th quarter as a number of recent indicators have come in under expectations.

In addition we don't think the sovereign debt problems have ended with Greece any more than we thought the subprime loan problems ended with Bear Stearns.  It remains to be seen whether Greece can carry out its promises of austerity and there is no need for us to dwell on the now well-publicized budding financial crises in the rest of the EU's Southern tier.  As we previously pointed out the debt problems have not gone away, but are in the process of being shifted from private to public entities.

Some may wonder why we continue to emphasize the global financial and economic problems and what this has to do with the stock market.  In our view this has everything to do with the stock market.  The entire rally has been based on the belief that we can undergo a V-shaped recovery and that modern governments just will not allow the kind of unraveling that has followed all other major credit crises.  However, governments can only try to halt the malaise by increasing their own debt and running up huge budget deficits that cannot be sustained.  In the U.S. we are already seeing the backlash as the public, while still demanding that the government somehow create more jobs, is also rebelling against the prospect of ever-increasing deficits. 

Therefore  if the market, as we believe, is discounting events that will not happen, the disappointment will be severe---and in a market increasingly dominated by trend players, the rush for the exits can be something to behold.  The market peaked on January 19th at 1150 intraday on the S&P 500, declined to 1044 and now has bounced back to 1122.  After the March 2009 low the index moved 62% in six and a half months, but only 4% in the last five and a half months.  In our view this is all part of a topping formation that will be followed by a substantial decline in the period ahead.    

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