Thursday, March 11, 2010

Morning Note...

Futures slightly lower (-35bps) on in-line unemployment data in the U.S., news that Greece has completely shut down due to striking workers, and inflationary data from China that indicates tightening ahead.  Initial Jobless Claims for the week ending March 6th were 462k vs. the 460k expectation, and Continuing Claims were 4.558M vs. the 4.5M expectation.  Additionally, the January U.S. trade balance was -$37.3 billion vs. the -$41 billion expectation.  In Greece, workers have taken to the streets to protest the latest round of austerity measures, which they believe place an unfair burden on the lower- and middle-class relative to the upper-class business owners and the wealthy.  Greece’s hospitals, airports, and schools are closed today and tensions continue to mount.  In China, inflation reached a 16-month high as consumer prices rose 2.7% year-over-year, production rose 20.7% for Jan/Feb, and new loans exceeded forecasts.  All this amounts to the possibility that new monetary policy will be forthcoming from Beijing aimed at tempering what appears to be an overheating economy.  In fact, China’s central bank governor Zhou said on March 6th that anti-crisis policies, including the yuan’s peg to the USD, must end “sooner or later.”  In corporate news, the New York Post reports that Nelson Peltz – whose firm controls WEN – is considering a bid for CKR.  Recall that CKR – which owns Carl’s Jr. and Hardee’s – has a $928M bid from Thomas H. Lee already on the table.  Additionally, DVN has entered into an agreement to sell a series of deepwater assets to BP for $7 billion and UTX announced a buyback.  In other economic news, RealtyTrac says the pace of foreclosures has slowed to the lowest rate in four years:

"The 6 percent year-over-year increase we saw in February was the smallest annual increase we've seen since January 2006, when we began calculating year-over-year increases, but it still marked the 50th consecutive month of year-over-year increases in foreclosure activity," said James J. Saccacio, chief executive officer of RealtyTrac, in a statement.

Interesting to note that an NPR story this morning offered a contrasting viewpoint to the “slowed rate of foreclosure” news.  The executive they interviewed explained that foreclosures remain elevated at “6-7x” normal levels and that a 2nd wave resulting from high unemployment is gathering momentum.  The problem, he noted, is the sheer volume of foreclosures does not allow for timely processing, thus the headline “slowed rate” is misleading.  He offered a great image to describe the backlog in the pipeline, calling it “a pig in a python.”  CSFB is out with a bullish call this morning (counter to what we saw from Barclay’s two days ago) titled “Don’t Short the Recovery:”

            Equity Strategy:
·          We are still bullish of equities. Our mid-year target remains 1220 on S&P 500.
·          Equities still offer better value that other asset classes with an equity risk premium of 5.4%.
·          Major macro and credit variables are at levels when equities were 20% higher.
·          Tactical indicators are supportive (although very near term equities look overbought).
·          Buy quality growth, cheap corporate spend related exposure and cheap indirect GEM exposure.
·          In our opinion, the time to turn bearish is when there is a sharp recovery in private sector credit growth and we now think that is more likely in 2011 than late this year.

PIMCO’s El-Arian posted an op-ed to the Financial Times on-line this morning which is decidedly cautious on the state of public finance – please see quote section below for the full text.  Here’s a solid teaser from Bloomberg news, though:

“The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” El-Erian, co-chief investment officer at Pacific Investment Management Co., wrote in an article on the Financial Times Web site. The potential damage from increased government borrowings is “at present being viewed primarily -- and excessively -- through the narrow prism of Greece.”

WSJ reports MON is at risk over forthcoming Justice Dept antitrust hearings.  WSJ reports ANF will continue cost-cutting to spur sales.  Retailers ARO, PSUN, and ZQK report tonight.  DPS upgrade at UBSS.  CITI ups AYR.  JPHQ ups LVLT.  PIPR ups PRA.  CSFB cuts WAC.  PIPR cuts ACAP.  UBSS cuts SLG.  Bill Gates ups KOF stake to 24.6%.  HSY, SUN upgrade at GSCO.  JEFF cuts ARG.  ING cuts MT.  SPHN cuts PSYS.  CLNE beats by 1c.  DEG posts increased guidance.  DPTR misses by 2c.  DTLK beats by 5c.  FCEL reports in-line.  GYMB beats by 1c.  HOTT reports in-line.  ICO prices 22M shares at $4.47/share.  Cramer positive MDR.  MW beats by 5c but trades lower.  WBLR cuts SKIL.  SMTC beats by 8c. 

Asia mostly higher overnight – Australia traded lower.  Europe down just over 50bps this morning.  USD +5bps.  Oil -70bps.  Gold -45bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
AMERICAN INTERNA       37.85    +4.44%             1333232
BOSTON SCIENTIFC       7.87      +2.88%             47210
DEVON ENERGY CO         73.73    +2.85%             314135
RADIOSHACK CORP        23.13    +1.89%             1100
WENDY'S/ARBY'S-A        4.67      -1.89%              1200
BED BATH &BEYOND       40.89    -1.87%              3200
FANNIE MAE                  1.12      +1.82%             1117458
GEN GROWTH PROP       14.65    +1.74%             300
SPRINT NEXTEL CO        3.59      -1.64%              81074
FREDDIE MAC                1.33      +1.53%             846823
HUNTINGTON BANC        5.33      +1.52%             85019

Today’s Trivia:  On this date 40 years ago, what won the Grammy Award for “Best Song?”

Yesterday's Answer:   China and the U.S. are #1 and #2 in apple production, but Iran (!!) is #3. 

Best Quotes:  “How to handle the sovereign debt explosion By Mohamed El-Erian

Published: March 10 2010 19:43 | Last updated: March 10 2010 19:43

Every once in a while, the world is faced with a major economic development that is ill-understood at first and dismissed as of limited relevance, and which then catches governments, companies and households unawares.

We have seen a few examples of this over the past 10 years. They include the emergence of China as a main influence on growth, prices, employment and wealth dynamics around the world. I would also include the dramatic over-extension, and subsequent spectacular collapse, of housing and shadow banks in the finance-driven economies of the US and UK.

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.

First, at the most basic level, what we are experiencing is best characterised as the latest in a series of disruptions to balance sheets. In 2008-09, governments had to step in to counter the simultaneous implosion in housing, finance and consumption. The world now has to deal with the consequences of how this was done.

US sovereign indebtedness has surged by a previously unthinkable 20 percentage points of gross domestic product in less than two years. Even under a favourable growth scenario, the debt-to-GDP ratio is projected to continue to increase over the next 10 years from its much higher base.

Many metrics speak to the generalised nature of the disruption to public finances. My favourite comes from Willem Buiter, Citi’s chief economist. More than 40 per cent of global GDP now resides in jurisdictions (overwhelmingly in the advanced economies) running fiscal deficits of 10 per cent of GDP or more. For much of the past 30 years, this fluctuated in the 0-5 per cent range and was dominated by emerging economies.

Second, the shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.

Third, the issue is not whether governments in advanced economies will adjust; they will. The operational questions relate to the nature of the adjustment (orderly versus disorderly), timing and collateral impact.

Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.

Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialise on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.

Fourth, governments can impose solutions on other sectors in the domestic economy. They do so by pre-empting and diverting resources. This is particularly relevant when there is limited scope for the cross-border migration of activities, which is the case today given the generalised nature of the public finance shock.

Fifth, the international dimension will complicate the internal fiscal adjustment facing advanced economies. The effectiveness of any fiscal consolidation is not only a function of a government’s willingness and ability to implement measures over the medium term. It is also influenced by what other countries decide to do.

These five points all support the view that the shock to balance sheets is highly relevant to a wide range of sectors and markets. Yet for now, the inclination is to dismiss the shock as isolated, temporary and reversible.

This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.

There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.

Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.”

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