Wednesday, March 17, 2010

Morning Note...

Futures are +30bps higher this morning as yesterday’s FOMC announcement signaled the “all clear” for a low interest rate environment (ZIRP) to continue for some time, and this morning’s Producer Price Index data was non-inflationary.  Month-over-month PPI was -0.6% vs. the -0.2% expectation.  Year-over-year PPI was +4.4% vs. the +4.9% survey.  Overseas, the ratings agencies’ recent reiteration of Greek, UK, and Spanish debt has also signaled an “all-clear” of sorts there.  Given the recent technical market close (despite low volumes) at a new 52-week high over S&P 1150 (in addition to positive data points and a lack of notable crises of late), the bulls are arguing for S&P 1200-1250, which – at this pace – seems well within reach.  In earnings news, DFS reported in-line with its prior preannouncement and will issue $350M of subordinated debt to repay TARP.   Note that Bernanke and Volcker testify before the House Budget Committee starting at 10am today.  Additionally, President Obama is due on Fox tonight (!!) to stump for the HealthCare Bill, which is reported to be up for vote by the House either Friday or Saturday this week.  Recall that this Friday marks quad witching expiry.  Taking the contrarian view of yesterday’s FOMC release, Nobel laureate (and Amherst grad) Joseph Stiglitz warns against stimulus withdrawal, in the form of quantitative easing scheduled to end this month:

The Federal Reserve’s decision to let its mortgage-debt purchase programs end this month risks driving up home-loan rates and worsening the housing crisis, Nobel laureate Joseph Stiglitz said. “The withdrawal of the support risks increasing the interest rate, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing,” Stiglitz said in an interview in Tokyo. He said officials “misjudged things,” and predicted foreclosures and bank failures this year will exceed the 2009 and 2008 totals. Stiglitz said the main dangers for the global economy are that central banks will “exit too rapidly” from measures adopted during the crisis, propelled in part by an “irrational” fear among some investors that inflation will soar. The liquidity created by central banks battling the recession isn’t likely to fuel consumer prices because of subdued consumer demand, he said. The warning by the Columbia University economics professor and former chairman of the White House Council of Economic Advisers is a contrast with the steps being taken by the Fed and its counterparts to rein in monetary stimulus to prevent a buildup of new imbalances that could destabilize the economy. In Asia, central banks are moving toward raising interest rates to prevent asset-price bubbles. (BBERG News)

In other political news, much has been made of recent U.S./China relations.  Dennis Gartman had some incendiary thoughts on this topic yesterday in TGL, and unfortunately I ran out of room in yesterday’s note, but I’ll include it here for entertainment purposes if nothing else:

Finally this morning, never ever under-estimate the ability of US congressmen... and Congresswomen too! do truly stupid, even dangerous things when it comes to economics. Their history is legion when it comes to making stupid… truly, truly stupid…decisions at the worst possible times, and they are adding to their storied history with their recent actions regarding the Chinese Renminbi. China has made it very clear that its intention is to make the Renminbi a freely floating currency that may, over many, many decades, become a rival reservable currency to the US dollar. The latter will be decades into the future, but the act of freely floating the Renminbi is probably only a year or less into the future. China knows what it must do in this regard. China understands its role in the world, and it has said time and time again that it shall move when it serves China’s best interests to do so…and not a moment before then. This is China’s prerogative. It is no one else’s to make. It is China’s alone.

Into this fray then comes the US House of Representatives, a large number of whom have signed and sent a letter to Treasury Sec’y Geithner and Commerce Secretary Locke, demanding that pressure be brought upon China to raise the value of the Renminbi immediately. The letter said “The impact of China's currency manipulation on the U.S. economy cannot be overstated. Maintaining its currency at a devalued exchange rate provides a subsidy to Chinese companies and unfairly disadvantages foreign competitors.”

The problem that these economic illiterates refuse to face is that China is running imbalance of trade deficits with nearly all other nations; it runs a huge imbalance
of trade surplus with the US because US consumers demand inexpensive goods from China, and as the economy here strengthens this propensity on the part of US consumers shall grow, not decline. Prime Minister Wen has gone out of his way to explain time and again that the US/China trade deficit is not China’s fault, it is that of the US consumer… and he is right. But idiocy trumps wisdom almost every time when it comes to the US House of Representatives. This is made all the clearer in light of the fact that the Chairman of the House Ways and Means Committee Chairman, Mr. Sander Levin, said he intends to hold a hearing next week to examine the impact of China's exchange rate policy on the U.S. and global economic recoveries as well as on U.S. job creation. Mr. Levin, one of the most far-left-of-centre members of the House, said, threatening China, that “steps will be taken” to insure that Beijing understands the US’ concerns on this issue. Other Democrats, and a few Republicans, lustily joined Mr. Levin in his economic idiocy. This makes for good “sound bites” in an election year; it makes for horrid economics however. Won’t someone please stop these men before they really do something truly stupid? Please!!

While we’re on the topic of “incendiary,” did anyone else notice this story yesterday?  The more things change, the more they stay the same:

            CLOs to End 12-Month Drought in Citigroup Deal: Credit Markets 2010-03-16 09:51:00.168 GMT

March 16 (Bloomberg) -- The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to open in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities. Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent. The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions. Citigroup and WCAS Fraser Sullivan are marketing the deal after prices on CLO debt staged a record rally on signs of economic recovery.

GRMN raises dividend.  WLP reaffirms guidance.  ANF tgt raised at Jesup.  ADSK added to CB list at GSCO.  ANN upped at BofAMLCO.  CSFB ups BLK.  CLD beats by 10c.  COV announces $1 billion buyback.  GSCO cuts ALU, CTXS.  ERIC cut at BofAMLCO.  FMCN higher on earnings.  KBWI ups GHL.  GSCO ups JACK.  BofAMLCO ups LNC.  LSI raises guidance.  NOK tgt raised at BofAMLCO.  PLCM in talks with Apax Partners to go private.  CITI cuts SHPGY.  SI higher after announcing job cuts.  TOO announces 4.4M share offering.  VHC wins $106M judgment against MSFT.  VIVO lowers guidance.  WNI beats by 6c.  CSFB cuts DO.  Barron’s bullish on MON.  Blockbuster formally announces bankruptcy. 

Asia higher overnight.  Europe up 50-80bps thus far.  USD flat.  Gold +32bps.  Oil +115bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
UNUM GROUP                 25.39    +5.05%             296
HARTFORD FINL SV        28.27    +3.71%             1302391
LSI CORP                       6.02      +3.44%             401075
CIT GROUP INC              37.38    +3.0 %              83642
AMERICAN INTERNA       34.40    +2.35%             208925
AUTODESK INC              29.99    +2.32%             6500
CITRIX SYSTEMS           47.85    -2.25%              6010
LINCOLN NATL CRP         29.10    +2.18%             58096
STARWOOD HOTELS      43.37    +2.12%             760
ADOBE SYS INC              35.75    +2.08%             4185
SPRINT NEXTEL CO        3.52      +2.03%             96552

Today’s Trivia:  Something near and dear to my heart (after all, I left a lot of brain cells behind after two years in Ireland)…what is the oldest beer in Ireland?  And, if you know the answer, what is the proper pronunciation?  Bonus question:  When US President Bill Clinton visited Ireland in 1996 – when your author was living there – what beer did he drink?

Yesterday's Answer:   The stonefish is most poisonous to humans.  (I was looking for via touch or bite, not eating…many people answered “blowfish,” which I think is most poisonous to eat.)

Best Quotes:  Please see the attached story, which is a chapter from Michael Lewis’ new book The Big Short.  It’s a must read for any would-be contrarian investors and anyone interested in the early stages of the subprime crisis. 

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