Friday, March 19, 2010

Morning Note...

Happy Friday…Futures are flat to +10bps ahead of today’s quad witching and S&P rebalance.  Quad witching references that date on which stock index options, single stock options, index futures contracts, and single stock futures contracts all expire.  Additionally, the S&P quarterly share rebalance will be effective as of close of business today (see below for details).  The net result of quad witching is that the S&P should hover between 1150 and 1175, depending on what level most options are “pinned” to.  Note that yesterday’s action was marked by light volume, EUR weakness, and speculation that the Fed will raise the Discount Rate again in the near term.  In corporate news, Carl Icahn is bidding for Lions Gate Films (LGF) and the WSJ notes that March auto sales may be trending much higher than expected.  GOOG is reported to be retracting from China as of April 10th.  Boeing announces production increases in a bullish sign for increased airplane demand.  Never heard this one before, but Cannacord Adams took their PALM (-20%) target to $0 following earnings last night. 

Overseas, China says it will send an envoy to Washington to help smooth recent tensions.  Additionally, the yuan is slightly higher on reports that China has begun “stress testing” to determine the impact of a higher yuan.  In Europe, banks are higher on Lloyd’s positive pre-announcement and the Greece/European Union comedy of errors continues.  As BTIG’s Mike O’Rourke pointed out last night, it’s saying something when their politicians actually have the effect of making ours look good!  In a nutshell, Germany & Angela Merkel think there should be rules in place for EU expulsion if a country’s financial affairs aren’t in order.  ECB President Trichet called this “absurd,” which only exposes the fact that this organization has no mechanism by which to enforce standards and membership.  So if Germany and the EU can’t help Greece, and send them to the IMF hat-in-hand, then it would effectively become the beginning of the end for the EU and the euro experiment.  And thus yesterday’s euro weakness.  Dennis Gartman has some colorful commentary on this topic today as well:

THE EUR IS WEAK and we fear that is shall…indeed we think it will almost certainly become…weaker over the course of the next several weeks, as the situation in Europe becomes more and more troublesome, not less. There are those who argue that Greece is but a small… a tiny… an unimportant portion of the economy that is the Euroland, and they have argued for weeks that this situation shall resolve itself to the benefit of the EUR bulls and to the clear detriment of the EUR bears. We can only suggest that they are wrong, and badly so. The problem that is Europe is only now coming to the fore. The problems that shall plague Europe in the future are the same problems that have plagued her in the past several years: hard working, high taxed, highly productive Germans will not pay the costs of less-than-hardworking, low taxes, incredibly unproductive Greeks can have an earlier retirement and more vacation days each year than can the Germans. One can wrap the problems in Europe in any and all sorts of politically correct language, but this is the problem when push comes to taxpaying shove.

If 1.3500 is “given” later today in European or N. American dealing in the EUR, we fear that that shall touch off a huge round of new and more aggressive selling. Simply put, those who are long of the EUR predicated upon a workable Greek bailout will then find themselves in a consistently uncomfortable position where their losses on their positions are growing and their defenses less and less certain. We do not relish watching Europe cave in upon itself in this manner. We have no sense of schadenfreude as we watch the EUR “go sellers” as readily as it does. We take no joy in watching this problem evolve, but we’ve been around far too long and have seen far too many “unwinding” such as this and they follow the same courses of action time after time after time. Initially, the problem is on the periphery, and those crying “Fire” are seen as wailing Cassandra’s in the wilderness whose opinions are better left unheeded. Then there is another slightly bigger problem that seems somewhat related to the first problem, but even then those who should know are prepared to take exception to the problem, calling it isolated, or misunderstood or both. Then the problem spreads… or more properly metastasizes, into some virulent disease as one group after another is brought low as new problems arise, all stemming from the first one. Then comes chaos, and finally resolution.

In healthcare news, the House Democrats appear to be headed for a successful vote on Sunday, and Obama has once again delayed his trip to Asia to ensure House passage of the bill.  Alan Greenspan speaks today at the Brookings Institution, Obama speaks on healthcare at 11:30am, and Bernanke speaks tomorrow morning here in Florida

Regarding the S&P rebalance:  estimates for money flows include net inflows into diversified financials (~$900M) and banks (~$290M), and outflows from software & services (~$360M) and healthcare equipment & services (~$350M).  Here’s a breakdown of the specifics:

S&P 500 - total trade size (buys plus sells) will be $7.1bn, for a two-way turnover of 0.61%. There will be 273 share increases, 103 share decreases and 103 weight decreases.
S&P 400 - total trade size (buys plus sells) will be $431mn, for a  two-way turnover of 0.71%. There will be 134 share increases, 68 share decreases and 198 weight decreases.
S&P 600 - total trade size (buys plus sells) will be $173mn, for a two-way turnover of 0.69%. There will be 145 share increases, 84 share  decreases and 371 weight decreases.

ADUS misses by 13c.  AJG cut at BofAMLCO.  BBY upgraded at GSCO.  BIDU higher on news that GOOG will retract from China.  CERN to replace BJS in S&P500.  CITI cuts DTV.  HRP prices 30M shares at $7.25.  HT announces 19M secondary.  SPHN cuts MLM.  PALM down 20% on earnings miss.  QADI upgrade at COWN.  SB prices 9M shares at $7.  SPWRA beats by 1c but guides lower.  UFS cut at BofAMLCO.  WFT cut at JEFF.  CITI cuts TEG. 

Asia higher overnight.  Europe roughly 50bps higher.  USD +40bps.  Oil -40bps.  Gold -30bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
INTEGRYS ENERGY         45.17    -3.67%  4420
BEST BUY CO INC           41.77    +3.26% 111007
QWEST COMMUNICAT    5.09      +2.41% 384445
BOEING CO                    72.50    +2.3 %  126084
LABORATORY CP            74.45    -2.26%  2300
WHOLE FOODS MKT       35.38    -1.72%  100
PROGRESSIVE CORP       18.15    +1.57% 800
BOSTON SCIENTIFC       7.18      +1.56% 117835

Today’s Trivia:  The company Nike is obviously named after the Greek Goddess of Victory, but let’s tackle some more obscure name origins.  Please guess at the translation, inspiration, or reference for the names of the following companies – Volvo, Akamai, Hyundai, and Raytheon.   
Yesterday's Answer:   Twelve teams would have been knocked out of this year’s NCAA tourney if the rules barred teams with less than 40% graduation rate -- Maryland, California, Arkansas-Pine Bluff, Washington, Tennessee, Kentucky, Baylor, Missouri, New Mexico State, Clemson, Georgia Tech and Louisville

Best Quotes:  ResearchEdge morning note below – always good stuff…

"I do not expect any major nations to default on their debt."
- Robert Rubin, Former Secretary of the Treasury, March 2009, Yale Law School

This is a quote we have highlighted a few times in the last year. We have it in our slide deck for the conference call that we will be hosting at 11AM: "Where Does The Sovereign Debt Cycle End?" (If you are interested in listening, email We use this quote to remind investors that the almighty ones at Groupthink Inc. have a serious problem in forecasting global macro risk.

Whether it is Robert Rubin, Larry Summers, Hank Paulson or now Timmy Geithner, it's critical to understand that these gentlemen all come from the same place - Goldman and/or the Government. In sharp contrast to proactively preparing America for future risks, their claims to fame often surround solving crises that they helped create.

We realize that Summers didn't work at Goldman. We also acknowledge that if he did, and he put GS into the derivative positions he put the Harvard Endowment into, he probably wouldn't have worked there for long. As for Timmy, well... he's not a P&L guy, so we aren't certain he will be hired by Goldman when this is all said and done, but he should definitely apply to their derivative sales group if he wants a legitimate shot.

What all of these gentlemen have in common is an ideology that Debt Is Good. Now, politically speaking, it's not palatable for them to admit this, but we will show you in a tight slide presentation that you should watch what they have done to America's balance sheet, as opposed to what they've been telling you they were doing.

Away from the shell game of issuing more US Treasury debt than maybe even God himself could, the latest bailout game that Geithner is playing with America's future is through what politicians are affectionately referring to as "Build America Bonds", or BABs.

Now Geithner and Schumer are more focused on calling the Chinese manipulators than focusing your attention on this, but that doesn't mean that State Treasuries aren't levering this country right up like the Greeks did (Greek stocks are down -4.8% this week, fyi).

When asked about debt-laden California's plan to issue BAB's, Tom Dresslar (a spokesman for the CA Treasurer Bill Lockyer), told Bloomberg, "we plan to go full speed ahead with our BABs." Nice. Lever this pig right up boys!

Now CA can call them BAB's and Geithner can call these something about "Building America", we call these Domestic Pigs. We'll go through the numbers and the historical context of US State and Sovereign Debt on our conference call, but the reality is that California has already issued $8.1B of these Piggy Banker Bonds, and have every intention on issuing as much as the US government will let them.

The US Treasury is so busy fear-mongering you into believing that they are "saving you from the unknown", that they often fail to mention the knowns. The US Treasury subsidizes municipal debt! New York City just issued $644M yesterday. This puts the US Municipal Debt market over the $2.8 TRILLION DOLLAR mark! They are feeding the pig and it's growing. Building America? Yeah... one more debt at a time.

Again, from a politician's perspective, Debt Is Good (we are working on a makeover for a Geithner Gekko). Think about why this is so - it's not that complicated. Debt is a future obligation. Most of these cats don't plan on sticking around Washington for your future.

The Federal Reserve's Vice Chairman, Donald Kohn, has recently announced that he is resigning from the Fed. This week, the Fed's balance sheet grew by another $26 Billion (week-over-week), taking it to a new record high of $2.31 TRILLION Dollars. If you didn't know he wasn't planning on seeing his Building America's Liabilities through, now you know... Kohn has sat on the Fed's Board since, you guessed it, 2002.

While it's getting hard to keep track of all this American Debt (Bernanke was asked by the House Financial Services Committee this week if $5 TRILLION in GSE Debt was US Sovereign Debt. His answer: "I don't know"), the team at Hedgeye Risk Management can tell you this: it will not end well. Across 8 centuries of economic realities, it never has. And never, is a long time.

My immediate term support and resistance lines for the SP500 are now 1151 and 1170, respectively.

Best of luck out there today

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