Monday, March 29, 2010

Morning Note...

Futures are 25bps higher this morning largely on the back of better-than-expected economic data in Europe.  European Confidence and UK consumer lending both beat expectations, while UK mortgage approvals were lighter than estimated.  Further, the UK had its outlook reiterated at “negative” by the S&P, and its credit rating was maintained at AAA.  S&P also stated that it expects to review the long-term rating and outlook again once 2010 Parliamentary elections are past.  Note that Greece plans to come to market with a 7-year EU5 billion bond offering this week.  Obviously, this will prove a critical test of the market’s confidence in the recent IMF-EU rescue package for Greece.  In Russia, a Subway terrorist attack during the rush hour took the lives of 39 people.  This was the worst terrorist attack in Russia since 2004.  In China, stocks rose ~2% overnight despite further tightening commentary from the Chinese government.  It’s shaping up to be an interesting week ahead.  Given the Jewish holidays today and tomorrow, and Good Friday at week’s end, how will volumes and trading action shape up ahead of month- and quarter-end on Wednesday?  Have most funds positioned themselves accordingly?  Or could we see some “window-dressing” or “tape-chasing” in the days ahead?  Further, the jobs data release on Friday looms large – most pundits expect further signs of economic recovery in the way of job growth for March.  Recall that equity markets will be closed Friday, but that the bond market will be open.  Also, we’ll get March auto sales data throughout the day Thursday and the CaseSchiller home price index is due on Tuesday.  In corporate news, APOL is trading higher on earnings pre-market, and we’ll get earnings from RIMM and MU on Wednesday.  Further, the London Telegraph speculates on a merger between VZ and VOD. 

Rising bond yields caught everyone’s attention last week.  BTIG posted the following summary:

A “good” sell-off?  Recent trends, namely a rising stock market, a stronger dollar, and weaker Treasuries, suggests that Treasuries are selling-off for the “right reasons” (i.e. rising growth expectations and a desire for more risky assets).  If the Treasury weakness was occuring coincindent w/a weaker dollar/rising gold and a sluggish stock market, then budget deficits and inflation could be more of the culprit.

Here are some interesting quotes pulled from my weekend reading… in general, the overall takeaway is decidedly “cautious” on equity markets:

Grant's has been, and remains, bullish on the economic recovery, but we see more risks than rewards in most stocks and bonds.  Cash yields nothing, or less, we know.  But it does come in handy when there's something to buy.  That there will be something to buy in some market and at some juncture, we have no doubt.  It's nature's way. 

In 1973, Benjamin Graham set out seven criteria for stock selection by the defensive investor. Little did he suspect that he was thereby devising one of those tests that everybody flunks. The criteria were these:(1) adequate size (an S&P 500 stock, for instance); (2) a current ratio of at least 2:1; (3) 10 consecutive years of net profits; (4) 20 years of uninterrupted dividend payments; (5) earnings growth in the previous 10 years of at least 33%; (6) a price-earnings ratio no higher than 15:1; and (7) a price-to-book ratio no higher than 1.5:1. One could combine the final two criteria in one ratio: P/E times P/B of less than 22.5.

At intervals, Grant's has screened for stocks that meet these exacting requirements. In the issue dated Dec. 12, 2008, we found eight: Pfizer Inc., Nucor Corp., Cooper Industries Inc., Cintas Corp., Tiffany & Co., Archer Daniels Midland Co., Molex and RadioShack Corp. An equal weighting of the eight, purchased on that date,would have de-livered a total return of 48.5% through March 12. It was a very simple thing to do, providing one had never picked up a newspaper or turned on a computer to observe that, by the early-2009 lows, one's value-armored, margin-of-safety- protected picks were down by 26%.

And today? Only one stock makes the Graham grade. Archer Daniels Midland is trading at13.1 times trailing earnings (9.5 times the 2010 estimate) and 1.24 times book, to yield 2.1%.

Marc Faber's most recent Gloom, Boom & Doom Report discusses his recommendation of a new book by Tony Boekh called The Great Reflation.  According to Boekh, "the unprecedented attempts underway to reflate the economy open a new chapter in financial experimentation, one that creates great uncertainty and risk for everyone, but also opportunity."  Says Faber, "Under the Great Reflation, I suppose that investors will need to be positioned most of the time in assets such as equities, real estate, commodities, and precious metals.  I have deliberately decided to distinguish between commodities and precious metals, because I believe that precious metals will increasingly be looked upon as an alternative to cash deposits and money market funds, whereas commodity prices will continue to be driven more by genuine demand and supply factors than by monetary factors."

I also noted something interesting from last Friday’s Gartman Letter – here’s a contrarian take on China and Renminbi appreciation:

We have long maintained that Beijing cannot allow itself to appear to have bowed to American demands on the question of her own currency, nor would the US bow to demands made of it by China. The question of a nation's currencies value is either a sovereign question, or one left to the market to decide.

What we wish to warn here this morning is that the Left may have it all wrong regarding the potential for the Renminbi only to rise once it floats, for something completely different may well develop. We suggest that the Left consider the fact that so much capital has gone to China for plant and equipment over the course of the past twenty years, and has been locked up there, that when the curtains are drawn down and the Renminbi is freely floated, there may be billions upon billions of Renminbi that flee the country looking for shelter elsewhere. We can actually make the case that the Renminbi shall fall precipitously a few weeks after the float is finally announced, as "locked up" investors move their capital to the US, or Canada, or Indonesia, or anywhere the dismay and embarrassment of the Left.  'tis just a thought, but the theory is universal that the Renminbi has only one direction to move when it is floated and that is upward, and we wish to suggest that it just might be otherwise.

VRSN downgrade at JEFF.  BTM upgrade at JPHQ.  BARD ups CVGI.  AIB lower on issues regarding capital requirements.  APOL beats by 3c.  PCP upgrade at GSCO.  ThinkEquity positive ahead of MU earnings.  BELM to be acquired by Avnet for $7/share.  EOG upgrade at RBCM.  VTIV may be up for sale. 

Asia mixed overnight but China +2%.  Europe mixed but leaning slightly lower.  USD -25bps.  Oil +79bps.  Gold +62bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
APOLLO GROUP-A           65.05    +6.15% 49844
SOUTHWESTRN ENGY     39.55    +4.91% 32685
INTL FLVR & FRAG         47.25    +3.5 %  2300
MICRON TECH                10.77    +2.67% 129205
SUPERVALU INC             16.61    +2.4 %  750
AMERICAN TOWER-A      42.63    +2.35% 2100
ITT CORP                      53.96    +2.31% 1100
LENNAR CORP-CL A        18.70    +2.19% 4300
CINTAS CORP                28.52    +2.15% 500
VIACOM INC-B               34.00    +2.13% 600
INTERCONTINENTAL       108.755 -2.09%  200
AMERICAN INTERNA       34.92    +2.08% 102525
SLM CORP                     12.84    +2.07% 150
EOG RESOURCES           91.41    +2.03% 4850
FREEPORT-MCMORAN    80.76    +2.01% 53588

Today’s Trivia:  A few more interesting company HQs…name the company associated the following headquarters:  Sandy Springs, GA; Vinings, GA; Purchase, NY; Issaquah, WA
Yesterday's Answer:  Redmond, WA - MSFT; Espoo, FINLAND - NOK; Bentonville, AR - WMT; Leiden, NETHERLANDS - IKEA; Round Rock, TX - DELL; Framingham, MA - SPLS. 

Best Quotes:  “Almost every major global equity market is higher as signs of "re-risking" continue; our S&P futures are close to the overnight highs.

Rising Treasury yields seems to have replaced Greece/EU as the next catalyst for a return to volatility.  Greece announced overnight its pricing 7 year bonds 310 bps over swaps (relatively cheap).  Consensus is they wouldn't announce this deal so soon if they couldn't get it done.

Rising Treasury yields, on the other hand, are beginning to weigh on equity investors as the 10 year is at its highest level since June '09.  There are two schools of thought by equity PM's on if this is a good/bad thing-

-  Bulls- rising yields on bonds are healthy and a sign of underlying macro improvement, and 4% is where we were pre-crisis, so this is normal and healthy.

-  Bears- the reason for higher yields is the flood of debt being issued, not underlying macro strength.  Investors are demanding higher rates to swallow our debt.  And rising rates potentially makes bonds more appealing than stocks (poor reasoning I think given Bond funds have already seen $110B inflows YTD vs. $2B domestic equity per ICI)

A few stats on the market's strength of late

-  S&P up for the fourth straight week, up 5.6% over that time.
-  the S&P has now gone 24 straight sessions without a 1% correction (Barrons)
-  Corporations ended '09 with 11.4% of assets in cash; the view is investors will demand this to be used for A) buybacks and B) deals.
-  89% of the S&P is above it's 50 dma, 96% of the financial sector is.

ISM and nonfarms on Friday; the nonfarm bogey continues to creep higher (currently 200k job gains).  Obviously equity markets will be closed, but the bond market is open Friday.”

--RBC trader note

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