Friday, April 30, 2010

Morning Note...

Futures ~10bps lower this morning on in-line economic data in the U.S. and tightening default spreads in Europe ahead of the long weekend and Monday’s European bank holiday. WSJ headlines regarding a criminal probe into Goldman Sachs’ trading activities (see more on this below) are weighing slightly on markets, along with weaker-than-expected earnings from banking giant Barclay’s (BCS; -7%) overseas.  Regarding Greece, credit spreads have tightened considerably as expectations that an official bailout deal will be struck today or over the weekend mount.  However, beware Spain…note this headline from Bloomberg this morning:  “Spanish Unemployment Tops 20%, Hurting Deficit Fight.”  In Asia, Bank of Japan left rates unchanged at 0.1%. 

In economic news, U.S. Q1 GDP came in at +3.2% vs. the +3.3% expectation.  Q1 Personal Consumption (always key when 70% of the economy is consumer-driven) was +3.6% vs. the +3.3% expectation.  In earnings news, McAfee is 11% lower premarket on earnings.  Monster Worldwide is also lower (lowered guidance slightly) despite a beat.  Nasdaq reported 3c light.  Looking ahead, U of Mich Consumer Confidence is due at 10am today, and the Chicago Purchasing Manager’s Index data is due at 9:45am.  In other news, Pennsylvania state capital may file for bankruptcy sooner than later.  Is this the “canary in the coal mine” (see “sovereign debt, Greece” or “Stearns, Bear” if you are tracking all this at home) for U.S. state and municipal financial woes?  Further, the Gulf of Mexico oil spill (by BP) continues to draw attention and negative headlines.  Unfortunately the whole thing appears on track to become the largest man-made ecological disaster ever.

Interesting thoughts on financial reform from CSFB’s Mary Whalen yesterday…this is pretty strong language:

The financial reform bill has the potential to be disastrous because if the agenda to eliminate private speculation in commodity markets prevails, then liquidation will be violent given the recent flows of money towards these markets. Maybe it is the government's final answer to deficit worries: if you force people out of commodities, they will have to support equities and bonds, and given the risks to growth and earnings priced in by equity markets, it means the US Treasury no longer has to worry about demand at auctions or a weak currency generating commodity inflation. It would be the final insult and nail in the coffin for what is left of our capitalist system. It was brought to my attention that national security concerns have been supporting this agenda, and that is a point well worth keeping in mind. It would certainly buy the US 10 more years of additional time to reach energy independence. Be very cautious though, bank stocks would take a strong hit, and so would energy companies.

Regarding Greece, Bloomberg posted the following table yesterday, which offers some granularity in terms of exposure to potential default (formatting a mess, sorry):

April 29 (Bloomberg) -- The following table shows European financial institutions’ stated exposure to Greece and Portugal. Standard & Poor’s cut its rating on Greek debt three levels to BB+, or junk, and lowered Portugal’s rating two steps to A-on April 27. Spain’s rating was lowered one step to AA on April 28. The figures were provided to Bloomberg News in interviews and e-mails, or culled from company reports and presentations, and are subject to change. The list is in alphabetical order.

COMPANY                       EXPOSURE TO:

                                                GREECE                         PORTUGAL

Aegon               EU92 million                   EU58 million

Allianz               EU900 million                 EU500 million
                        net                    sovereign                       net sovereign

Aviva                 GBP500 million               part of GBP1.2 billion
                                                                                    exposure to Greece,
                                                                                    Spain, Portugal

Axa                   EU600 million                 EU900 million

Barclays            no comment                    no comment

BBVA                “immaterial”                   “immaterial”

BNP Paribas       “negligible” vs
                                                Greek banks;                 “very limited” loans
                                                                                    to Greek companies

CNP Assurances      EU113 million            EU154 million
                                                            sovereign             sovereign

Commerzbank         EU3.1 billion             no comment

Credit Agricole     owns Emporiki Bank
                                                            of Greece.
                                                                                     EU850 million

Credit Suisse       “not material”               “not material”

Deutsche Bank       “not much” direct        no comment

Deutsche Postbank   EU1.3 billion              no comment
Dexia               no comment                  no comment

Fortis              EU4.1 billion                     EU3.1 billion
                                                sovereign                      sovereign

Hypo Real Estate    EU7.9 billion                EU1.7 billion
                                                sovereign; EU2               sovereign; EU3.7
                                                billion non-                     billion non-sovereign

ING                   EU3 billion                     EU1.9 billion
                                                 sovereign                     sovereign

Intesa              EU1 billion                       part of EU1.5 billion
                                                sovereign                      exposure to Portugal,
                                                                                     Ireland, Greece, Spain

KBC                 about EU1.2 billion           about EU600 million
                                                sovereign                      sovereign

Lloyds              “not material”                   “not material”

Monte Paschi        EU20 million

Munich Re           EU2.1 billion                 EU800 million
                                                 sovereign                     sovereign

Natixis             “negligible”                       “insignificant”

Nordea              no comment                  no comment

Prudential          no exposure                   no exposure

RBS                 < GBP1 billion                  GBP1.4 billion

SEB                 “very limited”                    no comment

Societe Generale    owns 54% of Geniki    no comment

Standard Chartered  no exposure           no exposure

Swiss Life          SF335 million                 SF170 million

Swiss Re            SF482 million

UBS                 “not material”                  no comment

UniCredit           “not material”                no comment

Zurich Financial    < $520 million             < $520 million
                        sovereign                                  sovereign

Goldman Sachs (GS; -3.5%) is trending down this morning on the aforementioned “criminal probe into trading” as reported by the WSJ.  Not sure about this one.  First of all, if government wanted to, I am sure it could find plenty of gray areas – legally and ethically – in the business of institutional trading.  Second, from my objective, outsider’s viewpoint, this just strikes me as silly.  If you indict Goldman for trading practices (which have always seemed above-board to me, but what do I know…) then you basically need to indict every financial institution with a trading operation, and you’d probably be indicting “free markets” and capitalism right along with them.  Recently, I mentioned how the GS testimony before the Senate reminded me of A Few Good Men…and someone went so far as to script a pretty funny parody that I posted here yesterday.  Today, however, I will do it myself… Who remembers Animal House and Otter’s speech defending the Deltas before the Greek council ( 

Otter/Blankfein/Viniar: The issue here is not whether we broke a few rules, or took a few liberties with our [trading counterparties]; we did. (winks) 

But you can't hold a whole [firm] responsible for the behavior of a few sick, perverted [traders]. For if you do, then shouldn't we blame the whole [financial] system?

And if the whole [financial] system is guilty, then isn't this an indictment of our [American business practices] in general?

(The other [banks] cheer; Otter/Blankfein/Viniar addresses the [Subcommittee Chair] directly)

I put it to you, [Carl Levin]! Isn't this an indictment of our entire American society?

(The [other banks] cheer again) 

Well, you can do what you want to us, but we're not going to sit here and listen to you bad-mouth the United States of America!  Gentlemen!

(Otter/Blankfein/Viniar packs his briefcase and leaves the room; the other banks follow, humming "The Star-Spangled Banner")

AIXG cut at Canaccord.  APKT beats by 6c.  ATHN misses by 7c.  BEXP beats by 3c.  BOOM beats by 3c.  CSTR beats by 8c.  CSUN beats by 8c.  CTV beats by 1c.  DLB beats by 12c.  JRCC beats by 42c.  KFN higher on earnings.  MFE misses by 3c.  MSTR misses by 45c.  MWW beats by 2c but guides slightly lower.  NETL beats by 3c.  PWER beats by 3c.  RMD beats by 6c.  SWIR beats by 2c.  SWKS beats by 1c.  SWN beats by 3c.  THOR beats by 6c.  VLCM beats by 12c.  VPRT beats by 4c.  VSEA beats by 9c.  WFR misses by 6c.

Asia higher overnight.  Europe slightly lower.  USD -40bps.  Gold +80bps.  Oil +85bps.    

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
MEMC ELEC MATER        14.75    -7.47%  43730
DR HORTON INC             15.20    +6.74% 225544
FISERV INC                    51.25    -6.29%  14920
NEWELL RUBBERMAI       18.00    +6.19% 1445
GOLDMAN SACHS GP      152.00  -5.14%  1697843
QLOGIC CORP                20.50    -5.0 %  8600
APARTMENT INVEST      22.00    -4.89%  100
AVON PRODUCTS           31.09    -4.84%  4500
SOUTHWESTRN ENGY     38.70    -4.16%  14800
TRANSOCEAN LTD          75.85    -3.39%  361995
HALLIBURTON CO           30.65    -3.01%  133807
EL PASO CORP               12.45    +2.98% 2544
LIZ CLAIBORNE               9.43      +2.72% 100
SYMANTEC CORP           16.70    -2.54%  100
TELLABS INC                  9.17      -2.45%  6655
MYLAN INC                    21.25    -2.39%  760
KLA-TENCOR CORP         35.50    +2.33% 3140
EXPEDIA INC                  25.00    +2.0 %  42026

Today’s Trivia:  What U.S. state boasts the largest seafood industry in America?  Which is 2nd?
Yesterday's Answer:  Acetylsalicylic acid is aspirin…ascorbic acid is vitamin C…ethylene glycol is antifreeze…

Best Quotes:  Here’s some Friday fun…this made the rounds “street-wide” yesterday, and is actually a re-write of something posted on the blog dopeycowboy about 6 months ago (let’s give credit where credit is due)… I have to say, the cowboy – as always – is spot on with much of this… definitely food for thought as Goldman Sachs is trotted out in front of the proverbial firing squad.  Let this serve as a warning for those folks on Main Street clamoring for the death of Wall Street:

“We are Wall Street. It's our job to make money. Whether it's a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn't matter. We would trade baseball cards if it were profitable. I didn't hear America complaining when the market was roaring to 14,000 and everyone's 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I've never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you're only going to hurt yourselves. What's going to happen when we can't find jobs on the Street anymore? Guess what: We're going to take yours. We get up at 5am & work till 10pm or later. We're used to not getting up to pee when we have a position. We don't take an hour or more for a lunch break. We don't demand a union. We don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we'll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We're going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I'll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we're going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we're going to stop buying the new 80k car, we aren't going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We're going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it's really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren't dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?”

Thursday, April 29, 2010

Morning Note...

Futures are ~60bps higher on the back of better-than-expected economic data and earnings in Europe, a lack of continued debt downgrades (U.K.?) in the area, and generally tighter credit default spreads and lower bond yields.  Euro-zone April consumer confidence was higher than expected, U.K. April home prices rose, and unemployment fell in Germany.  Here’s a quick wrap of the euro-news today:

1) no UK ratings change - Per the FT, there was speculation on Weds that Britain could see its rating cut by S&P (note that the agency has already cut Greece, Portugal, and Spain). However, as of Thurs morning, such a move hasn't occurred, and this is helping sentiment. 2) Santander, Europe's largest bank by market cap, jumps ~3% in European trading after earnings came in better-than-expected 3) European debt spreads continue to behave as the sovereign crisis appears to be under lids for the moment.  4) Italian auctioned off debt this morning on terms better-than-feared. 5) Markets are increasingly comforted by the fact Germany seems to have come around and will be making a firm commitment of aid for Greece.  Talks between the EU/IMF and Greece are due to wrap up this Sunday (EU’s Rehn just said this morning that talks are “about to conclude soon within days”).  ECB council member Axel Weber said Greece defaulting on its debt would have "incalculable" consequences on financial markets and other countries. Weber told the Thursday edition of Bild, quoted by Reuters. "Financial aid tied to tough conditions are for all parties concerned the best solution." and 6) Spain’s Finance Minister is on the tape saying that his country will have no trouble financing a EUR16.2B bond redemption in July and won’t need to ask for European Union aid.  (JPM)

In Asia, China was lower overnight for a 6th session in a row.  Elsewhere, Brazil became the first LatAm country to raise rates, Russia lowered rates, and New Zealand left rates unchanged.  In U.S. economic news, Initial Jobless Claims for the week ending April 24th were 448k vs. the 445k expectation and the 459k prior week.  Continuing Claims for the week ending April 17th were 4.645M vs. the 4.618M expectation and the prior 4.663M reading.  In U.S. corporate news, HPQ announced plans to buy PALM for $1.2 billion, despite weaker-than-expected earnings from PALM last night.  In U.S. earnings news:  Exxon Mobile (XOM; -1.5% premarket) reported slightly lower numbers than anticipated…Visa (V; +1%) beat expectations…Motorola (MOT; +7%) beat estimates by 3c…Akamai (AKAM; +11%) beat expectations…Baidu (BIDU; +15%) beat expectations and announced a stock split…First Solar (FSLR; +6%) also beat earnings estimates…Green Mountain Coffee (GMCR; -13%) reported weaker-than-expected…Proctor & Gamble (PG; +1%) reported in-line but slightly raised earnings guidance…Colgate-Palmolive (CL; -1%) beat by 6c…Time Warner Cable (TWC; flat) beat slightly…Kellogg (K; flat) beat by 15c… In U.S. political news, it appears the Republicans will lay down their financial reform bill filibuster as Senator Shelby announces that [Senator Dodd] “assured me that he will address a number of concerns I have expressed with respect to ending bailouts.”  The next vote on opening the bill for debate is slated for today.  Reports indicate the BP Gulf of Mexico oil spill is beginning to near the Mississippi River delta in Louisiana, and will quickly exceed the Exxon Valdez disaster in terms of spillage and environmental destruction.  The estimates vary from government to BP itself, but it seems safe to say at least 5,000 barrels per day are leaking into the Gulf. 

Incidentally, I finally got around to reading the most recent Grant’s Interest Rate Observer (4/16/10 – admittedly, I find Grant’s hard to get through sometimes…) and posted a clip in the quote section below.  Essentially Jim Grant is less than convinced that TARP has been the rousing success that the government would have us believe it to be.   He also wonders what ammunition our bailout kings would have left were we to tumble into a double-dip at some stage.  I think it’s a sobering few paragraphs - see below for the text.

Regarding Greece, I thought this piece – out of BofAMLCO yesterday afternoon – was well-done and offers an interesting perspective:

Greece vs. IBM - Compare & contrast:

As the markets finally lose patience with the tortuously slow policy response on Greece, it was interesting to compare the hand-wringing over Greece's upcoming May 19th EUR8bn debt 'repayment' versus the muted response to the similar-sized US$8bn buy-back AND 18% dividend hike at IBM.

All-in-all this encapsulates the yin-yang over the past few weeks of truly strong global corporate earnings and the straitened circumstances of a number of sovereigns. Compare the 'P&L' of IBM and Greece for instance.

Greece (population 11mn) and IBM (400,000 employees) will have almost exactly the same revenues in 2010 i.e. US$100bn. But there the similarities end - Greece has expenditure of US$40bn more than its income, while IBM has after-tax income of US$15bn.

And the balance sheet? Greek debt is close to US$400bn (and rising) while IBM's net debt is US$17bn and falling (despite returning more than $80 billion through dividends and share buybacks since 2003).

And when it comes to borrowing costs, IBM 2 year bonds cost them 1.5% vs. 18% for Greece.

The serious point here is that the corporate world is generally in good shape, and we would be enjoying an even stronger bull market were it not for the sovereign and contagion risk at the periphery. (P. Bradshaw).

Finally, for those who missed it and who might be in need of some comic relief, apparently I wasn’t the only one to draw the parallels between A Few Good Men and Colonel Jessep’s testimony and the Senate Banking Subcommittee hearings and Lloyd Blankfein’s testimony.  This made the rounds yesterday and is pretty funny:

“Goldman Has A Greater Responsibility Than You Can Possibly Fathom...” Blankfein’s shocking testimony:

Senator: “Did you order the big short?”

Blankfein: “You want the truth? You can’t handle the truth... Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You Senator? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom... You weep for Lehman and you curse derivatives. You have that luxury… You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.

We use words like credit default swaps, collateralized debt obligation, and securitization. We use these words as the backbone of a life spent investing in something. You use them as a punch-line. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!!!”

IRM +3% on earnings.  AKAM target increased street-wide after earnings and upgraded at CITI.  VRSN in-line earnings and target raised street-wide but tgt cut at JEFF.  AOL downgraded at BCAP, UBSS.  BofAMLCO ups CAKE, FSLR.  BCAP ups CAN, CNX, RHI.  BMOC ups RHI.  DBAB ups ROK.  JEFF ups ABX.  JPHQ ups SUSQ.  OPCO ups PGI.  PIPR ups BEC.  BCAP cuts PCX.  JPHQ cuts PX.  UBSS cuts HL. CVD missed by 15c.  OPWV lower on earnings.  HOT higher on earnings. 

Asia lower overnight (Japan closed).  Europe roughly 1% higher.  USD -55bps.  Oil +2%.  Gold -50bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
AKAMAI TECH                36.69    +10.58%           171413
MOTOROLA INC             7.48      +8.09% 3577853
HARMAN INTL                47.65    -7.15%  9538
E*TRADE FINANCIA        1.71      -7.07%  14927644
EASTMAN KODAK           7.80      -6.59%  403227
CELGENE CORP              62.79    +5.3 %  125077
BRISTOL-MYER SQB       25.35    +4.15% 134425
ANHEUSER-SPN ADR       48.68    +3.4 %  4100
WASTE MANAGEMENT    34.12    -3.32%  500
INTL PAPER CO              28.00    +3.02% 16210
CONSOL ENERGY            45.40    +2.95% 12927
KELLOGG CO                  54.05    +2.8 %  998
AETNA INC                    31.34    +2.75% 15207
AFLAC INC                     50.97    +2.7 %  34826
LSI CORP                       6.22      -2.66%  104500
MANITOWOC CO            14.02    +2.64% 15162
OFFICE DEPOT INC         7.04      +2.47% 9841
MGIC INVT CORP            10.50    +2.44% 200
FANNIE MAE                  1.27      +2.42% 346063
MBIA INC                       10.20    +2.41% 30447
AMERICAN INTERNA       40.46    +2.4 %  112919
AMERICAN CAPITAL        6.14      +2.33% 5527
STARWOOD HOTELS      54.50    +2.31% 13515
FIRST HORIZON NA        13.76    -2.2 %  1024
SPRINT NEXTEL CO        4.35      +2.11% 770363
EXPEDIA INC                  23.99    +2.09% 361
HUNTINGTON BANC        6.87      +2.08% 78609
EXPRESS SCRIPT           99.64    -2.01%  21900

Today’s Trivia:  Guess at the common name of these everyday items from the scientific name:  acetylsalicylic acid…ascorbic acid…ethylene glycol…
Yesterday's Answer:  According to Wikipedia, Southwest (LUV) is the U.S. airline that carries the most passengers.   

Best Quotes:  “At year-end, Bloomberg counted $8.2 trillion in federal loans, outlays, and guarantees in place.  The news service used outside limits for the various programs that had limits (e.g., TAPR was counted at the maximum $700 billion) and the highest recorded dollar volume outstanding for lending programs that had no limits (e.g., loan at the discount window were computed at $111 billion, the largest sum extended).  Though we don’t know the grand total at the moment of maximum federal exposure, it must have been well in excess of the $10 trillion, or close to 70% of 2008 GDP.  The Treasury’s blanket guarantee of money-market mutual-fund assets alone encompassed nearly $4 trillion; the government removed that security blanket in September.

The numbers are dream-like (or nightmarish, according to political taste) in their sheer size.  Only 18 months after the Lehman failure and little more than a year after the start of the huge updraft in the stock and credit markets, one stares in disbelief.  Did the Federal Reserve’s balance sheet realty balloon to $2.3 trillion from $850 billion?  Did a sleep-deprived Hank Paulson really push aside Mr. Market to decide which leveraged financial institutions to save and which not?  Did the taxpayers actually write blank checks to the insolvent GSEs (Fannie, broke?), and are those nationalized institutions not, to this day, accounted for in the federal budget or on the federal balance sheet?  Amazingly, the answers are “yes,” over and over.

Still, the world turns.  The feds bought controlling interests in Citigroup, GMAC, and AIG.  They ran roughshod over the price mechanism and established conventions of corporate finance.  They printed dollars by the boxcarful.  And Mr. Market?  The old man sweetly smiles.  The Treasury continues to fund itself at low nominal interest rates, the measured rate of inflation is scarcely 2% and the stock and credit markets have enjoyed the rally of a lifetime.  The Federal Reserve, which, to be charitable, was as surprised by the unfolding of the crisis as even the directors of Citigroup were, has emerged with expanded powers and with the same old chairman.  If the lesson from the crisis is, “Not to worry, because the government is only a bugle call away,” one wonders what policies our central bankers, Treasury mandarins and politicians will try next time, and what interest rates (and exchange rates) they will have to pay to carry out those bright ideas.”

--Grant’s Interest Rate Observer

Wednesday, April 28, 2010

Morning Note...

Futures are ~60bps higher this morning as perhaps the U.S. benefits from a “flight to quality” stemming from weakness overnight in Asia and weakness this morning in Europe.  Additionally, we’re likely – perhaps even more so given yesterday’s sell-off – to see continued accommodative monetary policy from the Fed as it releases its FOMC statement at 2:15pm today.  Overseas, Greece short-term (2-yr) bond yields surged as high as 24% and its CDS widened to record levels, but markets seem to have calmed as the EU & IMF are expected to broaden support of Greece well ahead of its highly-anticipated May 19th debt roll.  Toward that end, Germany’s Angela Merkel is due to speak at 10:45am EST today.  Also, in a move reminiscent of some of the worst times in American markets, Greece today banned short-selling through June 28th

Greece’s securities regulator banned short selling on the Athens stock exchange for two months from today after shares slumped yesterday and Standard & Poor’s Ratings Services downgraded the nation’s credit rating to junk. “The Capital Markets Commission, taking into account the extraordinary conditions prevailing on the Greek market, decided a ban on short selling on the Athens exchange,” the Athens- based Hellenic Capital Market Commission wrote in an e-mailed statement today. The ban is effective today through June 28, it said.  (BBERG)

Also worth noting – for what it’s worth – that Italy cancelled a bond auction earlier today.  In earnings news, Broadcom (BRCM; +3%) beat by 11c and guided Q2 higher…Flextronics (FLEX; -5.5%) beat by 1c but missed on revenues…Corning (GLW; +2.5%) beat by 10c and beat on revenues…Conexant (CNXT; -4%) missed by 1c…RF Micro Devices (RFMD; +3%) beat by 5c and beat on revenues…

Regarding Goldman…wow, that was some theatre yesterday.  While most cynics – including myself – see the entire thing as a political charade to garner public support for either financial reform or to generate “tough on Wall Street and their excesses” stance ahead of mid-term elections, someone quoted in Bloomberg news made a great point about the public’s view of all this, calling it a “Rorschach blotter test” for Main Street.   Essentially, you will see what you want to see:  do you have more contempt for incompetent politicians, who failed to regulate properly pre-crisis and who cry “wolf!” in hindsight driven by a politically-motivated self-preservation instinct?  Or do you despise the smarmy, “smarter-than-anyone-else-in-the-room,” power-suited Goldman cultists?  For my part, I was simply amazed at where the leverage seemed to lie during the testimony – the Goldman guys showed absolutely no fear nor intimidation at the hands of our legislative leaders.  In front of Congress (and really, how many people have ever testified before Congress?), these guys calmly stalled or walked the Senators through complicated structures with feigned patience or even interrupted Senators at times.  It was really something to see.  My takeaway?  I am not sure it plays well with Main Street, but it was clear to me that the alpha-dogs in the room were the Goldman suits.  Doesn’t mean they were right, or will be viewed as behaving ethically, but it was apparent these guys had a bit of Colonel Jessep’s (minus the breakdown and the screaming) “above the law” incredulity to their swagger.

Regarding the bigger picture, and how sovereign debt concerns might also affect the U.S., I found this note from Sprott Asset Management very well-written:

To believe that the US sets the benchmark for sovereign debt credit ratings is preposterous. While we have written ad nauseam about the excessive debt issuance by the United States, we found a recent update written by United States Government Accountability Office (GAO) to be particularly instructive. The update noted the US's budget deficit equivalent to 9.9% of GDP in 2009 - the largest 10 since 1945 - and stated that without significant policy changes the US government would soon face an "unsustainable growth in debt".

This was not news to us. It goes on to state, however, that using reasonable assumptions, "roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020." This is news! In less than ten years, using reasonable assumptions, there will essentially be no money left to run the US government - 93% of all tax revenues the US government collects will go to pay social security, Medicare, Medicaid and the interest costs on their national debt. This implies no money left over for defense, homeland security, welfare, unemployment benefits, education or anything else we associate with the normal business of government. And the US government is rated AAA!?

The historian Niall Ferguson recently wrote that, "US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941." It's hard not to agree given the foregoing statements by the GAO.

For the Fed-watchers (note today’s 2:15pm statement release), BTIG’s Mike O’Rourke expects a 50bps tightening of the discount rate to be announced:

The Exit Strategy.

The warm up for the exit strategy has been the Fed’s “normalization” policy during Q1 of this year.  This consisted of the wind down, or scheduling the wind down of the remaining emergency programs, and restoring the Discount Rate to a spread above the Fed Funds rate.  Currently, only 50 basis points of that traditional 100 basis point spread has been restored.  We expect the FOMC will raise the Discount Rate the additional 50 basis points at tomorrow’s meeting, restoring the spread. 

The Exit Strategy has been outlined by Chairman Bernanke on several occasions, the most recent of which was Congressional testimony a month ago.  During that testimony, the Chairman invoked the E&E language in combination with the qualifiers but then followed with “In due course, however, as the expansion matures, the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures.”

The big question has always been which will occur first: the shrinking the Fed’s balance sheet, thus reducing  the QE liquidity  (in the form of Bank Reserves) in the system, or tightening by raising the Interest Rate on Excess Reserves in combination with the Fed Funds target rate.  The Chairman has repeatedly discussed temporarily draining liquidity using reverse-repos and term deposits (CDs for banks) as measures to drain liquidity from the system by tying up those excess reserves.  Since both measures are temporary, when the agreements mature, the Fed can roll them or if weakness materialized in the system, return the liquidity to the system.  If all goes well, the FOMC than can focus on permanently draining liquidity.  

Finally, given words like “Greek contagion” and “crisis” (which I think has now overtaken “Katrina” as the most printed word of the last ten years) splashed across worldwide headlines, it’s always worth checking into recent news regarding gold.  I found this piece from CSFB particularly interesting:

On the wires from the World Gold Council: Central Bank sales have only sold 7.2 tonnes of gold within the CBGA3 agreement as of September 2009.

We have long held the view that Central Bank sales will decline going forward.  We restate our view with regard to the main drivers of the supply-and-demand equation in 2010:

“We believe that the 2010 gold market will likely be dominated by the demand side of the equation. We believe that the possible muted and/or decline in year-on-year investment demand for ETFs will play a pre-eminent role as a swing factor in our supply-and-demand balance in 2010. Jewellery, industrial and dental demand will likely strengthen marginally year on year. The secondary supply of scrap will depend on the gold price but will probably remain above 50% of mine supply. Central banks will likely become net purchasers while de-hedging will reduce significantly as the major players in this arena accelerated their de-hedging activities in 2009.
On the supply side, our analysis of global mine production indicates that the current year-on-year decline in global mine production will likely be halted until 2013-2014, mainly as a result of the large number of projects that are due to be commissioned over the next five years. We expect that global production, the fourth production cycle since 1900, will be in decline from around 2013-2014 as global exploration discovery is unlikely to be sufficient to replace production.

Our supply-and-demand equation indicates that before speculative investment is taken into account there was an oversupply of around 500 tonnes in 2009 and a large oversupply of around 650 tonnes is looming in 2010. Muted investment demand which results in a large supply-and-demand surplus together with a change in the economic environment and market sentiment point to a downward correction in the gold price from the highs reached at the end of 2009. A downward correction in the gold price will also likely trigger a sell down of speculative positions, which in turn, will likely catalyse the downward pressure on the price.

We believe that the gold price is currently being bolstered by the Greek sovereign risk crisis and seasonal high factors. In the long term, we believe that the gold price will likely resume its upward trend".

Finally, if you missed the PBS show Nova last night, you missed a great documentary on your mind and its wiring relative to issues of money and competition, featuring Robert Shiller, a slew of University of Chicago “rationalist” economists, Nobel Prize winner Vernon Smith, and Jeremy Grantham.  Highly recommended and very relevant.  Check it out on demand if you can…  here’s the link:

FIS beats by 1c.  BEN earnings were 2c light but beat on revenues.  BCAP ups BBG, XEC, MMM, NTY.  BCAP cuts FST.  CSFB ups SPP.  CSFB cuts F.  GSCO ups WPI.  GSCO cuts FORM.  JEFF ups TLAB.  MSCO ups UPS.  RBCM ups CSCO, BRCD, CIEN.  BARD ups AME, FPO.  OPCO defends OLN, cuts BWLD.  UBSS cuts DELL.  AMAG misses by 30c.  RHI cut at BARD and tgt lowered.  SMCI reports in-line.  PNRA reports in-line.  OC beats by 27c.  PMTC beats by 1c.  ISSI beats by 5c.  CCUR misses by 17c. 

Asia lower overnight.  Europe lower but improving.  USD -35bps.  Gold +20bps.  Oil +45bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
ROBERT HALF INTL         28.50    -9.24%  29650
LINCOLN NATL CRP         32.58    +6.30% 300
TYCO ELECTRONICS       31.00    +6.16% 4700
MANITOWOC CO            14.25    -5.82%  5625
AMERICAN CAPITAL        6.20      +4.73% 12200
TELLABS INC                  9.02      +4.52% 31400
ROCKWELL AUTOMAT     63.50    +3.64% 4990
CINTAS CORP                28.44    +3.46% 797
UNISYS CORP                31.87    +3.44% 800
THERMO FISHER            55.50    +3.39% 7700
GOODYEAR TIRE            14.50    +3.2 %  11425
MASCO CORP                16.12    +3.2 %  14852
AMERICAN INTERNA       38.50    +3.02% 211364
BROADCOM CORP-A       35.80    +2.81% 46498
JONES APPAREL             23.30    +2.73% 700
OFFICE DEPOT INC         7.25      +2.69% 43268
NORTHROP GRUMMAN    68.96    +2.65% 100
HESS CORP                   65.00    +2.6 %  2950
MEMC ELEC MATER        15.58    +2.5 %  200
CIENA CORP                  18.00    +2.45% 21990
US STEEL CORP             57.78    +2.03% 59621

Today’s Trivia:  What U.S. airline carries the most passengers? 
Yesterday's Answer:  Entomology is the scientific study of insects and etymology is the study of the history of words. 

Best Quotes:  “Good Morning - Anyone else find it interesting that the Oversight committee yesterday kept referencing the book "Going short"?   I doubt that they read that massive binder they dropped in front of the three guys from Goldman, but I'm sure they all saw the "Blindside" and thought Sandra Bullock was great.   EU says that debt restructuring "Not an option" for Greece.   This comes after yesterdays downgrade to Junk where the S&P stated that holders of Greek debt could lose 265 billion, and recover only 30 to 50%.  Really got the market rolling.  The market has bounced this morning, following a reversal in Euro markets. FOMC at 2:15 eastern time.  According to our records, yesterday reflected the second largest one-day increase in new short positions in SPZs since Feb 2009.  The SPX put/call ratio jumped to 1.97 from 1.73, mostly driven by customer demand for protection from the sell off and the desire to lock in profits.   The markets appear to be at a reflection point.   The easy money has been made, and we are now going to see the rubber meet the road.    Folks will have to get back to picking stocks smartly, look for sector rotations.   1200 level of resistance.  Have a good day.”  --BofAMLCO trader note 

“Global stocks are off meaningfully, China's doing the best (down roughly .50%), while several European indices are off over 2%.  SPX futures are marginally lower, but well off the worst levels after the EU said "restructuring Greek debt is not an option, their needs will be met on time" in the last hour.  Also Greece  has banned short selling thru June 28th.

Yesterday's sell off was the second worst of the year, and 3rd worst in the last 6 months as measured by intraday peak to trough.  The move lower is being viewed as a referendum on Greece being a European issue, not just a Greek issue, meaning most now believe sovereign issues with Spain, Portugal, etc are a function of "when", not "if".  It's worth putting May 19th down in your calendar, as that's when Greece must roll 8.5B euro's worth of debt.

Yesterday's volume was the 3rd highest since going back to September, which is a bit surprising given many were glued to CNBC for 3 hours.  That being said, our financial team notes ETF volume was 48% higher than its' 5 day average, and 43% of yesterday's total volume.  That, combined with the Russell not underperforming like most would expect in a de-risking tape likely means investors were selling what was easiest to raise cash (ETF's).

The VIX was up over 30% yesterday, making it the biggest one day jump in 18 months (although clearly this move was off a much lower base).  But when equity traders are fixated on the VIX and CDS, it reminds of scarier times.

So other than earnings, there's really only two things worth watching today.  1.  The European equity close 11:30 ET  and 2.  The Fed statement.  There are zero expectations for a rate hike or wording change (extremely low rates for an extended period), but look for them to "upgrade" the economy as a precursor to changing wording in the future.”

--RBC trader note