Monday, April 12, 2010

Morning Note...

Futures flat this morning as the Eurozone quantified its Greek bailout over the weekend (EU30B at below market rates of 5% interest) and the euro rallied.  Further, the IMF will meet today to discuss a bailout package of its own.  Greek PM Papandreou said the bailout mechanism would only be used if needed, but the package is spurring debate over the moral hazard involved.  For example, BNP is out with a note critical of the bailout.  Of course, those of us on this side of the Atlantic have been through this philosophical argument before….given the bailout, what incentive does Ireland or Portugal or Spain have to get its financial house in order? 

Europe’s “game of fiscal chicken” over Greece may make debt-burdened governments less determined to cut budget deficits after the European Union offered Greece a rescue package yesterday, BNP Paribas said. “It was the eurogroup who swerved to avoid the crash,” Paul Mortimer-Lee, head of market economics at BNP in London, said in an e-mailed note today. “The Greek decision has introduced, or increased, the incentive for governments to avoid tough choices and to let their finances drift or not to try hard enough to consolidate. The market will take the view that any time a country’s 10-year yield rises 400-450 basis points above the benchmark a bailout will not be far off. We are concerned that Portugal’s current plans, for example, could be more ambitious,” Mortimer-Lee said. “This decision is unlikely to make them more so.”

Earnings season kicks off this afternoon with AA, and we’re seeing a “watered-down” version of Merger Monday with the announced MIR/RRI merger and news that HAL is bidding for WEL.  In other corporate news, UBS pre-announced its most profitable quarter in three years ahead of Weds earnings.  In political news, Congress returns to session today, and Dodd’s financial regulation proposal may generate some headlines.  Additionally, Obama meets with Chinese Prez Hu Jintao today ahead of a two-day nuclear summit in Washington, DC.  For the technicians, S&P 1230 represents a Fibonacci retracement of 62%.  Further, expect to hear the words “pre-Lehman levels,” i.e. S&P 1250, in the coming weeks and days.  Additionally, note that the S&P500 has been up for 6 consecutive weeks, which has not happed since March-April 2009.  Looking ahead, potential market-moving economic releases include U.S. retail sales, Beige Book, and CPI on Wednesday; and Credit Card data plus the Philly Fed on Thursday.  In Europe, we’ll see the UK Trade Balance on Tuesday, Eurozone IP on Wednesday, and Eurozone CPI on Friday.  In Asia, China releases GDP, PPI, CPI, retail sales, and IP on Wednesday.  Major earnings this week include AA tonight, INTC on Tuesday, JPM on Wednesday, GOOG Thursday night, and BAC and GE on Friday. 

For those interested in a “dissenting” opinion on Greece, here’s last week’s commentary from John Taylor of FX Concepts, the world’s largest FX fund. (Think of it this way, as Bill Gross is to debt markets, so is John Taylor to FX.)

Greece Is Out, We Just Have To Sort Out the Details (April 8, 2010) By John R. Taylor, Jr.

Global monetary and macro economics have become more like the literary nonsense in Alice in Wonderland. It is great fun to read, but unfortunately for all of us, we are living through this economic house of mirrors, which is more and more rapidly spinning out of control. The situation in Greece is the most poignant example at the moment. Although there do not seem to be more than 100 people in all of New York City that have any interest or concept of what is going on in Greece and within the euro, the events of the next few months will have a tremendous impact on the world. If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse. There is no way to win. The powerful elite political forces, and their co-opted market allies, involved in this fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe. Hopefully, they will be forced to give up before the damage is too severe. The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain. At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner.

Our office has done a non-exhaustive, but quite extensive search of the research coming from banks, and it made no difference whether it was from Anglo-Saxon or European names, it was all positive for the rest of the year. Greece will make it! Fantastic cash flow projections, great statements about ‘never giving up,’ assessments of how horrifying it would be to leave the euro, and legal issues galore. Almost not one of these major institutions issuing these studies talked about how horrifying it would be to remain in the euro, how many man-hours of work would be lost, and how lives would be destroyed. There was no comparative studies section, which would have compared what we already know from Ireland, Latvia, Lithuania, and Iceland. Internal devaluation is hell. We believe the Baltic states will make it because they would eat grass and leaves to stay out of the hands of the Russian bear next door, and if Europe follows its Greek strategy much longer, they might have to. Remember, retail sales in Latvia were down 30.2% last year and this year they should decline another 10% or so. My heart goes out to them, but their country is in a much better situation to suffer this internal devaluation process than Greece, as international trade is a much bigger factor of GDP. Latvia can win even if the Germans are determined to have no wage growth, positive productivity growth and no appreciable CPI movement, but the Greeks and the other southern Europeans are more rational than the Lats. There is nothing but politics that says that Greece can make it through this process. Although politics includes compromise when it is working, the breakdown of politics is war. Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them. The Greek government can’t follow the current course. On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end. No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies. Please let the Greeks out and please restructure the euro, or drop the whole idea. If you don’t, the future will not be pretty.

Regarding the less sexy, underlying core of the economy, I found this small blurb from this weekend’s WSJ very interesting.  Note that 42 banks have failed thus far in 2010, which compares favorably to the 140 in 2009.  Note, however, that 25 banks failed in 2008 and 3 failed in 2007:

Federal bank regulators announced the closing Friday of Beach First National Bank of Myrtle Beach, S.C., making the bank the 42nd U.S. lender to fail this year and the first South Carolina failure in more than a decade.  Beach First's seven branches will be acquired by Bank of North Carolina, based in Thomasville, N.C., and its depositors will automatically become depositors of Bank of North Carolina, the Federal Deposit Insurance Corp. said in a statement.  The FDIC said depositors in the failed bank can continue to access their money over the weekend by writing checks, or using automated-teller machines or debit cards, and that loan customers should continue making payments as usual.  At year-end, Beach First National Bank had about $585.1 million in total assets and $516.0 million in total deposits. Bank of North Carolina assumed all of the deposits of the failed bank and essentially all of the assets, according to the FDIC.  As part of the sale, the FDIC entered into a loss-share transaction with Bank of North Carolina on $497.9 million of Beach First National Bank's assets.  The latest bank failure is expected to cost the FDIC's deposit insurance fund $130.3 million. The FDIC said Beach First is the first South Carolina bank closing since Victory State Bank of Columbia was closed on March 26, 1999.  There were 140 bank failures in the U.S. last year, the highest annual tally since 1992 at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008 and only three succumbed in 2007.  The number of banks on the FDIC's confidential "problem'' list rose to 702 in the fourth quarter from 552 three months earlier. (WSJ 4/10/10)

BofAMLCO ups CIEN, COLM.  ANF tgt raised to $75 at JEFF.  Barron’s cautious on ANF valuation.  Speculation continues around CPKI sale to private equity firms. BCAP ups LDK.  BERN ups CCL.  CITI ups ACI, PCX.  DBAB ups HNZ, MIR, SLE.  GSCO ups INFN.  JEFF ups STJ.  PIPR ups EXPE, GPS, US.  BARD ups ATU, CAT, IR, JOYG, PH, FCS, GSTI, LCSS.  BACP cuts PWAV.  BERN cuts PBR.  DBAB cuts FCX.  PIPR cuts DECK.  UBSS cuts CHD, LPX, WY.  PALM hires GSCO to find buyer.  BRKR positive in Barron’s. 

Asia mixed overnight.  Europe slightly lower.  USD -33bps.  Oil -55bps.  Gold -25bps.   

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
CIENA CORP                  17.05    +4.86% 139376
DYNEGY INC-A                1.25      +4.17% 125853
AMERICAN INTERNA       39.28    +2.99% 460279
EXPEDIA INC                  25.27    +2.85% 1750
AES CORP                     11.56    +2.48% 1300
PAYCHEX INC                 31.90    +2.18% 410
ST JUDE MEDICAL          42.13    +2.16% 300
JONES APPAREL             21.50    +2.09% 950

Today’s Trivia:  According to NatGeo TV, what are your odds of being killed by a shark?  How about a dog?
Yesterday's Answer:  Simple answer to Friday’s question…Plum Creek Timber is a REIT (Real Estate Investment Trust), putting it in the “financials” category. 
Best Quotes:  “There's near universal agreement that Q1 earnings are the next major catalyst for the market.  As we begin earnings season today, some context to keep in mind;

-  What's built in?  With stocks up 6 straight weeks to their highest level in 18 months, how much earnings/rev strength has been discounted?  Look at retailers last week; March SSS jumped 9.1%, but retail stocks were only up 1.3% given their 17% run over the past two weeks.  77% of the S&P is over its' 50 dma.

-  Volatility.  Everyone knows the VIX is near 2 yr lows.  But the implied volatility of the 500 S&P components is approaching its lowest level in 20 years.  Some fear the biggest risk is "the perceived lack of risk" (Barrons).

-  Macro- almost every data point is positive vs. consensus.  We saw some job growth last month, the service sector is growing at its fastest rate since '06, manufacturing at its' quickest since '04, and home sales were up 8.2% in Feb.

Broader sentiment is still a 5%-10% dip would be healthy, and nearly everyone wants to buy it if/when it happens.”  --RBCM trader note

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