Tuesday, April 20, 2010

Morning Note...

Futures are ~40bps higher this morning on positive U.S. “bluechip” corporate earnings, positive economic data in Europe, and a psychological jump back to the S&P1200 level.  The largest catalyst thus far this morning is Goldman Sachs, who (and who really thought they wouldn’t?) reported an absolute blowout quarter, at $5.59/share vs. the $4.14/share estimate.  However, Coke (KO) reports slightly lower revenues than expected and is trading lower pre-market.  In other earnings news, Johnson & Johnson (JNJ) reported better-than-expected and is slightly higher.  Industrial giant ETN beat by 22c, beat on revenues, and guided estimates higher.  Healthcare giant UNH beat revenue estimates and guided higher for 2010.  Last night, IBM beat by 4c, beat on revenues, and reaffirms 2010 guidance.  Restaurateur EAT reports in-line earnings and trades lower.  Retailer Coach (COH) reports better-than-expected, raises the dividend, and authorizes $1B buyback.  Oil company WFT is trading slightly higher on earnings.  In Europe, Germany’s PPI and ZEW Economic Sentiment numbers were both better-than-expected.   However, Portugal’s CDS are widening, indicating a potential spill-over of default risk from Greece.  Greece CDS widened also but its auction of 13-week paper was met with strong demand.  In the UK, March inflation data was higher than expected.  In Canada, the BofC left key rates unchanged at 0.25%.  Note that – slightly under the radar given earnings season and Goldman’s front page status – India raised interest rates for the second time in a month.  In Asia, China Mobile’s 1Q10 figures failed to meet market’s consensus posting a 1.1% y-o-y hike in net profit (25.5 billion yuan vs. 26.9 billion yuan/e) on the back of lower additions.

Bernanke and Geithner are on the Hill today (11am) testifying on the Lehman failure.  The question on everyone’s mind is, will the conversation shift to Goldman Sachs?  (For a summary of the Goldman situation, as posted in yesterday’s Gartman Letter, see quote section below.)  Additionally, will the Congressional grilling of Bernanke & Geithner lead to anything positive in the way of financial reform from lawmakers?  Regarding Goldman and the CDO litigation “spill-over,” this news item was interesting:

BofA-Merrill Tops Credit Suisse List of ‘CDO Litigation Risk’ 2010-04-19 23:00:24.0 GMT
April 20 (Bloomberg) -- Bank of America Corp. and Merrill Lynch & Co. led Credit Suisse AG’s “CDO litigation risk” list after offering $16.85 billion of collateralized debt obligations similar to the one that drew a U.S. fraud suit against Goldman Sachs Group Inc. The tally of lead underwriters of CDOs with “salient characteristics” of the disputed deal between 2005 and 2008 may help investors gauge the risk that lawsuits will spread to other firms, Credit Suisse said in a report yesterday. Bank of America, the largest U.S. bank, acquired New York-based Merrill Lynch in January 2009. “Problems of this sort are rarely confined to one institution,” Credit Suisse said. “The dot-com era shows us that in the wake of a crisis, business practices which were considered normal at the time can look very much worse with the benefit of hindsight and in a legal setting.” Bank of America and Merrill Lynch, which combined in 2009, were collectively the largest underwriters of CDOs with components of the Goldman Sachs offering --“structured finance collateral and an ‘arbitrage plus cash flow’ structure,” Credit Suisse said in the report. Goldman Sachs has denied wrongdoing in the offering. That type of security was a subset of the total CDO market, which peaked at $418 billion in 2007, according to UBS analysts. Bank of America and Merrill Lynch together ranked first that year with $9.97 billion of those offerings, said the Credit Suisse report, citing Dealogic data.

Note that AAPL reports tonight.  JPHQ downgraded Brazil to Underweight.  The WSJ’s Heard on the Street column is cautious on C earnings.  SVU -4% on earnings.  BofAMLCO ups FPL; cuts PL, WDR.  BERN cuts ZION.  JEFF cuts DLLR.  ATHR beats by 6c.  UBSS ups CGV.  CKR to terminate merger agreement with TH Lee.  TWPT cuts CSTR.  EAT misses by 5c and misses on revs.  ESLR higher on earnings.  ETN beats by 22c, beats on revs, and guides higher.  FBRC ups HK.  ICUI misses by 11c.  UBSS ups MCHP.  MGM added to Conviction Buy List at GSCO.  CSFB ups MWW.  RIG starts to trade on Swiss Exchange.  CITI ups TOT.  WERN misses by 1c.  HOG trading higher on earnings.  RF beats by 7c.  STT reports in-line.  BK beats by 6c.  SUSQ raises HAL price target.  MGT lower on news of stock offering. 

Asia mixed overnight.  (Note that there was an interesting article out about New Zealand possibly lowering income tax to increase global competition.)  Europe over 1% higher across the board.  USD flat.  Oil +125bps.  Gold +63bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
MGIC INVT CORP            11.00    -12.07%            993467
NORTHERN TRUST         55.60    -4.75%              60000
SUPERVALU INC             16.41    -4.26%              6800
HARLEY-DAVIDSON         34.07    +3.97%             74383
PARKER HANNIFIN          72.00    +3.76%             6100
AMERICAN CAPITAL        5.81      +3.75%             2000
EATON CORP                 82.00    +3.6 %              1494
FREDDIE MAC                1.48      +3.5 %              191085
UNITEDHEALTH GRP       32.30    +3.43%             59598
ILLINOIS TOOL WO         50.40    +3.26%             1800
STATE ST CORP            45.75    -3.17%              119559
MICROCHIP TECH           30.82    +3.15%             100
TRANSOCEAN LTD          90.88    +2.93%             766008
TENET HEALTHCARE       6.05      +2.72%             27506
OMNICOM GROUP           42.17    +2.55%             11460
FANNIE MAE                  1.24      +2.48%             202823
AK STEEL HLDG              20.35    -2.3 %              65290
HUMANA INC                  45.65    +2.22%             810
MARSHALL &ILSLEY        8.59      +2.14%             262
CITIGROUP INC              4.98      +2.05%             44793717
GOLDMAN SACHS GP      166.60  +2.01%             2067426

Today’s Trivia:  What is the difference between a sardine and a herring?
Yesterday's Answer:  The Oklahoma City bombing – the most destructive terrorist act on U.S. soil prior to the September 11th, 2001 attacks – took place on April 19th, 1995.    
Best Quotes:  “When asked over the weekend by a friend of ours who works at Goldman Sachs what we thought the implications were we noted the following:

Firstly, and foremost, as we have always said,”There is never just one cockroach.” There has probably never been a more apt statement about what shall transpire about the future than this statement regarding Goldman, for clearly there will be more revelation; and clearly there will be more and larger legal problems for Goldman to wade its way through. If the US government is willing to take Goldman to court in a civil suit, then it is but a matter of time until the French, the German, the Canadian, the Australian, the British and many other governments too shall take them to court in the same fashion. The legal expenses alone shall be material; the mental stress from one law suit after another shall become worse. On Wall Street there is never only one cockroach… Never.

Secondly, Goldman Sachs will survive this event, but clearly it will be a much smaller entity when everything is finished, and that will be years into the future, not days or weeks or months. The impact upon morale within the company shall be huge and it will not be good. Initially, there will be an “Into the bunkers, us vs. them” mentality that will ramp up the morale within the firm, but eventually the grind of the law suits involved will weigh heavily upon that moral and heavily upon the company… but Goldman will survive, diminished but still a viable entity.

Thirdly, the now infamous “Fabulous Fabrice” will be tossed under the proverbial bus as quickly as senior management can toss him, with the “buses” already lined up to run him over. Other, higher-up officials within the firm will also be tossed under the bus, and before it is done the entire group assembled to piece together exotic mortgage back securities will be forced out and that department closed if the firm is to retain any credibility at all. The process will be slow… except in the case of Mr. Tourre.

Fourthly, we do find it of some mitigating value that the actions taken by the government are civil and no criminal. The Justice Department’s civil and criminal people must talk one with the other and we suspect that the criminal division approved the civil action in lieu of a criminal proceeding, apparently believing that a finding of criminal guilt would be impossible to bring to fruition before a judge or jury, but that the lesser level of proof required in a civil action was achievable.

Fifthly, we are still shocked at the responses by the currency markets to this news, for although we do indeed understand that this action is forcing “risk” to be taken off the table globally, the fact that this action originated in the US should mean that the risk of holding US assets should be more serious than the risk of holding European or other non-US dollar assets. We can therefore understand why the Yen strengthened, but we are still surprised by the overt weakness in the Aussie and Canadian dollars. This makes no sense to us whatsoever given the stronger economies in both countries and the far sounder banking systems in both.

Sixthly, just as we were and are surprised by the weakness in the Aussie and Canadian dollars, we are surprised too by the weakness in the gold market, for we would have thought that a rush out of equities and away from risk would be a rush to gold. Thus far that assessment has proven to be uncommonly wrong.

Seventhly, the public will love this story and because the public will love it it shall have “legs:’ that is, we can expect that this story will linger on the front pages of the US’ newspapers for months, with the very obviously help by the Democrats to keep it there. The Left shall see this as a means to push harder and longer against Wall Street and the public will accept that and urge the Obama Administration to press its case fervently. This will be all the more ironic given that Goldman Sachs was one of the largest donors to and most open and consistent supporters of the Democratic Party. Those donations and that support will now prove for naught.

Eighthly, the Democrats will use this politically in November to keep the gains by the Republicans that might otherwise have occurred to much small losses, winning seats that at the margin would have gone Republican. It will make no difference to the man-in-the- street that Goldman was an enormous supporter of the Democrats, for the Left will paint this situation as one of “Bankers vs. the Public” and that will play well to the Democrat’s benefit and to the Republicans’ detriment.

Finally, the longer term implications for the US economy in particular and the global economy in general are small at worst. The global economic advance is strong enough to pick itself up, dust itself off and continue higher even in the aftermath of this event. This will be disastrous for Goldman Sachs; it will be merely a misfortunate blip along the way for the economy generally.

There are clearly other implications that will evolve, and perhaps some of ours will not happen or will happen in s slightly different format than the one we have drawn here, but we think these nine points cover the situation rather well for the moment. We will add to what we’ve written over the course of the next several months, but all we are certain of at this time is that life within Goldman Sachs shall not be fun for a very, very long while, nor shall it ever be the same as it was only a few days ago. The “game” for Goldman Sachs has changed materially. It clients and its employees shall have to come to grips with that fact. Goldman of the future will not be the Goldman of the past. Of that much we are certain”

--4/19/10 TGL

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