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

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