Tuesday, May 11, 2010

Morning Note...

Futures down ~1.2% this morning as markets pause to consider whether yesterday’s “euro-phoria” was truly justified and whether we may see more tightening out of global demand-driver China given their strong economic data last night.  Regarding EuroTARP, a rift appeared yesterday as Germany’s Weber warned of the risks surrounding the bailout.  Also see the Wall Street Journal’s headline Stocks Surge on $955 Billion Plan, but Economists Question Long-Term Burden and John Mauldin’s comments below…he notes that you cannot solve a debt problem with more debt, and that probably says it all.  There are also renewed rumblings of Spanish and Portuguese debt downgrades.  Moreover, has anyone noted the FNM/FRE need for more funds amidst all the macro-news?  After already accepting $145 billion between them, now Fannie Mae needs another $8 billion??  Keep an eye on Gold (+1.8%), which appears to be making new highs in all currencies today.  In other news, BP, RIG, and HAL will testify before Congress today on the Gulf oil spill.  Here’s a good volume update from BTIG: “With some 1.8 billion shares exchanging hands on the NYSE this session, trading volume surpassed its 200-day moving average for the fifth time in a row.”  Regarding China, here are some red-hot numbers as summarized by Hedgeye (and note that China is now down 19% for 2010):

Here is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours that took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD:

1.       Chinese imports spiked to +49.7% year-over-year growth
2.       Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March)
3.       Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005
4.       Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively
5.       Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March
6.       China's Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y!

Regarding Europe, it’s always a good idea to peruse The Gartman Letter, which previewed today’s “caution” from the markets in yesterday’s note and wrote on the “loss of ECB independence” apparently echoed in the Financial Times this morning:

The most important decision was that mandating that the ECB accept a mandate to buy European debt directly from the governments in question. The ECB has said time and time and time again that it would never monetize anyone’s debt obligations, but that is precisely what it has agreed to do. We note that it was only last weekend… only last weekend… a mere eight or nine days ago!!!... that Mr. Trichet said emphatically that the ECB’s authorities had “absolutely no intention” of buying government debt. However, when the bank agreed to accept any and all Greek debt as collateral for future borrowing by the Greek government from the Bank the die was cast. This decision tells us unequivocally that the independence of the ECB has been utterly and completely compromised and that the political will of Brussels has trumped the economic will of Frankfurt.

Yes, the Bank has said that it will “sterilize” the long term effects of this monetisation policy and in so doing modify somewhat the long term inflationary impact of the decision. However, the plain and very simple truth is that the ECB’s supposed “independence” has now been shown to be nothing more than a sham… a chimera… a willow-the-wisp, and in the end the ECB and the EUR will be punished for this decision to stand down from what had previously been considered sacred. In the end, gold will triumph for this decision is a very plain and very simple abrogation of all that the Bank has stood for previously. But the “end” might well be some while into the future and the need for a “bounce” trumps all other concerns at the moment.

Usually level-headed John Mauldin also vented a bit regarding the ECB decision in his note last night:

Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 BILLION in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees. Not sure what that translates into for Britain or Canada or Australia.

I can swallow the Fed dollar swaps to the ECB. Don't really like it, but I can deal with it, as I don't think it will ultimately put US tax-payers at risk, as long as the swaps are in dollar terms. But the IMF bailout is just wrong.

Interestingly, the euro shot up on the announcement in what was now clearly short covering. As I write this, it is almost back down to where it started. That seems to me to be a vote of "I don't believe you." We will see. But if the ECB actually goes ahead and floods the market with liquidity, that will be very good for all types of risk assets.

Note that in last Friday's letter I quoted Trichet where he said we would not do what he agreed to do over the weekend. What a turn-about. So much for ECB independence. The European leadership must have realized the wheels were coming off and brought out the nuclear option in order to stave off a very serious crisis. In my opinion, this buys time but does not solve the problem.

The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a MASSIVE misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.

Getting back to fundamental economics (easy to forget amidst all the European news/headlines), I thought Dennis Gartman was also spot-on in his review of last Friday’s jobs number, quoting the work of David Rosenberg at Gluskin Scheff:

Finally, regarding the US and Canadian employment data released Friday, we, like former Sec’y of State Warren Christopher, shall “urge caution.” The data at first blush was strong, and was especially so in the latter’s case. No one anywhere does a better job of tearing apart the employment data than does our old friend, Mr. David Rosenberg, the Chief Economist of Gluskin Scheff in Toronto. Yes, non-farm payrolls rose in both instanced, with the Canadian data rising far more positively than did that of the US… which itself went beyond the most bullish numbers on Wall Street. We needn’t get into too many details here this morning, but David notes that the broad U6 measure of unemployment, rose to a stunning 17.1% in April, up from 16.9% previously, and although this is not a new high, it is important to understand that U6, until this cycle, had never been above 12% in the post-World War II era. Too, David notes that the “median duration of unemployment rose to 21.6 weeks from 20.0 in March… more than 50% higher than a year ago… [and a] new all time high.” To put this in perspective, in previous recessions, the median duration of unemployment peaked at 7%, 10%, 12%,10% and 11% respectively (rounded to the nearest whole number). 21.6% trumps them all… plus some! Worse still the average, as opposed to the median, duration of unemployment is now nearly 33%, with the previous record being 20% seen in the aftermath of the twin recessions in the early 80’s. This knowledge helps us to be somewhat “under-whelmed” then by the headline non-farm payrolls which came in higher than expected, but which got lost amidst the panic of late last week.

MBIA down 12% on earnings.  BofAMLCO ups LM.  DBAB ups PCS.  BARD ups CAKE.  CSFB cuts TSN.  UBSS cuts DF.  WEFA cuts SXE.  MFB beats by 11c.  PCLN -10% on earnings.  ADY misses by 6c.  BEE announces 40M share offering.  Cramer bullish on CRUS.  GFI announces new gold discovery in Peru.  JASO beats by 6c.  JAZZ announces 7M share offering.  BTIG initiates VIA/B and DIS with Buy. 

Asia lower overnight.  Europe -2% across the board.  The EUR is holding $1.27.  USD +50bps.  Gold +180bps.  Oil -140bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
MBIA INC                       8.15      -12.65%            233748
J.C. PENNEY CO              28.36    -4.25%  2950
MGIC INVT CORP            9.20      -4.07%  200
TYSON FOODS-A            17.50    -4.06%  7985
CME GROUP INC             320.00  -3.9 %  344
LEGG MASON INC           31.10    +3.84% 6350
JOHNSON CONTROLS     30.66    -3.83%  420
SUPERVALU INC             13.26    -3.63%  500
WILLIAMS COS INC        20.70    -3.63%  1095
KEYCORP                       8.05      -3.59%  26860
AMERICAN CAPITAL        5.64      -3.59%  21196
FIDELITY NATIONA         28.65    -3.31%  2500
MARSHALL &ILSLEY        8.77      -3.23%  1186
KB HOME                       17.00    -3.19%  1800
ALTERA CORP                23.6800 -3.11%  300
SLM CORP                     11.7100 -2.90%  200
PRINCIPAL FINL              29.36    -2.88%  152
FANNIE MAE                  1.04      -2.8 %  157572
FLUOR CORP                  47.60    -2.78%  6500
US STEEL CORP             54.05    -2.77%  24170
GENWORTH FINANCI      15.9200 -2.75%  4974
EXPEDIA INC                  23.05    -2.54%  900
MICRON TECH                8.86      -2.53%  12110
STARBUCKS CORP          26.36    -2.51%  3904

Today’s Trivia:  On this date in 1820, the ship taking Charles Darwin on his scientific voyage (which yielded his theory on evolution) was first launched.  What was the name of the ship?
Yesterday's Answer:  The currency of Haiti is the gourde.  Never knew that.

Best Quotes:  SEC Meeting With Exchanges Yields No Cause for Plunge 2010-05-10 21:37:05.194 GMT By Jesse Westbrook

     May 10 (Bloomberg) -- Heads of the biggest U.S. trading venues could provide no clear reason for last week’s stock- market selloff in meetings today with the Securities and Exchange Commission, two people familiar with the matter said.
     The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private.
     The Dow Jones Industrial Average fell as much as 9.2 percent on May 6, its biggest tumble since the crash of 1987, before paring losses and closing down 3.2 percent. Almost $700 billion was erased from American equity markets over one eight- minute span, according to data compiled by Bloomberg.
     The CEOs earlier took a step toward aligning trading rules to prevent conflicting systems from worsening stock-market plunges. The group meeting with Chairman Mary Schapiro agreed on a framework for “strengthening circuit breakers and handling erroneous trades,” according to a commission statement.
     Regulators and exchanges face pressure from lawmakers and President Barack Obama’s administration to offer proposals aimed at preventing future crashes even though the SEC hasn’t determined what caused last week’s free-fall. Schapiro and exchange officials gave Treasury Secretary Timothy Geithner an update on progress they’ve made at a briefing today.

                        Circuit Breakers

     At the two-hour meeting at the SEC, Schapiro and representatives from the NYSE, Nasdaq and other trading venues discussed the need to revise market-wide circuit breakers and implement halts for individual stocks, the people said.
     The New York Stock Exchange currently has circuit breakers that pause trading when the entire market falls 10 percent before 2 p.m. New York time. The NYSE also uses so-called liquidity replenishment points, which slow trading in companies that experience sudden price moves.
     The triggering of liquidity replenishment points on May 6 encouraged orders to flow to alternative platforms with few if any buyers, worsening the decline, NYSE Euronext Chief Operating Officer Larry Leibowitz said last week.
     Schapiro and exchange heads discussed specific percentage figures that would trigger new circuit breakers, said the people. Plans will be refined over the next day, according to the SEC statement.

                         Swamped Demand

     The May 6 plunge swamped demand, pushing share prices of companies from Accenture Plc to Exelon Corp. to pennies. Nasdaq announced it would cancel trades on all exchanges that were more than 60 percent above or below prices at 2:40 p.m. New York time, just as equities plummeted.
     Proposing regulations to handle such erroneous trades was a focus of Schapiro’s meeting with executives, with discussions focusing on how to best define what constitutes a false trade, said the people. The exchanges agreed that new rules are needed.
     Schapiro, Commodity Futures Trading Commission Chairman Gary Gensler and executives from the NYSE, Nasdaq and CME Group Inc. will testify on the market rout before a House Financial Services subcommittee tomorrow.

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