Thursday, May 13, 2010

Morning Note...

Futures down ~30bps on a quiet morning as much of Europe is out on holiday.  (But note the EUR/USD has dropped below $1.26 this morning…)  As a result, the focus shifts back to the U.S. as catalyst:  In economic news, import prices rose slightly versus estimates, and Initial Jobless Claims disappointed somewhat at 444k vs. the 440k estimate.  The prior reading was also revised slightly higher to 448k.  Continuing Claims are 4.627M vs. the 4.590M estimate.  Further, much is being made of foreclosures dropping in April (-9% month/month and -2% year/year), but most experts caution that a massive backlog still remains in the pipeline (see article below).  In earnings news, Cisco (CSCO; -2.5%) reported better-than-expected earnings for its fiscal third quarter last night, and gave in-line guidance for Q4.  Whole Foods (WFMI; +7%) reported Q2 profit that doubled over a year ago, and raised forward guidance.  Restaurateur Wendy’s (WEN; -3.3%) beat earnings estimates but reported lower sales growth; Jack-In-The-Box (JACK) is also lower on earnings.  Further, in M&A news, SAP will pay $65/share – or roughly $6 billion – for Sybase.  In other news, the NY Times is reporting that NY Atty General Cuomo is investigating eight banks over potential misleading disclosures to ratings agencies. In Europe, CDS are slightly tighter as Germany, France, Austria, Sweden, and Switzerland celebrate Ascension Day.  In fact, Europe may be quiet tomorrow as well if investors there take Friday off to make a four-day weekend…  Note that Obama is in Buffalo, NY today – where jobs will be a major focus – for his “White House to Main Street” tour, before returning to NYC for – what else? – a fund raiser.  Looking ahead, we’ll get the results of the 30-yr Treasury auction at 1pm today. 

Regarding the EUR move, I thought the dedicated FX trader commentary this morning was interesting:

EURUSD support 1.2605/10, 1.2510/50, 1.2450, 1.2330 resistance 1.2750/60, 1.2800, 1.2880, 1.2940

EURUSD market appears to have settled for now , and the fireworks of last week have been replaced with price action similar to that seen a lot this year ...a slow grind lower with the buying interest coming from the usual suspects and rallies limited despite improving risk sentiment. This fits with the view that the reasons behind the single currency's demise have shifted since the weekend...what was a 'credit story' has now migrated into an FX story. If this move grinds lower and continues in this way then it can be argued that 1.2800/50 should not be seen again. Currently small short, adding on mini rallies 1.2700/50, reassess above 1.2800.

Gotta love the always-entertaining morning note from the guys at Hedgeye, who remind us that the U.S. has to roll over 40% of U.S. Treasury debt by 2012:

With Ben Bernanke and Jean-Claude Trichet printing moneys from the Keynesian heavens, we thought we'd do some minting of our own this morning and introduce Fiat Fools as our new Hedgeye nickname for politicians running European and American monetary policy.

Adam Smith be damned - there is nothing invisible about the heavy hands of these governments. When it comes to their latest storytelling of a "fat finger" causing volatility in the US stock market, take their word for it. It's a big fat middle finger from the creditors of our broken promises.

In Latin, the word fiat means "let it be done" ... and so our modern day Roman Gods of finance will do exactly that. Let us debauch the value of our currencies and inflate our way out of this colossal mess. All the while, let us hope that our creditors and citizens alike don't notice Main Street inflation while Wall Street gets paid to underwrite it.

Alas, we all know that hope, unfortunately, is not an investment process for anyone other than the Fiat Fools. The inconvenient truth of history reveals that debtor nations who become hostage to foreign lenders are just that - hostages. As David Walker points out in his latest book "Comeback America", "the British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt." All US President Eisenhower needed to do was threaten to sell the British Pound.

What if the Chinese or Japanese imposed that credible threat on the US? Up until Greenspan went global with the Fiat Fool system of US economic policy, US public debt held by foreigners was less than 20%. Now it's pushing north of 50%, and that's the point. The Buck stops there - and don't think for a New York minute that America isn't setting herself up on the trolley tracks to get run right over by the same oncoming train that European pigs have.

Given the light news flow today, here’s some interesting reading from Tony Boeckh of the The Boeckh Investment Letter:

Spending and borrowing excesses of governments and the public have a long and dangerous history, suggesting a deeper malaise is affecting the nation. Moreover, there are other serious signs of long-term decline, and policy and leadership will have to be particularly adroit in steering the U.S. through the difficult few years ahead. It has been documented that the latter stages of a long wave decline are parochial, nasty and politically unstable. People are fed up with the system, their loss of wealth, jobs, and income. Traditional politicians are blamed. People look for quick and easy solutions and are open to simplistic solutions provided by demagogues. It is difficult to sell the austerity, sound policies and pro-growth strategies needed to transition through the long wave trough before really big crises occur. Countries in denial face the prospect of repeating Greece’s calamity.

The risk for the U.S. and other countries is that politicians will cater to populist pressures and impose spending and tax policies that are counterproductive. In the aftermath of the Great Reflation, this could mean more government programs (e.g. health care), failure to raise taxes, where appropriate, out of fear of losing office, and excessive monetary ease because the Treasury bond market cannot absorb government funding on its own.

However, we should avoid the temptation to get too pessimistic. It is important never to underestimate the ability of the U.S. to recover from adversity, rejuvenate itself and get its house in order. Its long-term track record is pretty good, and realistic hope should not be jettisoned too readily. The question remains however, as to whether the U.S. needs an economic Pearl Harbour before serious action is taken. Investors have seen empty promises many times before and hence should be skeptical until they see clear, positive evidence that such action is being taken. Until then, they should take the attitude “show me”.

The Investment Challenge

The great problem for investors in today’s environment is that there is no return on short-term, safe assets yet the higher risk levels on longer‐term, higher return assets are too uncomfortable for most people. There are a number of conservative strategies that investors can employ, which are discussed at length in The Great Reflation and in our Boeckh Investment Letter (, which, for lack of space, cannot be discussed here.

The centerpiece of our own strategy, and outlined in the book, is understanding liquidity flows. They are the single most important force driving investment markets both up and down. Contracting liquidity caused the crash in 2008-2009 and dramatically expanding liquidity since March 2009 has triggered one of the greatest bull markets in U.S. history. The next bear market will also be driven, at some point, by a contraction in liquidity flows. However, as long as the great reflation is doing its work, that day can be postponed. Chuck Prince, if he were to comment today, would probably point out that the music is playing again. People are back out on the dance floor. But, if the great reflation is as artificial as we believe, then this is still musical chairs. When the music stops, there won’t be a chair for everyone, just like the last time.

WSJ reports VZ is in talks with rural carriers to more quickly expand 4G network.  BERN cuts DVN.  RAJA ups S.  MS upped at FBRC.  HAL upgrade at FBRC.  SLB upgrade at MACQ.  MYGN upped at Auriga.  EMS upped at CSFB.  AHL/VR/PRE upped at DBAB.  TEVA cut at OPCO.  KBH/MDC/TOL/COF cut at MACQ.  JACK cut at CSFB.  CRIC strategic alliance with BIDU.  URS higher on earnings.  WRC announces 5M share repurchase. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
PROLOGIS                     13.50    +8.78% 6823
WHOLE FOODS MKT       42.76    +6.24% 130168
EBAY INC                       23.37    +3.82% 82806
CISCO SYSTEMS            25.80    -3.52%  5651006
WENDY'S/ARBY'S-A        4.93      -3.14%  58743
SPRINT NEXTEL CO        4.28      +3.13% 1686434
HALLIBURTON CO           29.92    +2.85% 296026
ALTERA CORP                24.15    -2.42%  18590
US STEEL CORP             56.22    +2.16% 166059
DEVON ENERGY CO         68.13    -2.07%  7650

Today’s Trivia:  What percent of McDonald’s orders are made from a car?
Yesterday's Answer:  The Seven Summits are Kilimanjaro (Africa), Vinson Massif (Antarctica), Kosciuszko OR Carstensz (Australia), Everest (Asia), Elbrus (Europe), Mt. McKinley (N. America), and Aconcagua (S. America). 

Best Quotes:  U.S. Home Seizures Reach Record in Sign Recovery Is Delayed 2010-05-13 04:00:00.5 GMT By Dan Levy

May 13 (Bloomberg) -- U.S. home repossessions rose to a record level in April while foreclosure filings dropped in a sign mortgage lenders are working off a backlog of seized properties, according to RealtyTrac Inc. data. “Right now it appears that the banks are focusing on processing the loans already in foreclosure, and slowing down the initiation of new foreclosure proceedings as a way of managing inventory levels,” Rick Sharga, RealtyTrac’s executive vice president, said in an e-mail. “We’ll probably see this trend continue for a while.” A record 92,432 bank repossessions were reported in April, up 45 percent from a year earlier and 1 percent from March, Irvine, California-based RealtyTrac said today in a statement. Foreclosure filings, including default and auction notices, were 333,837. One out of every 387 U.S. households got a filing. Unemployment of 9.9 percent and a rising percentage of U.S. homes worth less than the mortgages on them are combining to thwart a housing recovery, according to RealtyTrac. About 5 million delinquent loans will probably end up in the foreclosure process in addition to the 1.2 million homes already taken back by lenders, Sharga said.Foreclosure filings fell 2 percent from a year earlier, the first decline since the company began issuing annual reports in January 2006. Defaults may not peak until 2011 depending on how lenders process them, Sharga said. “The underlying conditions -- mostly unemployment and millions of ‘underwater’ loans -- haven’t improved,” he said.

                        ‘Very High Level’

Monthly foreclosure filings will remain “at a very high level that will not drop off in the near future,” James J. Saccacio, RealtyTrac’s chief executive officer, said in the statement. April marked the 14th straight month that foreclosure filings exceeded 300,000. More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter, according to The proportion rose to 23 percent from 21 percent in the previous quarter, the Seattle-based property service said this month. Home prices may fall as much as 5 percent through the first quarter of 2011, according to forecasts from IHS Global Insight of Lexington, Massachusetts. Still, economist Patrick Newport said foreclosures may not get much worse. “The key thing is fewer problem loans are going into the pipeline,” he said.

                          Defaults Drop

Default notices went to 103,762 properties, down 27 percent from April 2009 -- the peak month with 142,000 -- and down 12 percent from March, RealtyTrac said. The numbers show fewer properties entering the foreclosure process as those that fell into delinquency earlier in the housing crisis finished the legal cycle. Nevada had the highest foreclosure rate for the 40th straight month. One in every 69 households got a notice, more than five times the national average. Bank seizures rose 57 percent from a year earlier and filings were little changed, RealtyTrac said. Arizona had the second-highest rate, at one in 169 households, or more than twice the U.S. average. Filings fell 1 percent from a year earlier. Florida ranked third, with one in 182 households. Filings there dropped 25 percent. California had the fourth-highest rate, at one in 192 households, and Utah was fifth at one in 221, RealtyTrac said. Idaho, Michigan, Illinois, Georgia and Colorado also ranked among the 10 highest rates.

                          Five States

Five states accounted for more than half the total filings in the U.S., led by California’s 69,725. That was down 28 percent from a year earlier and 25 percent from March. Florida ranked second with 48,384 filings, down 25 percent from April 2009 and 18 percent from March. Michigan was third at 19,173, a 77 percent increase from a year earlier. Illinois had 18,870 filings and Nevada had 16,217. Arizona, Georgia, Texas, Ohio and Virginia rounded out the top 10, RealtyTrac said. The company sells default data collected from more than 2,200 counties representing 90 percent of the U.S. population.

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