Wednesday, June 30, 2010

Morning Note...

Futures had been ~50bps higher this morning as ECB short-term debt rolls went better than expected overseas, but retreated by ~60bps on the 8:15am release of the ADP employment change, which dropped to +13k from the +60k estimate and the +57k prior reading.  As a result, futures are now hovering between unchanged and -10bps.  European markets also turned lower on our ADP release.  See below for some solid quotes re: strategy and sentiment from sell-side traders.  Here’s the Bloomberg piece on this morning’s ECB roll – and note the EU442M debt repayment (bold) expected tomorrow:

ECB Lends Less Than Forecast in Three-Month Tender 2010-06-30 10:34:16.632 GMT By Gabi Thesing
June 30 (Bloomberg) -- The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists forecast and a sign that the region’s financial industry may be stronger than investors estimated. Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said. Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.”

Note that today marks both month- and quarter-end, and typically some window-dressing is to be expected.  However, given recent participation levels as measured by volumes and anecdotal evidence (see quote below) that many hedge funds are running at very “lean” net exposure levels, will we see any window-dressing at all?  Looking ahead, note that China, EU, UK, and US ISM data is due tomorrow, and official June U.S. unemployment data is due Friday.  Note that U.S. 2-year note yields closed at an all-time low yesterday, at 0.5857%.  It had never before closed below 0.60%.  Given that “flight to quality,” do equities hold the key S&P 1040-ish level??

Regarding the FinReg vote and yesterday’s back and forth regarding the proposed $19 billion “bank fee” that had been tacked on, it appears a resolution has been achieved.  According to FBR,

In a move to secure the 60 votes necessary to clear the financial regulatory reform bill through the Senate, the House/Senate conference committee abruptly called a meeting last night to axe the $19 billion bank and hedge fund tax. In its place, the committee moved to pay for the bill with a combination of new FDIC assessment fee minimums and an early termination of the TARP program. These changes should assure Senate passage, but the timing remains unclear. The House is now scheduled to pass the revised final bill as early as today. Some say that the Senate will work into the weekend to finish the bill, but Senator Chris Dodd (D-CT), Chairman of the Senate Banking Committee, said he viewed Senate passage this week as “doubtful,” and that Majority Leader Harry Reid (D-NV) has assured him that if they are unable to finish it this week, it will be the first thing on the agenda the week of July 12, when the Senate returns from their July 4 recess.        

Ratings agency Fitch is on the tape this morning with comments about the global landscape.  Somebody please tell me if this reads positive or negative…despite a college degree, I have no idea:

The global recovery has strong momentum, and Fitch's base case is that global GDP will grow 3.1% in 2010, after contracting 2.5% in 2009, helped by a rebound in world trade, a turn in the inventory cycle and accommodative fiscal and monetary policies. Emerging market (EM) economies are providing the main impetus to growth, helped by a gradual recovery in US consumption and a strong rebound in Japan. However, activity in the euro area remains sluggish. The extension of loose monetary policy should support continued expansion in 2011 - albeit at a weak pace relative to previous recoveries - despite the fiscal consolidation plans currently mapped out by major advanced countries. However, the high degree of macroeconomic uncertainty is highlighted by the presence of inflation and deflation risks, and the scope for policy misjudgements is high.

Regarding “trader sentiment” following yesterday’s weakness, here are a few quotes:

…Yesterday, the S&P 500 closed below the February low of 1044.50 and is at risk of breaking this key support ahead of a deeper correction into our 1000-950 support zone. This would equate to 5% to 10% decline from yesterday’s close and an 18%-22% drop from the April high.  Volume expanded yesterday to 6.3bn shares on the consolidated tape as a strong 90% down day pointed to sellers coming back into the market. This suggests a deeper decline and the levels to watch on the downside are 1000 to 950 on the S&P 500.   The average mid-term year intra-year correction is 20%. This also supports the case for a decline into the 1000-950 area. June is typically a down month in the mid-term year and MTD, June 2010 is down 4.4%. Based on the mid-term year pattern, there is a slight upward bias in July, but summer rallies tend to be capped with lower lows in the fall.   US equity market remains under pressure, the assets we believe should provide positive returns are gold, bonds, and cash.  (BofAMLCO)

…Asia Lower overnight on follow through from US; European markets stronger as funding stress is not as dire as feared after better than expected results in 3month ECB auction…"thin", "liquid", "lean", more and more hedge funds we talk to are describing there portfolio's as such. 35%-50% invested seems to be the new norm. (feel free to challenge that, as it is far from an "official" stat).  We have now tested and held the 1040 level for the 4th time in the last 5 months. Chinese growth continues to be a key focus. Our emerging markets desk points out following yesterday’s news that the Conference Board index registered a smaller increase in April than previously estimated (due to a calculation error), today there have been rumours that the official PMI to be released tomorrow will fall to less than 50 in June (from 53.9 in May and an expectation of 53.2). This rumour seems less credible than others in recent months, but it is very likely that we will see some moderation in activity.  Feels like today is setup to give us a light volume bounce before tomorrow really gives us a solid direction. As our London desk pointed out yesterday, Thursday we'll have China/US/UK/EU ISM numbers, plus the expiry of the €442bln of 12 month Long-Term Refinancing Operation (LTRO) for European banks.  (RBC)

…Even traditionally multi year mutual funds get worried about short term performance in markets like these.  The mutual funds have been taking one of two approaches.  Some are literally doing absolutely nothing and staying close to benchmark weightings until more clarity comes into the marketplace.  On the other hand, there are some funds that were traditionally long term investors flipping around positions if/when they get these 20% type moves in a matter of days or weeks.  The staying power simply isn't there FOR ANYONE.  Like we pointed out a few weeks ago, THE DURATION OF POSITIONS BEING HELD BY THE ASSET MANAGEMENT COMMUNITY (especially hedge funds) IS THE LOWEST WE HAVE EVER SEEN IT IN OUR 10 YEARS TRADING.  I'm very consensus right now.  I think we bounce but any major bounce is probably a sold.  (Barclay’s)

Something to think about today will be the potential rebalance for mutual funds and some pensions with regards to their weightings in bonds/equity. It will be especially interesting this month given the move we have seen in bonds recently on the back of the current macro backdrop. As we have stated in the past, this event when looked at statistically over many years has been a difficult to handicap. The obvious conclusion has not shown any consistent statistical significance over When it is apparent that stocks should be to buy and bonds should be for sale the price action on the day of the event has been a 50/50 result at best.A competitor of mine for example is calling for large equity to buy today as result of the move in bonds. Also of note is that most sophisticated pensions make large decisions semi-annually. Given where we are in the calendar this could be important today. Also important is that most bench their TSY exposure to the Barclays Aggregate Bond index (formerly LEH index). Pension Fund liabilities are inherently short duration. As index duration extends they need to buy longer dated issuance. The current Barclays Aggregate bond index effective duration stands at 4.08 last month it was 4.02. The bond desk notes that they will likely see the interest from passive funds and index funds to match the index at 3:00 PM today. No one wants to take tracking error. (DB)

GIS lower on in-line earnings with reduced 2011 guidance.  SCOT ups LPX.  BA to acq STST for $34.50/share.  STEM announces $6M equity financing.  DBAB ups BTU.  OPCO ups NEE.  BofAMLCO ups CNS, EV.  FBRC ups NE.  JEFF ups AZN.  JPHQ ups AZN.  CSFB, MSCO cut CMST.LI.  CELG to acquire ABII for $71.93 in cash and stock.  ETRM 1-for-6 reverse split. 

Asia lower overnight.  Europe trending lower after being up 1%.  EUR/USD $1.2239.  Oil -15bps.  Gold -40bps.  USD -15bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
CELGENE CORP              50.65    -4.86%  122382
GENERAL MILLS IN          35.15    -4.74%  19700
VORNADO RLTY TST      70.64    -4.5 %  100
GOODYEAR TIRE            10.68    +4.50% 1220
TYCO ELECTRONICS       26.80    +4.48% 200
FREDDIE MAC                .437      +4.4 %  13200
KIMCO REALTY               13.02    -3.98%  100
PACTIV CORP                28.75    +3.98% 200
NOVELL INC                   5.98      +3.82% 100
ANADARKO PETROLE      35.50    -3.19%  42441
LSI CORP                       4.86      +3.18% 5000
FORD MOTOR CO           10.18    +3.04% 2339970
FANNIE MAE                  .360      +2.86% 13860
HERSHEY CO/THE           49.49    +2.61% 100
RAYTHEON CO               49.84    +2.24% 200
INGERSOLL-RAND           36.04    +2.15% 200
WESTERN UNION           15.25    +2.07% 100

Today’s Trivia:  Which nation is responsible for the largest margin of victory in a World Cup game?  (They did it twice, beating El Salvador 10-1 in 1982 and Korea 9-0 in 1954.) 
Yesterday's Answer:  Pele, at 17 years and 239 days, was the youngest player to ever score in a World Cup game (1958). 

Best Quotes:  Here’s the annoying TV ad that constantly runs on CNBC that I ranted against last week… The phony French accent cracks me up, not to mention the use of a French trader given the SocGen Jerome Kerviel scandal and American attitudes toward the French:

Tuesday, June 29, 2010

Morning Note...

Futures on shaky ground this morning (~1.4% lower) and “safe-haven” U.S. Treasuries yield the lowest levels in 14 months as concerns over global growth develop in China overnight.  The Bloomberg news summary explains it better than I could:

China Leading Index Revised to Show Smallest Gain in 5 Months 2010-06-29 08:56:21.210 GMT
June 29 (Bloomberg) -- The Conference Board revised its leading economic index for China to show the smallest gain in five months in April, in a release that contributed to the biggest sell-off in Chinese stocks in more than a month. The gauge of the economy’s outlook compiled by the New York-based research group rose 0.3 percent, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began. Equities slumped in Asia and Europe as the prospect of a slowdown in the fastest-growing major economy fanned concern that the global recovery may weaken. With American consumers boosting their savings rates and European governments moving to cut spending and restrain fiscal deficits, emerging markets in Asia have led the rebound in the past year.

The revision has rattled global investors as the Shanghai composite sold off over 4%, Japan was down 1.3%, Australia was down 90bps, and Europe is down 2.2% to 2.8% across the board.  Additionally, Nouriel Roubini wrote an editorial in the Financial Times urging Greece toward an orderly default (*GREECE FACING `INEVITABLE DEFAULT,' ROUBINI WRITES IN FT…*GREECE NEEDS DEBT RESTRUCTURE NOW, ROUBINI WRITES IN FT).  In Japan, unemployment claims were higher than expected and ratings agency Moody’s made cautious comments.  Watch S&P 1050 for U.S. technical support.  And watch Thursday for important global economic data:  China, U.S., and Euro ISM.  Further, Friday’s U.S. jobs data looms ahead as well… In earnings news, chip-maker MU is down 6% on Q3 results.  Finally, concerns regarding European bank liquidity – and the need to refinance on less favorable terms by July 1st – are also making the rounds:

Beware of the ECB Roll ...
On 1 July, European banks need to repay the ECB EUR 442B that they borrowed a year ago. To smooth the process, banks can re-finance with the ECB at 10am (BST) the day before (i.e. tomorrow)-- but on less attractive terms.

It’s interesting to note that this revised China news actually adds fuel to the fire that has been sparked by the recent release of the Economic Cycle Research Institute’s (ECRI) Index of Weekly Economic Indicators, which point to a rather ominous U.S. double-dip recession.  I’ll borrow from John Mauldin again, since he’s been my go-to read of late (lots of charts, sorry…):

The Leading Indicators Are Starting to Turn

Even while I was on vacation in Italy, I had to regularly feed my addiction for economic and investment information. Over the course of a few days I ran across several studies on the Economic Cycle Research Institute's (ECRI) Index of Weekly Leading Economic Indicators. The index has turned down of late. Chad Starliper of Rather & Kittrell sent me the following charts and analysis. (I love it when someone else does the work for me while I'm on vacation!)

"The ECRI has been getting some news of late. I did a little work on it, played with the rates of change, and found something a little ominous you might be interested in. The normal reported growth rate is an annualized rate of a smoothed WLI. However, when the 13-week annualized rate of change is used - shorter-term momentum - the decline in growth has fallen to a very weak -23.46%. The other times it has fallen this fast? All were either in recession or pointing to recession in short order (Dec. 2000)."


Jonathan Tepper (coauthor of the next book I am working on) sent me this piece from a group called EMphase Finance, based in Montreal. They wrote this back in April, as the Weekly LEI was beginning to turn over. They have found a bit of data that seems very good at predicting the economy of the US 12 months out. Let's take part of their work:

Terms of Trade and US Real GDP

"Many market participants are debating whether or not a double-dip recession will occur within the next quarters. As we are writing our report, ECRI Weekly LEI fell quickly to 122.5 points from 134.7 in April. This indicator did a good job leading U.S. Real GDP Y/Y by 6 months over the last two decades. However, ECRI Weekly LEI recently became quite unreliable as it increased up to 25% Y/Y in April, a level consistent with an unrealistic 8% U.S. Real GDP Y/Y! You can notice the problem on the left chart below.

"We discovered a new leading indicator to forecast U.S. Real GDP Y/Y, and it is simply the U.S. Terms of Trade (TOT). It is defined as the export price / import price ratio. We are pleased to be the first to document this, at least publicly. On the right chart above, TOT leads U.S. Real GDP Y/Y by 12 months. The only drawback: underlying time series are monthly instead of weekly, but this is not really an issue with that much lead. Also, the relationship still holds well if we extend to the maximum data (1985)."

Their conclusion?

"As you probably noticed earlier, TOT is suggesting a decline of U.S. Real GDP Y/Y to nearly 0% within the next 12 months. Q2 2010 Real GDP Q/Q Annualized to be released on the 30th July may match expectations as it reflects data of the last three months, which were positive in general. However, we are most likely going to see weaker numbers in the next quarters. Will this lead to a double-dip recession? We believe the odds of a double-dip recession within the next 9-12 months are minimal, but odds may increase to 50-50 in 2011, depending on the evolution of variables we follow in the upcoming months."

And while we are on leading indicators, let's end with this note from good friend and data maven David Rosenberg of Gluskin Sheff (based in Toronto).

"For the week ending June 11th, the ECRI leading index (growth rate) slipped for the sixth week in a row, to -5.7% from -3.7%. Only once in the past - in 1987, but the Fed could cut rates then - did this fail to signal a recession. But a -5.7% print accurately signaled a recession in the lead-up to all of the past seven downturns.

"The consensus is looking at 3% real GDP growth for the second half of the year, but as Chart 2 suggests, the two quarters following a move in the ECRI to a -5% to -10% range is +0.8% at an annual rate on average. So right now the choice is really either a 2002-style growth relapse or an outright double-dip recession - pick your poison."

Tesla IPO prices at $17/share, which is ahead of the $14 expectation.  CaseShiller Home Price data slightly better than expected.  Rumors of JBS for SFD acquisition.  GSCO cuts COV to neutral.  AAN to close office furniture division.  ACPW initiated OW at TWPT.  AKAM cut at MERR.  POT files $2 billion offering.  RYAAY to cut winter capacity by 16%.  SMSC beats by 6c.  GSCO cuts TWX.  CSFB cuts VOD.  FBRC ups NE.  GSCO ups ZMH.  KBWI ypos LEN, BLK, WDR.  TWPT ups JBL.  UBSS ups RYL, RF, USB.  KBWI cuts ART, JNS.  WSJ bullish on railroads. 

Asia lower overnight.  Europe lower.  EUR/USD $1.2201.  Oil -325bps.  Gold -22bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
LIZ CLAIBORNE               4.17      -6.71%  2000
MICRON TECH                9.40      -6.19%  633252
JANUS CAPITAL GR         9.29      -4.52%  400
VULCAN MATERIALS       43.85    -4.19%  900
ST JUDE MEDICAL          36.14    -3.63%  200
BOSTON PROPERTIE       71.99    -3.56%  300
JDS UNIPHASE               10.65    -3.53%  250
WEYERHAEUSER CO       35.54    -3.48%  200
SIGMA-ALDRICH             49.89    -3.43%  300
MGIC INVT CORP            7.48      -3.36%  1845
FREEPORT-MCMORAN    62.50    -3.34%  29787
AMERICAN CAPITAL        5.25      -3.31%  21235
FREDDIE MAC                .423      -3.2 %  24400
MBIA INC                       5.80      -3.17%  11200
US STEEL CORP             40.28    -3.06%  63391
CONSOL ENERGY            35.20    -3.03%  500
HARLEY-DAVIDSON         23.19    -2.93%  100
PLUM CREEK TIMBR        35.04    -2.91%  200
MANITOWOC CO            9.74      -2.89%  2250
HALLIBURTON CO           25.24    -2.89%  4018
MASSEY ENERGY CO       29.35    -2.81%  6455
WEATHERFORD INTL      13.90    -2.8 %  7868
ARCHER-DANIELS           25.96    -2.59%  600

Today’s Trivia:  Name the youngest player to have ever scored in a World Cup. 
Yesterday's Answer:  Brazil’s Ronaldo – with 15 goals – is the all-time World Cup goal scorer.  

Best Quotes:  From the RBC desk…  Global equity markets down big on signs of slowing Chinese growth and higher inflation; China down over 4% (lowest level since April '09), all of Europe down at least 2%, the Euro's back under 1.22. If you believe the equity market, things are OK. But if you believe the bond market, the macro environment is downright awful.  The 2 yr has hit a record low yield (.554%), while the yield on the 10 yr is now under 3% (2.97%), the lowest level since April of '09.  Combined US and EU bond indices are up 5.7% YTD vs.  the SPX down 3.63%.  So clearly bonds are pricing in a more "dire" scenario vs. stocks, and sentiment among most investors we meet is the equity crowd is coming around to the bond crowds' school of thought vs. vice/versa.
Bonds continue to be the only viable "hedge" as all risk assets continue to be highly correlated.
The one silver lining to the overseas markets and our move lower yesterday is volume isn't going to "confirm" any of these moves.  Despite there still being some Russell rebalance unwind trading to be done, yesterday's NYSE volume was the lightest since April 6th (935M shares). Despite the quiet week ahead of July 4th, our London desk points out Thursday is a huge day for macro news globally; Thursday we'll have China/US/UK/EU ISM numbers, plus the expiry of the €442bln of 12 month Long-Term Refinancing Operation (LTRO) for European banks. 

Monday, June 28, 2010

Morning Note...

Futures flat this morning on a relatively quiet weekend, despite the G20 meeting, which yielded largely expected results:  countries agreed to cut deficits by at least 50% by 2013 and to stabilize debt-to-output ratios by 2016.  Regarding new capital rules for banks, they will be phased in by 2012 and more details were deferred to the November G20 meeting in South Korea.  For the moment, however, the global bank tax looks to have completely lost momentum.  Given the light news and the un-official U.S. vacation season (book-ended around July 4th), investors are looking ahead to this Friday’s jobs number, mid-July European bond offerings and bank stress-test results, and Q2 earnings (July 12th after the bell: AA) for clues as to how the market will break out of its current S&P 1050 to S&P 1110 trading range.  In economic news this morning, Personal Spending for May rose slightly more than expected, at +0.2% vs. +0.1%/e.  Personal Income for May was slightly lower, at +0.4% vs. +0.5%/e.

Regarding the G20, in broad terms, Obama seems to have lost another battle of sorts, pushing for more global stimulus rather than increased austerity.  Of course, one wonders if the chatter about the need for stimulus (RBS is also out with a call this morning on Helicopter Ben dumping more newly printed dollars on the global economy sooner rather than later:  from the Telegraph  -- Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke [2002 helicopter speech] text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)". "We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors from the Obama Administration – when coupled with the dour tone from the most recent FOMC release – indicates that things may be worse than they actually appear?  Worth noting that Obama is also beginning to push for a 0.15% U.S. bank tax in order to repay TARP. 

In political news, the death of Senator Byrd and the protestations of Senator Scott Brown in Massachusetts cast some doubt on the FinReg vote scheduled for Tuesday.  Worth noting that most pundits seem to be in agreement that the financial sector “dodged a bullet” with regard to financial reform, and that the proposed bill does not address the “too big to fail” issue.  Also note the Kagan (Supreme Court) and Petraeus (Afghanistan) confirmation hearings are set for the Hill this week. 

John Mauldin took a stand on his recession-expectation view in this weekend’s note, as many “forward thinkers” have expressed concern over an almost-certain U.S. tax increase to come.  Here are a few quote-worthy paragraphs:

The uber-Keynesians that are in control of our economic policy clearly do not think that large tax increases matter, or if they do think so they are not speaking out about them. They are conducting an experiment on our economic body without benefit of anesthesia. Here's a prediction about which I can feel confident: if we do slip back into recession, they will blame some factor other than the tax increase and call for massive stimulus. In fact, they will probably say that the lack of stimulus was the problem in the first place.

Unless something changes, we are going to enact the largest tax increase in US history. And that will be matched by equally large tax increases and spending cuts by state and local jurisdictions. And we are going to do it at a time when the above research suggests that growth may be in the 1% range and unemployment will still be in the 9-10% range. Extended unemployment benefits will be long gone for many people. Housing will still be in the doldrums (more on that in next week's Outside the Box) and housing prices are likely to fall from here.

Growth in the first quarter was revised down (again!) to 2.7%, or about half that of the 4th quarter of last year. Much of what passed for growth was inventory rebuilding and stimulus. The underlying economy may be weaker than the headline number reveals. And by the 4th quarter, there is very little stimulus.

Given the above, I think we have to increase the odds of a 2011 recession to 60%, and those odds will rise and fall based on the economic performance of the next two quarters.

Considering Personal Spending was released this morning, I enjoyed this summary on the retail sector from JPM:

What is Weighing on Investors’ Minds: Retail has underperformed the SP500 by 7% this month as investor concerns in the group have expanded down the income statement to include gross margins, in addition to the existing top-line concerns.

·         Higher 2011 Sourcing Costs Becoming Real Concern – China’s announcement on Monday that the Yuan will be revalued higher brought to the forefront an issue that's been brewing for a while but hasn’t received much attention, Spring 2011 sourcing costs are likely to be higher than expected. Sending 2011 sourcing costs higher will be a) Cotton prices up significantly yoy, b) China Labor Costs heading higher and c) greater FX headwinds with the stronger Yuan. This point was further reinforced in investors minds on Wednesday night when NKE provided weaker than expected 2011 GM guidance (said GMs would be down ~100bps vs. St. looking for up 30-40bps) citing rising sourcing costs and FX.

·         Other Margin Concern – Increasingly promotional environment: BBBY’s GMs came in weaker than expected (50bps below the St. and 110bps below JPM ests) with higher coupon redemption rates weighing. There is concern that the environment is becoming more promotional moving forward which will also negatively impact margins.

·         Concerns over the Consumer - While we haven’t heard any direct commentary on June retail sales (BBBY guided Q2 sales inline w/St. ests, which some don’t think they would have done if sales trends had slowed significantly, and retail management teams struck a generally positive tone at sell-side conferences/meeting the last few weeks), investors remain concerns over the pace of June sales.  Negative lateral reads on sales trends inc. 1) Restaurant June Sales datapoints – CPKI & SONC both cut Q2 guidance discussing weak May/June sales and DRI declined to comment on June trends on yesterday’s earnings CC and spoke to month-to-month and week-to-week volatility, 2) Consumer Electronics - DELL commented at their analyst meeting yesterday that they were seeing some weakness in Europe and within Consumer and May TV shipment data fell 14% (vs. Apr. +6, Mar. +27%) which bodes poorly for June sales, and 3) PIR said it expects a little bit of pressure on Q2 sales.

·         European Exposure Also Being Seen As A Negative – While the European sovereign debt crisis remains in the headlines, investors will likely continue to worry whether those headlines weigh on European consumer confidence and spending.

·         Seasonal Weakness – Retail shares historically (‘90-’10) have underperformed the SP500 the most during the months of July-Sept. 

·         Valuation – Outside of an expectation for stronger than expected sales in June, there’re few arguments to get long retail now outside of valuation (and w/the broader market pullback, that logic applies to most sectors).

·         Technicals – Group has broken through 200day MA.

·         Trading Flows – Flows can be best characterized as a ‘buyer strike.’ We have seen HFs become increasingly more comfortable getting short retail while there has been orderly selling by vanillas. Strength in most stocks has been met w/more aggressive sell-side orders and there has not been many orders chasing or scrambling to cover. Despite the >20% pullback in retail, we have not seen vanillas defending long positions.

Taking a look around, it appears that what’s behind us is looking more significant than what’s ahead for the first time in a while. In other words, the G20 is past…the yuan revaluation is past… financial regulation is past…the FOMC decision is past… Greek crisis is past… with these major landmark events in the rear-view mirror, the market should have an idea of where it wants to be… the only significant catalysts – as U.S. summer vacation time is upon us – appear to be 1) the jobs numbers on Friday (for which chatter/whispers become more and more grim…perhaps we’ll see a relief rally if this number is not an absolute shocker to the downside?) and 2) earnings season, which starts July 12th.  Sure, an unexpected geopolitical event, another potential Gulf hurricane, or increased protesting in France (as austerity measures are delivered to an often uncooperative work force) has the potential to surprise… but more likely than not, it could be a slow and steady next couple of weeks... 

Tesla Motors to increase IPO size.  STFL takes bank estimates down.  SUSQ cuts AMZN, upgrades FINL.  iPhone 4 becomes the most popular AAPL release ever.  WSJ Heard on the Street cautious on homebuilders.  BARD ups EGP.  BofAMLCO cuts CEL, PTNR.  BP higher on news that the most recent storm will miss the Gulf area. 

Asia mixed overnight.  Europe slightly higher.  EUR/USD $1.2331.  Oil -90bps.  Gold -5bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
FREDDIE MAC                .4799    +5.77% 3600
MEMC ELEC MATER        10.30    -3.38%  1174
FANNIE MAE                  .400      +3.33% 31600
NOBLE CORP                  30.00    +2.46% 7394
MICRON TECH                9.69      +2.43% 86465
LSI CORP                       4.81      -2.04%  2900
NEW YORK TIMES-A       9.59      +2.02% 100

Today’s Trivia:  Who is the top overall World Cup goal scorer?
Yesterday's Answer:  The fastest goal in a World Cup match was by Turkey's Hakan Sükür after only 11 seconds against South Korea in 2002.
Best Quotes:  Good Morning -  After last weeks snoozer, I am not expecting a heck of a lot to happen this week.   Markets ticking up slightly on the comments out of the G-20.  Pledges to stimulate growth, and curb deficits to me sounds like a good idea.  I wouldn’t think they need the G-20 to come up with such a grand plan.   This week will be stifled by the upcoming Unemployment data, quarter end, and the 4th of July.   Democrat Robert Byrd dies at the age of 92.  leaving the Dems with only 59 votes in the Senate.  Financial reform looks like it is on the brink again.  I am not bullish on the market, or the economy, but we could get a bit of a slow grind higher into all these events as sentiment have been pretty low of late.   1079.50 was Fridays high, 1101 is the 200 day moving average.  1062.75 was last weeks low.  Have a good day.  –BofAMLCO trader note.

Friday, June 25, 2010

Morning Note...

Happy Friday… Futures ~15bps higher as financial reform – finally, and for better or worse – appears to be behind us, as Congress delivered a reconciled bill set for a final vote next week and delivery to President Obama for enactment prior to the July 4th holiday.  See below for specifics on this FinReg Bill.  Overseas, the Financial Times reports that Basel III is backing down on its proposed stringent liquidity requirements, which is helping European financials.  However, Greek CDS continue to widen to record levels, and – for what it’s worth – Romania rejected austerity measures and France is on strike to protest the proposed increase in the retirement age.  Also, EU officials are meeting today in Brussels to discuss whether Spanish savings banks and German state banks should be included in the upcoming round of stress tests.  In economic news, the final GDP revision for Q1 came in at +2.7% vs. the +3% expectation and Personal Consumption was also lighter, at +3% vs. the +3.5% expectation.  In earnings news, ACN beat by 4c and is trading 2% higher premarket.  Activist Ronald Burkle disclosed a 6% stake in American Apparel (APP).  ORCL beat by 6c and is 5% higher premarket.  And Blackberry maker RIMM beat by 4c but misses revenue estimates and trades down 5% premarket.  In currency news, the yuan rose 50bps against the USD, marking its biggest weekly gain since December 2008. 

Looking ahead, UofMich consumer confidence is due at 10am.  Also note the Russell rebalance today – hopefully that will spark some volume.  Regarding the Russell, great advice from the Barclay’s desk:  Today is a great "liquidity" day with the annual Russell Rebalance taking place.  We always tell fundamental investors the same thing.  Don't try to "trade the trade".  We suggest picking your fundamental levels and being in scale mode irrespective of the time of day.  These trends have a tendancy to go the "wrong way".  For example, many times if there is supposed to be 2 million shares to buy on the bell from indexers the stock actually sells off for the last half hour of the day.  Don’t forget - G20 this weekend in Toronto.  Also, make sure you watch USA/Ghana at 2pm tomorrow or be labeled a communist.  It’s win or go home at this point…

Before getting to the meat of the quotable stuff, here’s another nice little tidbit from Barclay’s that made the rounds last night…good observation, but “cum grano salis” (look it up):  …down 4 days in a row now…since hitting the Mar09 lows, SPX hasn’t traded down 5 for consecutive days. It has been down 4 days in a row on 5 different occasions with an average return on the 5th day of +2.32%...

From the institutional perspective, here’s a summary of the landmark FinReg bill that was apparently hashed out at roughly 5am this morning after an all-night session:

House/Senate reconciliation process wraps up after compromise reached on Lincoln derivatives amendment; sets stage for vote to take place next week & for Obama to sign into law by Jul 4 weekend break.  Democratic members of the House and Senate committees agreed at ~5:30amET this morning on a Lincoln compromise; no Republicans voted in favor of the reform package.  The Lincoln language was softened slightly. 

Lincoln amendment compromise reached - banks can trade in-house foreign exchange and interest rate swaps, gold and silver swaps, and derivatives designed to hedge their own risk.  But banks will need to spin off dealing desks to affiliates to handle agricultural, energy and metals swaps, equity swaps, and uncleared credit default swaps.  Non-financial companies "using swaps to hedge or mitigate commercial risk" are exempt from clearing the trades, as long as they explain to regulators how they are meeting financial obligations.  The financing arms of manufacturers do not have to clear swaps when they assist in selling the parent company's products.  Clearinghouses will not be forced to accept credit risk from other clearinghouses.  Capital and margin requirements for uncleared swaps done by non-bank swap dealers and major players will be set at "appropriate" levels (somewhat softer language than prior).  Regulators will have at least a year after the time of passage to implement the legislation.  Reuters 

Volcker Rule compromise reached - would limit a bank’s investment in private-equity or hedge funds to 3 percent of a fund’s capital. Total investment in private-equity and hedge funds wouldn’t be able to exceed 3 percent of a company’s tangible common equity.  Dodd proposed adding language to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the security.  Bloomberg 

And from the consumer perspective, I will lean on friend and former Amherst Student sportswriter Ron Lieber’s excellent summary in the New York Times:

After months of haggling, the terms of financial reform are set, so long as both houses of Congress vote to accept them in the coming days. While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with their own money, they also set a number of new rules that will directly affect consumers.

CONSUMER BUREAU The bill would create an independent Consumer Financial Protection Bureau, housed within the Federal Reserve. The bureau is to be headed by a single director appointed by the president and confirmed by the Senate.

The new bureau would write and enforce rules for most banks, mortgage lenders, credit-card and private student loan companies. Smaller banks and credit unions, or those with less than $10 billion in assets, would have to obey the consumer bureau’s rules — but the smaller institutions’ enforcement and supervision would remain with their current regulators, said Travis Plunkett, legislative director for the Consumer Federation of America.

CREDIT SCORES While you still can’t get a free credit score each year with your three free credit reports, you will soon be able to see the score if it has hurt you in some way.

MORTGAGES The bill offers a number of new protections, many of which are a bit like closing the barn door after all of the animals escaped. Lenders, for instance, will have to check borrowers’ income and assets. Most lenders have learned that lesson by now or have ceased to exist.

Other rules include a ban on prepayment penalties for people with adjustable rate and other more complex types of mortgages. Mortgage brokers and bank employees will no longer be able to earn bonuses based on the type of loan they put you in. That will presumably eliminate any incentive to push high-interest loans on borrowers (who might otherwise qualify for a better deal) to inflate bank profits.

CREDIT AND DEBIT CARDS Hate those merchants that won’t let you use your credit card unless you spend more than a certain amount? Well, now they have Congress’s blessing, as long as the minimum is not higher than $10. The Federal Reserve can increase the minimum if it chooses. As for maximums, only the federal government and colleges and universities can limit what people spend. So if you are paying tuition on a credit card and earning a couple of free plane tickets each year, that fun may soon end.

Merchants are also free to offer discounts to people who pay cash instead of using cards, or use debit instead of credit cards. They will not, however, be able to charge one price for people using American Express cards and a lower price for people using Visa and MasterCard credit cards. …It is not clear what the Fed will do or how the big banks and Visa and MasterCard will react. This could take a few years to play out, or many years if lawsuits start flying.

FIDUCIARY DUTY The Securities and Exchange Commission was given the authority to create a new rule for brokers that would require them to put their clients’ interests first. But that won’t happen right away. Consumer advocates wanted the so-called fiduciary standard in the new law, and it appeared in the House’s original proposal.

EQUITY INDEXED ANNUITIES These annuities are complex financial products that promise a minimum return on your investment. But they often require you to tie up your money for long periods of time and charge hefty surrender fees if you need to pull out your money early. Unscrupulous salesmen, who collect lucrative commissions, have used deceptive marketing techniques to sell these products to senior citizens, which is why sales of these annuities have been the subject of many lawsuits.

But a provision in the legislation will prevent the S.E.C. from regulating them, a step backward, consumer advocates and the commission have argued, from what is now the case. The S.E.C. had adopted a rule to regulate these annuities as securities, but it had not yet been enacted. Now, the annuities would be treated as insurance products, which means they would be overseen by state insurance regulators.

Regarding yesterday’s concerns over FNM & FRE liability falling to banks, BTIG’s Mike O’Rourke spelled out the Congressional comedy of errors (remember the great line from Will Rogers, oft used here…the opposite of Progress is Con-gress…) in last night’s note:

…Then news of a  proposal by House Republicans to make the banking sector liable for the losses at the GSEs in the liquidation fund portion of the FinReg bill was another indication of how lost the legislative body is.  First Congress creates the GSEs.  The GSEs crowd the banks out of their vanilla home mortgage business, forcing them to embrace riskier businesses like derivatives and securitizations.  Now the GSEs have hundreds of Billions of Dollars in losses, and the House Republicans want to lay it off on the banks who are dealing with their own losses.  Barney Frank must have been chuckling to see the Republican members of the House do his heavy lifting for him.  Senate negotiators rejected the measure.  Needless to say, today’s round of negative headlines was enough to move Bulls to the sidelines. 

Mike also discussed yesterday’s jobs data, and sets the context ahead of the big June unemployment report, due on Friday July 2nd (catalyst alert!): 

One of the data points lacking inspiration was the Initial Jobless Claims report.  The bottom line is that 457,000 beating a 463,000 claims estimate is not enough to make a difference.  Small expectations beats at these levels do not provide any additional help to the economy.  Without resumption of the downward trajectory, Non-Farm Payrolls and the Unemployment Rate will not improve.  Considering it has become a key focal point, it is only appropriate to provide the proper context.  Going back over 40 years, the current levels of 450,000-475,000 on a 4 week moving average are consistent with adding nothing in Non-Farm Payrolls per month, and still losing approximately 30,000 Private Sector Payrolls.  Even the 425,000-450,000 range indicates flat Non-Farm Payrolls.  The key threshold that needs to be broken is 425,000.  At that point, approximately 100,000 Non-Farm Payrolls are being added, most of which are Private Sector.  That rate is still not enough to bring the Unemployment Rate down, but it is a very healthy start.  The true sweet spot arrives when initial Claims drop below 375,000, then the economy is adding 200,000 Non-Farm Payrolls, 170,000 of which are Private Sector.  That is the point where Unemployment starts declining and the recovery gains real momentum.

AZZ reports in-line.  FCEL announces stock offering.  MXIM, POWI, VLTR upgrade at NEED.  TIBX beats by 2c and beats on revs. TUP upgrade at JPHQ.  ZOLL upgrade at RBCM. 

Asia lower overnight.  Europe ~50bps lower this morning.  EUR/USD $1.2296.  Oil +40bps.  Gold +43bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
JDS UNIPHASE               11.38    +4.12% 2625
KEYCORP                       8.375    +4.04% 22371
ORACLE CORP                23.07    +3.83% 636214
KB HOME                       11.79    -3.52%  17400
FIDELITY NATIONA         28.09    +3.5 %  8100
AETNA INC                    27.82    -2.93%  11640
FIFTH THIRD BANC         13.55    +2.65% 34678
HUNTINGTON BANC        5.89      +2.61% 77606
BB&T CORP                   28.83    +2.34% 4136
SCHWAB (CHARLES)       14.9500 +2.26% 200
US BANCORP                 23.10    +2.17% 15677
JPMORGAN CHASE          38.80    +2.02% 392162
ZIONS BANCORP            23.41    +2.0 %  1391

Today’s Trivia:  What is the fastest World Cup goal ever scored?
Yesterday's Answer:  Gonzales or Gonzalez is the most popular World Cup surname.   

Best Quotes:  For the geopolitically-inclined, here’s today’s STRATFOR piece on the McChrystal/Afghanistan scenario:


The commander of U.S. Forces-Afghanistan and the NATO-led International Security Assistance Force, Gen. Stanley McChrystal has resigned his command. His resignation is a direct result of his controversial remarks in a Rolling Stone interview broken late June 21, and not a reflection or indictment of the campaign he has led in Afghanistan. But that campaign and the strategy behind it are having significant issues of their own.

U.S. President Barack Obama on June 23 accepted the resignation of command from U.S. Gen. Stanley McChrystal, commander of U.S. Forces-Afghanistan and the NATO-led International Security Assistance Force, following a controversial interview with Rolling Stone Magazine. McChrystal's resignation is a direct result of this interview and is not itself an indictment of the status of the war he commanded or the strategy behind it. But ultimately, the U.S. strategy is showing some potentially serious issues of its own.

The U.S.-led campaign was never expected to be an easy fight, and Helmand and Kandahar provinces are the Taliban's stronghold, so progress there is perhaps the most difficult in the entire country. But the heart of the strategy ultimately comes down to "Vietnamization." Though raw growth numbers officially remain on track for both the Afghan National Army and Afghan National Police, according to testimony which U.S. Central Command chief Gen. David Petraeus and Undersecretary of Defense for Policy Michelle Flournoy gave before the U.S. Congress last week, there are serious questions about the quality and effectiveness of those forces and their ability to begin taking on increasing responsibility in the country.

Meanwhile, a U.S. program to farm out more than 70 percent of logistics to Afghan trucking companies appears to be funding both warlord militias independent of the Afghan security forces and the Taliban itself. As STRATFOR has discussed, this may be a valuable expedient allowing U.S. combat forces to be massed for other purposes, but it also risks undermining the very attempts at establishing good governance and civil authority that are central to the ultimate success of the U.S. exit strategy — not to mention running counter to the effort to starve the Taliban of at least some of its resources and bases of support.

Intelligence is at the heart of the American challenge in Afghanistan, a fact that was clear from the beginning of the strategy. Special operations forces surged into the country (now roughly triple their number a year ago) and are reportedly having trouble identifying and tracking down the Taliban. Similarly, slower-than-expected progress in Marjah and the consequent delay of the Kandahar offensive have raised serious questions about whether the intelligence assumptions — particularly about the local populace — underlying the main effort of the American campaign were accurate. Security is proving elusive and the population does not appear to be as interested or as willing to break with the Taliban and join the side of the Afghan government as had been anticipated.

So while there have absolutely been tactical gains against the Taliban, and in some areas local commanders are feeling the pinch, the Taliban perceive themselves as winning the war and are very aware of the tight U.S. timetable. Though the Taliban is a diffuse and multifaceted phenomenon, it also appears to be maintaining a significant degree of internal discipline in terms of preventing the hiving off of "reconcilable" elements, as the Americans had originally hoped. Senior Pentagon officials including Petraeus and Secretary of Defense Robert Gates have admitted as much: It is simply too soon for meaningful negotiation with the Taliban. There has been some recent movement, but nothing decisive or irreversible — and certainly nothing that yet shows strong promise.

And with the frustrations and elusive progress in the Afghan south, it is increasingly clear that the political settlement that has always been a part of the long-term strategy is becoming an increasingly central component of the exit strategy. This is the U.S. State Department's main focus, and there appears to be considerable U.S. support behind Afghan President Hamid Karzai's reconciliation efforts. The Taliban appear to be holding together, so negotiation with the Taliban as an entity (rather than hiving it apart) may be necessary. And given the Taliban's position, this could come at a higher price than once anticipated — and then only if the Taliban can be compelled to enter into meaningful negotiations on some sort of co-dominion over Afghanistan.

The U.S. Army and Marine Corps certainly have no shortage of competent generals to replace McChrystal. And the surge of forces to Afghanistan is not likely to be reversed — U.S. and ISAF forces are spread quite thin, despite the already-significant increase in troop levels. But whoever replaces McChrystal will continue to struggle with a war that remains deeply intractable with limited prospects for success.