Friday, October 29, 2010

Morning Note...

Apologies, no morning note today… First look at Q3 GDP was in-line with expectations (+2%) and Q3 Personal Consumption was slightly better than expected (+2.6% vs. +2.5%/e).  Futures slightly lower, ~10bps, but off the earlier lows on the GDP release.  Busy week next week… Midterm elections and the Fed… Note that today (last day of October) is year-end for many mutual funds. 

Thursday, October 28, 2010

Morning Note...

Futures had been flat all morning, but surged +60bps at 8:30am on the release of better-than-expected unemployment data.  Initial Jobless Claims for the week ending October 23rd were 434k vs. the 455k expectation and the 455k prior reading.  Continuing Claims were also lower than expected, at 4.356M vs. 4.430M.  The prior reading was 4.478M.  Of course, this begs an interesting question given the recent “bad news = good news since it prompts heavy Fed stimulus” tone of the market:  could better-than-expected economic data (including tomorrow’s first look at Q3 GDP) cause markets to pause since “less Fed action” would be inferred?  As of right now, with the futures popping off the jobs data, the answer is no…  In corporate news, Q3 earnings season continues in earnest:  Akamai (AKAM; +4%) reported in-line, Avon Products (AVP; -6%) missed by 6c, AstraZeneca (AZN; -3%) beat by 2c, Beckman Coulter (BEC; +4%) beat by 12c, Eastman Kodak (EK; +7.5%) beat by 29c, Flextronics (FLEX; +11%) beat by 3c, Flowserve (FLS; -8%) missed on revenues, Motorola (MOT; +5%) beat by 5c, Annaly Mortgage (NLY; -5%) missed by 7c, Norfolk Southern (NSC; -2%) beat by 10c, Sketchers (SKX; -11%) missed by 28c, Symantec (SYMC; +7%) beat by 6c, Teradyne (TER; -9%) beat by 3c, and United Therapeutics (UTHR; +7%) beat on revenues.  Overseas, Asia was mixed overnight and Europe is up ~1% as of writing.  Oil +70bps, Gold +1%, and USD -85bps. 

The big news yesterday was actually market commentary from both Bill Gross at PIMCO and Jeremy Grantham at GMO.  Gross was cautious on QE and decidedly negative on Washington – he even came across as slightly tea-party-esque.  (Text below in case you missed it.)  Grantham blamed the Fed for any and all ills of the past 15 years (since Greenspan, essentially) and he’s probably right.  A politicized bank like the Fed that openly manipulates “free and open” market pricing does indeed make one wonder if we live in a capitalistic free-market society at all… (PDF attached in case you missed that one too.) 

Good rant from Hedgeye this morning:

The #1 headline on Bloomberg this morning is "FED ASKS DEALERS TO ESTIMATE SIZE, IMPACT OF DEBT PURCHASES." So, after creating massive disconnects in global expectations and seeing both inflation and interest rates rise this week, look at what the New York Federal Reserve is doing this morning - giving conflicted and compromised bankers a "survey" on the size and impact of Quantitative Guessing. This isn't leadership - this is a joke.

Can you imagine if another Washington (Ron Washington, the Manager of the Texas Rangers) took a stinking survey days before game-time? What in God's good name would his players think? Ben Bernanke has stated this plainly, so take his word for it - he has no idea what QE's impact will be.

A better question to ask yourself is what aren't people talking about? What's the risk that the current market debate is about the bark on a QE tree as opposed to the burning forest of credibility in the US economic system? What if the Chinese or Japanese sell Treasuries and rates rip higher?

What people aren't talking about on Wall Street is the crisis of leadership in this country. We're hyper focused on what group-thinkers at the Fed will do next. At the same time, the politicized members of this conflicted institution are being held hostage to where the political wind blows. We've stopped thinking about re-thinking US monetary policy altogether.
                                                                                                                                                                                                                                                      I often get asked for my advice - what would I do? First, I say stop. That's it. Just stop what these people are doing to your hard earned savings. Put that in your survey Bill Dudley. Stop. Then start to un-learn bad policy and re-learn the lessons of the US Military's 2009 plebe class:

"We have a crisis of leadership in America because our overwhelming power and wealth earned under earlier generations of leaders, made us complacent, and for too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don't know how to ask them. Who can fulfill goals, but don't know how to set them. Who think about how to get things done, but not whether they're worth doing..."

Also thought this BTIG summary of Cramer’s Mad Money last night was interesting:

Jim Cramer's "Mad Money" Jim Cramer said, "Don't fight Wednesday's pullback, welcome it." He listed 10 reasons why investors should embrace a market selloff. 1. The market's gotten ahead of itself in preparation for next week's election -- assuming a Republican sweep. 2. The Federal Reserve is expected to stimulate the economy. 3. Earnings can't last forever. 4. There was no news Wednesday to drive the markets up. 5. There were visible losers - Whirlpool (WHR), Jones Apparel (JNY) and Sprint (S) earnings all disappointed - but no one noticed. 6. International companies need a weak dollar. 7. Unemployment numbers are coming. 8. There are too many bulls, and the markets are now overbought. 9. Too much short covering. 10. It's October - the end of the tax year for many mutual funds. Cramer told viewers that with all these sell indicators out there, investors should expect, and not fear, the next selloff when it comes.

BCAP ups WDC.  RCII ups buyback.  BBNT cuts DOLE, CQB.  BMOC ups IPI.  Canaccord cuts CML.  CITI cuts KLAC, reits buy on EBAY.  COWN ups SVNT.  CSFB cuts SSW.  DBAB ups STM, DDR.  GSCO cuts MT, ups NOC.  Janney cuts CAVM.  JPHQ ups NVO, cuts AVBY.  MOKE cuts AIQ.  MACQ ups LM.  OPCO cuts RIMM.  RAJA cuts SCHW.  RBCM cuts S.  STFL ups A, cuts STX, CHRW.  WEFA ups PLD, cuts DDR. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  746 watts is equivalent to what commonly-used measure of power?
Yesterday’s Question:  What popular casino game was invented by mathematician Blaise Pascal?

Yesterday's Answer:  Pascal invented Roulette.   

Best Quotes:  PIMCO note…

Run Turkey, Run
·      The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
·      We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
·      The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.
Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.
And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales. Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.
There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”
Whatever the conclusion, not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity. Of course we’ve tried it before, most recently in the aftermath of the Lehman crisis, during which the Fed wrote $1.5 trillion or so in “checks” to purchase Agency mortgages and a smattering of Treasuries. It might seem a tad dramatic then, to label QEII as “critical,” sort of like those airport hucksters, I suppose, that sold whale blubber for a living. But two years ago, there was the implicit assumption that the U.S. and its associated G-7 economies needed just an espresso or perhaps an Adderall or two to get back to normal. Normal just hasn’t happened yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart have since alerted us that countries in the throes of delevering can take many, not several, years to return to a steady state.
The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.
We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.
Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.
Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.
Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?
We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter. You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
If a country gets the politicians it deserves, then the same can be said of an investor – you’re gonna get what you deserve. Vote No to Republican and Democratic turkeys on Tuesday and Yes to PIMCO on Wednesday. We hope to be your global investment authority for a new era of “SAFE spread” with lower interest rate duration and price risk, and still reasonably high potential returns. For us, and hopefully you, Turkey Day may have to be postponed indefinitely.
William H. Gross
Managing Director

Wednesday, October 27, 2010

Morning Note...

Futures are ~70bps lower this morning as earnings season continues.  BRCM beat estimates.  P&G, ODP, and CMCSA all reported in line.  Sprint, Heineken and SAP earnings fell short of expectations.  In M&A news, it’s official:  CTV to be acquired by the Carlyle Group for $31.50/share.  Europe ~30bps lower.  Asia mostly lower overnight.  USD +15bps.  Oil -90bps.  Gold -60bps.  September Durable Goods Orders were mixed and basically a non-event.  New Home Sales due at 10am.  Some chatter this morning about a Wall Street Journal article that speculates on lighter-than-expected QE2 from the Fed, but there’s nothing really new there:

Looking ahead, next week will be huge (and Friday’s Q3 GDP will also be critical).  Here’s a quick cut and paste from JPHQ:

Super-week of catalysts coming up to start off Nov nxt wk; more than overwhelming the Q3 earnings season. 

To watch next week (week of Nov 1): 1) elections on Tues Nov 2; 2) FOMC on Wed Nov 3; 3) ECB/BOE on Thurs Nov 4; 4) US BLS on Fri Nov 5; 5) the PMIs for the month of Oct (China will be out Sun night and the US is out on Mon). 

The last important piece of information from this week will prob. wind up being Fri’s (10/29) Q3 GDP number in the US.  This will be the last big piece of data the Fed will have prior to their decision on Nov 3.

What’s the view from the cheap seats these days?  [Soap Box Alert]  This week, outside of earnings, there continues to be little “new news” or commentary that already hasn’t been released.  Volumes – and trading action – remains surprisingly light thus far into Q3 earnings, and one could argue that we’re floundering in the “calm before the storm” that will arrive with QE2 and midterm elections.  The critical question, of course, is which way that storm will break…  Will we see a break to the downside on a massive “sell the news” trade, as GOP victory and QE2 has been already priced in?  Or will we rip to the upside?

I have no crystal ball, but what is worth noting this time around is investor psychology and media coverage.  As recent as the widely anticipated FNM/FRE bailout in September 2008 (S&P 1236 the morning of…), the concept of “sell the news” was well known among the “professionals” but underreported and perhaps even misunderstood by the media, and thus that message was not delivered to the masses.  And as it turned out, the perceived “good news” of the bailout was met by massive selling from the pros – it was an amazing shorting opportunity.  (One could argue that going against the masses is always a good trading strategy.)  However, this time around, everyone and their brother are wondering about “sell the news” and investor psychology appears to be leaning that way.  So, is the contrarian call – amidst the general public and media’s expectation of a sell-off – to load the boat on the long side? 

It’s anybody’s guess…but I have always thought that success in this business requires first a fundamental understanding of business, second an understanding of the basic forces of supply and demand, and third a healthy understanding of “what other people think or perceive,” i.e. investor psychology.  As a result, the next few weeks will prove very, very interesting.  I think most people are comfortable with parts one and two above, but guessing as to number three will probably separate the winners from the losers. 

ABD beats by 2c.  AMLN upgraded at Leerink.  BRCM beats by 5c.  BWLD beat by 3c.  CENX misses by 23c.  CHRW beats by 1c.  CML beats by 11c.  CMP misses by 20c.  FFIV beats by 7c.  ILMN beats by 6c.  IP beats by 12c.  JDAS beats by 2c.  JNY misses by 8c.  MCK higher on earnings and buyback.  OII beats by 15c. PNRA reports in-line.  RFMD beats by 3c.  SLAB beats by 1c.  STM beats by 1c. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia: What popular casino game was invented by mathematician Blaise Pascal?
Yesterday’s Question: What waterway, opened on this date in 1825, was critical to the economic development of the Midwestern - and ultimately, Western - U.S.?

Yesterday's Answer:  The Erie Canal opened on October 26th, 1825.   

Best Quotes:  BofAMLCO note…

Good Morning - focus is on WSJ article on Fed starting their program next week, buying several hundred billion dollars of bonds, falls short of expectations and the buy the rumor sell fact trade could ensue. I think it’s a bit of a double edged sword in that maybe the Fed knows something and doesn’t feel like it had to be a monster program like some of the recent competitor research that pointed towards a $2-4 trillion bond buying program. Overnight: The MSCI Asia Pacific Index fell by the most in almost two months on the WSJ article and we should expect to test weekly low at 1174.00 in SPZ. Next level of support comes in at 10/21’s low at 1167.25. I think we test that. What will be most interesting is to see if the recent better volumes that we’ve seen, dry up as we head towards elections next week. We do get Durable goods today, jobless claims tomorrow and first look at Q3 GDP on Friday, so there could be some catalysts but I would expect risk off as we head into election. Have a good one.

Tuesday, October 26, 2010

Morning Note...

Futures are ~50bps lower this morning as markets digest recent earnings reports.  In fact, 46 S&P500 names are due to report today.  European financials are lower as Swiss bank UBS and Spanish bank STD both disappoint.  Steel giant Arcelor Mittal (MT) also missed estimates.  On this side of the pond, US Steel (X) disappoints, Kimberly-Clark (KMB) missed and lowered guidance, Dupont (DD) beat and raised, Texas Instruments (TXN) reported in-line, and retailer Coach (COH) beat handily.  Europe down 1% on aggregate.  Asia mixed to slightly lower overnight.  Oil -60bps.  Gold -50bps.  USD +60bps.  In economic news, home prices rose at a slower pace than expected.  

Here’s this morning’s cheat-sheet, courtesy of MSCO:

+ ACGL: EPS $2.55 beats MS estimate $2.20 and Street $2.19. Core margin (ex. cat and reserve release) improved 440 bps YoY, driven by lower CATs. Premiums written down -12.5% YoY
= WRB: EPS $0.67 vs. MS $0.64 and Street $0.63. Low quality beat, driven by ~$10m higher investment income. Premiums written grew +1.8% YoY and the Combined ratio was 95.4% inline with MSe
- RF: EPS -17c vs MS -10 and Cons -8c. Weak qtr vs most peers. Credit remains the key drag on RF, with provisions ahead of expectations and NPAs down slightly QOQ
- AMTD: EPS missed slightly, 20c vs Cons 23, driven by weaker trading (already known b/c of SCHW's qtr). Gave F'11 guidance range of $0.90 - $1.20, Cons was at $1.15.

+ DD: Reports headline EPS of $0.40 vs MSe of $0.34 and cons of $0.33; Clean Beat, Raising Guidance
+ F: Great qtr with the beat driven by strength in the N. Am Autos biz; Expectations were very high walking into today, and the co comes in at the high-end of the likely buy-side cons of $0.45-0.48
+ CE: EPS of $0.88 vs cons of $0.75; Solid qtr across all segments; Raising 2010/11 guidance
= JCI: EPS is in-line as JCI beats on revs but margins come in a touch light; Guidance re-affirmed
= ATI: In-line with preannouncement; A&D and Oil & Gas showing strength
- ASH: EPS $1.05 vs street $1.07 est; Modestly disappointing qtr on cost inflation weighing on margins
- Mittal Steel (MT) - Q3 Ebitda in-line with estimates at $2.3bn but they are guiding Q4 Ebitda at $1.5bn-$1.9bn. That's very low vs. expectations.
-- X: Big Miss, adjusting for increased maintenance and FX gets us to a number closer to a loss of (-$1.01) well below street expectations; Guidance below already low expectations

++ WYN: $.68 vs street $.63 (+.02 tax rate) but also raised Q4 to $.40-$.44 vs street of $.39.   Rev and EBITDA guidance for 2011 is above the street on both ends. Thus, decent beat with strong guidance
+ UA: Solid Print although beat was driven by a lower tax rate - $.68 would have read $.63 vs street of $.60.  (GMs weak); Preliminary 2011 Guidance Looks Solid
+ COH: Solid Results; $.08 beat ($.63 vs .55) driven by a very strong comp 8.5% (Street was 4-5, Whisper 6-7) and stronger Gross Margins.
= SPLS: Reiterated guidance for the year and issued 2011 with the street at the mid-point - Pretty much a non event; very blah across the board
- CPLA: 3rd out of 3 education companies this EPS season to guide to weakening growth; fine quarter but weak guidance
- KMB:  $1.14 is light, street $1.27 (miss was GM related with sales inline, and Org sales 1.3% light); They cut guidance for EPS and Org Sales, Now $4.6-$4.7 and 2% (Street was $4.80 and roughly 2%) driven by commodity costs
+ DRIV: Beat and raise, looks to be on track to replace lost SYMC business (at a lower margin).  Convert to be used to buy back stock.
= TXN: Revs & EPS slightly ahead for the quarter and guidance down 2-10%q/q or -6% at the midpoint vs street looking for -5%q/q & normal seasonal is -4%q/q - so numbers pretty much inline and stock only down 30C after acting well the last few weeks
= IDTI: Headline numbers look okay, no guidance yet
= ARM.LN: 3Q and 4Q in line, backlog up 10% q/q, GM a bit light.  More of an expectation game than anything else, story all about the 'long term'
=/- ATHR: EPS came inline on revs $1M light of consensus; Press release alludes to potential PC/netbook weakness but also that "increasing demand for ATHR's ROCm low-power mobile" solutions fueled record revs in 3Q
=/- ADVS: 3Q results look like a slight beat but guidance weaker
- RCI/b: Wireless margins and ARPU light; no guidance change which likely will be a surprise
- UCTT: Posted a slight miss with guidance below the street - mgmt "anticipates a slight decline in overall demand, partially offset by continued progress in penetrating the HB-LED market."
- VLTR: Slight miss though within guidance - release talks up record revs "led by [their] notebook business."
- VECO: Posted inline revs but guided below the street citing pushouts of tool shipments "from 4Q into 1Q by several customers in Korea & Taiwan"
-- ZRAN: Posted inline revs but 4Q guide looks atrocious at $60-65M vs St $95M.

+ NOV: Very good quarter.  Book to bill > 1;  Drillships likely in order book this Qtr; Outlook commentary likely to be bullish
+/= COG: Earnings beat but higher capex in 2011 remains a headwind for the stock; EPS of $0.31 (ex items) vs. MS at $0.30, and cons at $0.28

+ WAT - reports small upside surprise, should see stock trade higher, organic revenues accelerated and beat, +9% growth vs MSe 8%, reported revs a bit higher and eps 1c ahead, '10 guidance on the call
+ HSP - beat top and eps by 4c, did lower '10 rev guidance 3-5% cc growth to 2-3%, raise eps 3.35-3.45 to 3.40 to 3.45.  Given messy qtr expected + co tends to be conservative, expect stk to be up.
~ AMGN - revenues and eps were ahead (revs beat 1.3%, reported eps by 7%), most drugs beat but guides to lower end of range for '10 eps and D-mab sales in 1st launch qtr fall short ($10m<$25m cons)
~ BMY - top line light, beats by eps by 9c, maintain guidance. Key is understanding drivers of eps beat, we are still looking into it
- VRTX - qtr not impt (costs were higher, incr negative pipeline update), rather its all about Telaprevir data/filing/ did discontinue trial combination arm, an incremental disappointment.
- EW - slight miss on revenues, eps 1c ahead, bump guidance higher, importantly Sapien growth of ~100% was in-line BUT did guide down Q4 Sapien growth. Will get 2011 Sapien guidance on Dec 13
- CNC - modest disappointment, eps beats (excluding a charge) but co tweaks eps range lower (midpoint now 1.78, a few cents < street), margins and enrollment were light in qtr

= WEC: Beat by +9c and raised '10 guidance by +5c, but weather-fueled beat have received little credit so far, doubt this one's any different; Also, silent on prior '11 guidance / '12 key drivers

CITI cuts WLP.  BCAP cuts CTV.  DBAB cuts ICE, LCAPA, LSTZA, TRV.  MSCO cuts CTAS.  BARD cuts CTV.  UBSS cuts EXPD. FT speculates FDP approached by KKR, $18.50/share.  ACPW beats by 2c.  ALV beats by 25c.  ARIA to offer 16M shares.  ARMH lower on earnings.  ATHR reports in-line.  CMI misses by 8c.  COH beats by 8c.  DRIV beats and guides higher.  JAKK beats by 16c.  JASO raises guidance.  LXK beats by 11c but misses on revenues.  NOV beats by 7c.  HBC rumored to be making bid for NTRS.  OLN beats by 4c.  PCL misses by 4c.  PLD beats and announces 80M share offering.  PLXT misses by 1c.  RF misses by 8c.  SHW misses by 7c.  TLAB beats but lowers guidance.  VDSI beats by 3c.  VECO beats by 20c.  VLTR misses by 8c.  X lower on earnings.  XRAN beats by 3c.  

S&P 500 PreMarket 8:30am (last/% change prior close/volume):  
Today’s Trivia: What waterway, opened on this date in 1825, was critical to the economic development of the Midwestern - and ultimately, Western - U.S.?
Yesterday’s Question: When facing forward on a ship, which way is starboard? 
Yesterday's Answer:  Starboard is to the right.   

Best Quotes:  From BofAMLCO…
…one doesn't need to look too far for a catalyst as 46 SPX names due to report today.  With regards to earnings, 40% of the SPX has reported so far this period with approximately 70% beating on the headline numbers and 62% beating on the revenue front.  On the economic front, consumer confidence and case-schiller data could wield some influence.  Let's keep an eye on volumes - coming off of Friday's low-water mark, volume rebounded by more than 30% but came in much lower than the levels we've grown used to over the last few weeks.  With the issuance calendar heating up (7 IPO's and 5 secondaries announced so far this week), it will be interesting to see if the secondary volumes can hold up.  Lately dips have been bought - will today follow that trend?  1200 is the key on the upside while the key support levels are down in the 1155 - 1150 area.    

Monday, October 25, 2010

Morning Note...

Futures are ~60bps higher this morning as U.S. markets – for the moment – inversely correlate to the USD (-70bps) weakness stemming from this past weekend’s G20 summit.  In economic news, this week’s biggest release will most likely be Friday’s first look at Q3 GDP.  In corporate news, Deutsche Bank announced it would lay off 5-10% of its workforce.  The Wall Street Journal front page discusses the potential elimination of popular tax breaks, like mortgage interest tax.  Worth noting that three more banks failed over the weekend, bringing the 2010 tally to 135.  In case you missed it, there was an interesting Anti-QE Op-Ed from Nobel-winning economist (and, of course, Amherst alum) Joseph Stiglitz in the weekend Wall Street Journal – please see quote section below for the text.  Also, Goldman’s Chief Economist predicts the Fed’s asset purchases may ultimately top $2 trillion.  In M&A news, CTV is up 35% after confirming it is in talks with the Carlyle Group.  Asia mostly higher overnight.  Europe holding on to slight gains.  Oil +170bps.  Gold +140bps.  USD -70bps.  In U.S. earnings news, ~30% of Q3 earnings are complete, and ~85% have beaten estimates.  For today’s releases, here is the cheat-sheet:

= BOH: Ex one-timers EPS of 78c, in line with consensus and 1c better than MS est. NIM came in 16bp worse than expected, fees were ahead. Credit metrics slightly better than expected.

++ ROP: Reported 3Q EPS of $0.87 vs. cons of $0.79; good beat even ex the tax benefit; Guidance is ok, which shld be favorable for the stock
- Scania: Q3 disappoints; Negative read for the US truck mfrs; Truck order intake was disappointing beyond the usual seasonal weakness

++ LO: Volumes 5.8% and MS -1.7% and the street was closer to flat – Overall very strong qtr, Newport +2.9% strong as well, street was closer to flat.
+ RSH: Sales look great at the cost of margins – Comps 6.2%, 200 bps better but GMS were 45.4% which was 200 bps worse. (SGA offset the margins)
- BYD: EPS and Ebitda light – This was expected in our eyes and the stock is trading up because the miss isn’t that bad and they also walked from the other half of the Borgata stake (MGM)

+ RDY – FQ2 11 results > MS on top line, margins and EPS (EPS beat by 7%, also aided by lower tax). Net, good set of results, MS forecasts continue to be signif. > cons 

Speaking on cheat-sheets, here’s a quick run down of the anticipated earnings releases this week (note the big names – BMY/DD/UBS/AFL/BRCM Tuesday, DB/CMCSA/PG Wednesday, MET/EL/MOT/MSFT/STD/XOM/DOW Thursday, CVX Friday):






Regarding the G20 this past weekend, here is the JP Morgan summary:

G20: The final communiqué touched on three key points: 1) FX; 2) trade; 3) IMF reform.  On the subject of global currencies, the final language was inline w/the draft leaks made to the press in the days leading up to the event.  No single currency was singled out and a commitment was made to adopt “more market determined exchange rates” and to “refrain from competitive devaluations”.  On trade, the US-proposed 4% limit for trade surpluses/deficits was rejected (as was expected) in favor of more general language (there was a commitment made to reducing “excessive imbalances”).  One of the most significant developments at the weekend summit was the reform of the IMF, granting emerging market economies are larger voice at the institution.  The key focus point for investors was on FX and there the outcome of the weekend was inline w/expectations (some may take the weekend as a neg. for the dollar given there was no explicit language aimed at strengthening the greenback; however, Geithner did reiterate a “strong dollar” policy on the sidelines of the event while the prospect of a smaller QE2 on Nov 3 and greater GOP control of the Congress, which could come w/it spending constraints, may keep a bid under the buck in the coming week). 

Elsewhere, I thought this strategy piece from Barclay’s late Friday afternoon summed up things nicely:

Next week marks the final 5 trading days of the month following 7 up weeks in the last 8 - given the recent run up in SPX (14% from the lows) - it might be worth buying downside protection given the following:

1)  over the past 14 months, we have seen the market drop 10x in the final 5 trading days of the month (see attached - avg of 4 up months 58 bps // avg of 10 down months -157bps)

2)  The week after Oct month end is probably the most anticipated news week of the year - FOMC QE II decision, results of midterm elections and the Oct Payroll report.  Given the recent rally, there is certainly the potential for a retracement on buy the rumor / sell the fact trading or an overall disappointment on the results

3)  Market starting to feel like it has stalled - has not been able to break through with any momentum the recent highs.  AAII Bull Bear ratio currently just below 2.0 - overlaying  SPX vs. this ratio has shown that readings near or above 2.0 have been good indicators of overbought territory going back to 2007

In the “random news” category, I thought this BBERG piece was interesting:

Pickup Sales Get a Boost From Surging U.S. Agriculture Industry 2010-10-25 07:46:42.831 GMT

Oct. 25 (Bloomberg) -- U.S. pickup sales are getting a boost from rising farm incomes, giving carmakers extra momentum as the auto industry recovers from the worst sales in almost three decades.

            * Jan-Sept. pickup sales rose 14% to 1.2m, according to researcher Autodata
            * The gain outpaced the 10% increase overall industry deliveries
* Jan-Sept. Sales of Ford’s F-Series pickups rose 31% Y/y to 386,000, according to Autodata
            * Deliveries of GM’s Chevrolet Silverado increased 17% to 267,000, and those of GMC Sierra rose 14& to 90,000.
            * Sales of Chrysler’s Ram slipped 1.6% to 140,900, according to Autodata

WSJ speculates BAC and C may have credit ratings cut at Fitch.  CITI ups RRI.  CITI cuts ATHN.  BCAP positive on cruise lines – ups CCL, RCL.  FBRC cuts MSFT, HD.  JEFF cuts ATHN, ANSS.  OPCO cuts PRXL.  UBSS cuts ETR.  Barron’s negative on RNOW.  C added to GSCO conviction buy list.  ODP higher on CEO departure. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia: When facing forward on a ship, which was is starboard?
Yesterday’s Question: The majority of genetic research centers on human beings…but what is the 2nd most studied creature in genetic research?

Yesterday's Answer:  The second-most genetically researched creature is the fruit fly.   

Best Quotes:  From the Wall Street Journal weekend edition…

Why Easier Money Won't Work

The Fed risks fueling a destructive bond market bubble, while any gains from a weaker dollar will come at the expense of those to whom we hope to export.


The Federal Reserve, having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the problem, now wants to make a contribution to preventing the economy from sinking into a Japanese-style malaise. How? As Chairman Ben Bernanke announced last week, through large-scale purchases of U.S. Treasurys—called quantitative easing, or QE.
The Fed is right to be worried.
If high unemployment continues, America faces the risk of losing human capital as the skills of the unemployed erode. It will then become increasingly difficult to bring the unemployment rate down to anywhere near the levels that prevailed in the mid- and late 1990s, and the higher unemployment rate and lower output will make the current pessimistic budget projections of the Congressional Budget Office and the Office of Management and Budget look rosy.
The problem is that, with interest rates already near zero, there is little the Fed can do to restart the economy—and doing the wrong thing can do considerable damage. In 2001, (then) record-low interest rates didn't reignite investment in plant and equipment. They did, however, replace the tech bubble with an even more dangerous housing bubble. We are now dealing with the legacy of that bubble, with excess capacity in real estate and excess leverage in households.
Today, the Fed is paying too little attention to the transmission between the interest rates paid by government and the terms and availability of credit to small and medium-sized enterprises (SMEs). Large businesses are flush with cash, and small changes in interest rates—short-term or long—will affect them little. A banker rightly asks if such a business comes asking for money, "What's wrong with it?"
But it is SMEs that are the source of job creation in most economies, including the U.S. Many of these enterprises are starved for cash. They can't borrow money at the interest rate that big banks, big firms or government can. They borrow from banks, and many of the smaller local and community banks on which they depend are in dire straits—more than 800 are on the FDIC's watch list.
Yet even if the banks were willing and able to lend, lending to SMEs is typically collateral-based, and the value of the most common form of collateral, real estate, has fallen 30% to 40%. No wonder then that credit availability is so constrained. But QE in the form of buying U.S. Treasurys is not likely to affect this much. It will have some effect in lowering mortgage rates, and lower mortgage rates will put a little more money into people's pockets. Higher real-estate prices may also allow some SMEs to borrow more. But these effects, though positive, are likely to be small—so small as to make a barely perceptible difference in America's persistent unemployment.
There is another channel through which easing will have some positive effects: Equity prices are likely to rise. But for all the reasons just given, this is unlikely to have much effect on investment. Nor will most Americans, burdened with debt and diminished retirement accounts, likely embark on much of a spending spree. Nor should they. Doing so would only delay the deleveraging that is necessary if we are to have sustainable growth going forward.
There is another downside risk: QE may not even succeed in lowering interest rates, or lowering them very much. Given the magnitude of excess capacity, there is little risk of inflation today. But if the inflation hawks come to believe that the risk of future inflation is real, then they'll believe that short-term interest rates will rise. This will mean that long-term interest rates, even now, may actually rise, in spite of the massive Fed intervention, because long-term interest rates are based on expectations of future short-term interest rates.
QE poses a third risk: The bursting of the bond market bubble that the Fed is seeking to develop—the sequel to the tech and housing bubbles—will clearly have adverse effects on the economy, as we should have learned by now.
The advocates of QE point to another channel through which it will strengthen the economy: Lower interest rates may also lead to a weaker dollar, and the weaker dollar to more exports. Competitive devaluation engineered through low interest rates has become the preferred form of beggar-thy-neighbor policies in the 21st century. But this policy only works if other countries don't respond. They will and have, through every instrument at their disposal. They too can lower interest rates. They can impose capital controls, taxes and bank regulations, and they can intervene directly in their exchange rate.
Under the gold standard, there was supposed to be an automatic adjustment mechanism, as a country with a trade surplus would see an inflow of gold and an increase in prices, leading to an automatic real appreciation of its currency. It never worked as smoothly as it was supposed to, but in the modern economy with fiat money, the adjustment processes can be short-circuited even more easily. China, for instance, has sufficient control of its banking system and economy that it can simultaneously maintain a stable exchange rate that generates a surplus and prevents inflation.
Such policies may come with a price, but the price may be less than the alternative: the bankruptcies and unemployment that would follow from disruptive currency appreciation as the U.S. lets forth a flood of liquidity. That money is supposed to reignite the American economy but instead goes around the world looking for economies that actually seem to be functioning well and wreaking havoc there.
The upside of QE is limited. The money simply won't go to where it's needed, and the wealth effects are too small. The downside is a risk of global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted. If the U.S. wins the battle of competitive devaluation, it may prove to be a pyrrhic victory, as our gains come at the expense of others—including those to whom we hope to export.

Friday, October 22, 2010

Morning Note...

Thin note today…haven’t read much of real interest.  Futures are ~30bps higher this morning as Q3 earnings continue to roll through.  The latest big names to report better-than-expected bottom line results include Honeywell (HON; -75bps), Ingersol-Rand (IR; -40bps), Ericsson (ERIC; +6.5%), Amazon (AMZN; -1%), (BIDU; +4.5%), Verizon (VZ; -65bps), Schlumberger (SLB; +1.25%), and American Express (AXP; -25bps).  Downside earnings results came from Leggett & Platt (LEG; -9%), Citrix Systems (-3.65%), and QLogic (QLGC; -3%).  Looking ahead, the G20 meeting is set for this weekend…does anything material ever happen at these things?  Asia mixed overnight.  Europe mixed to slightly higher.  USD -15bps.  Oil +125bps.  Gold +15bps. 

This morning’s earnings summary from MSCO:

++ KEY: EPS of 19c vs 5c consensus, a clean beat on better revs, lower provision and lower op costs than MS estimates. Stock should outperform on these numbers
+ AXP: Strong qtr, EPS beat on fee income and lower than expected provisions; Reported EPS 90c vs consensus of 80c
+ CB: Reported operating EPS of $1.69 vs. Consensus of $1.40 and MS of $1.55, driven b y better margins. Chubb repurchased ~3% of shares in 3Q and remains on track to buy ~12% of shares in 2010 while paying a $1.48/share in dividends (~3% yield).

= HON: Reported adjusted 3Q EPS of $0.64 vs cons of $0.62; a small beat as expected with light 4Q guidance
= DOV: Reported operating EPS of $0.98 vs. cons of $0.90 and MSe of $0.89, reported EPS of $1.18 includes a $0.20 tax benefit; a nice beat as expected (although it might not be enough vs. high expectations)
= PAG: Reported 3Q EPS of $0.34 vs. cons of $0.33 and MSe EPS of $0.34; qtr is in-line with higher revs being offset by compressed margins
-  IR: Reported 3Q EPS of $0.80 vs. cons of $0.79 and MS est. of $0.74; headline looks in-line but when you walk through all the puts and takes on the guidance line the bottom line is it looks light
- BUCY: Reported 3Q EPS of $0.94 vs cons of $1.15 and MSe of $1.12; modestly weaker than expected qtr could drive BUCY shares lower

++ CMG: Another Blowout Driven by Strong Comps (11.4% vs. MS +10% and Consensus +7.9%) and Margins (27.7% (+220 bps) vs. MS 25.7% and Consensus 25.6%); The margin this quarter was the best ever
= CAKE: In-Line with Investor Expectations; EPS came in slightly above consensus driven by moderately better than expected same-store sales and a lower than expected tax rate; EPS was $0.37, vs. MS $0.36 and Consensus $0.34. Mgmt guidance was for $0.31-$0.33; Lower than expected tax rate added $0.02 to EPS
- COLM:  Slight miss on inline revs – Guidance for the remainder of year is below the street.  (implies a $0.59 4Q EPS, vs. $0.82 current consensus)
- GAP:  Adjusted EBITDA was only 8M vs. 65M last year, down 87% Y/Y (even worse than last quarter's 77% Y/Y decline).  While the stock has dropped a lot in the last couple weeks, it is hard to see the positives in this release

++ FTNT: Big beat by 6C & $8M with billings +33%y/y, guidance is nicely ahead of consensus
+ SNDK: 25C eps beat with ASP declines less severe than expected though revs were just inline. Mgmt talking about “continued strength in our OEM and retail businesses” and “stable pricing and substantial cost reductions”
+ RVBD: 8C & $12M beat and on the call guided to $155-158M vs St $146M but still looks conservative given the 3Q beat
+ SYNA: Beat by 2C & $1M and guided inline
+ ELX: Beat by 3C & $1M and guided slightly ahead
+ CA: beat by 2C & billings beat by $200M. Mgmt took numbers up into FY11(Mar) just to account for more favorable F/X
+ INFA: Beat by 2C & $4M release talks about “sustained growth opportunity” and “increasing customer demand” for their analytics software
+ CALX: Beat by $2.5M & 8C talking about strong demand in the quarter and 4Q guidance “achievable”
+ PLCM: beats by 3C & $8M press release comments are bullish on demand for their collaboration products
+ CPWR: beat by 3C & $4M
+ NCR: Looks like a slight beat & raise
+/= MCRL: Beat by 3C & $3M and guides down 3-7%q/q which is slightly inline with the street.
= PMCS: Print came inline with the negative pre-announcement
= CYMI: Decent beat but guidance is below the street for 4Q which could be a negative
= QLGC: Printed inline with their positive pre-announcement
=/- VZ: Solid quarter at first blush but given the huge 3Q move; stock now 14.4x consensus 2011 earnings, implying a 15% premium to the S&P500, close-to-record levels.  Stock trades ~8% above base case value of $30.  
- AMZN: Big revenue beat but operating margins weaker than expected at 5.3% vs expectations closer to 6%
- LSCC: Posted a slight miss & guided well below for revs down 2-7%q/q.
- CTXS: Messy with some good, some bad; Beat the quarter on revs & eps with 4Q guidance about inline

GSCO ups AGCO.  JEFF ups RVBD.  OPCO ups USB.  BARD ups LHO.  JEFF cuts ALXN.  OPCO cuts EMC. BARD cuts LSCC, UNP.  RAJA cuts CAT.  RBCM cuts K.  FNF cut at MACQ. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia: The majority of genetic research centers on human beings…but what is the 2nd most studied creature in genetic research?
Yesterday’s Question: From last nights NLCS Phillies-Giants game…What does Alcatraz mean in Spanish?

Yesterday's Answer:  Alcatraz is derived from the Spanish “Alcatraces,” which is generally taken to mean “pelican” or “strange bird.” 

Best Quotes:  Couple interesting BBERG stories…

Megadeals Go Missing From M&A Rebound as Companies Avoid Risk 2010-10-22 08:28:28.30 GMT

Oct. 22 (Bloomberg) -- Announced takeovers of more than $25b are set to make up smallest percentage of total deal volume in any year since 2002, according to Bloomberg data. * 73% of transactions this year less than $5b, purchases put dealmaking on pace to surpass last year’s $1.78t in vol., may portend return of more sizeable acquisitions  * BHP Billiton’s offer for Potash only bid this year valued at more than $30b, 2 others valued at more than $25b, including net debt.

Fed’s Hoenig Says More Easing Would Damage Recovery, WSJ Reports 2010-10-22 07:43:15.152 GMT

Oct. 22 (Bloomberg) -- Any further quantitative easing by the Fed would risk damaging the nascent U.S. economic recovery, Federal Reserve Bank of Kansas City President Thomas Hoenig said, WSJ reports, citing remarks he made in N.M. * Hoenig, a voting member of the FOMC, said purchasing what would almost certainly be U.S. government debt may ramp up inflation forecasts to ~2%.