Wednesday, February 3, 2010

Morning Note...

Futures -30bps this morning as the EU embraces the Greek deficit reduction plan, media giants TWX and CMCSA post earnings surprises while PFE misses by 1c, Mortgage Applications rise 21% over last week, the ADP employment change was better-than-expected (-22k vs. -30k/e and a prior revision from -84k to -61k), and the US threatens legal action against Toyota over the recent recalls.  ISM non-manufacturing data is due at 10am today, and all eyes look forward to Friday’s official Change in Nonfarm Payrolls release.  In other corporate earnings, insurers AFL and MET also beat estimates, and AFL also raised guidance.  Overseas, Chinese banks were higher, as they proactively moved to curb lending rather than wait for government mandates.  Solid quote from BTIG this morning regarding yesterday’s action:

Sp500 advancers led decliners at a healthy 6.75 to 1 and all 10 major sectors finished the latest session in higher ground; seven of them gained in excess of 1%.  The Russell’s breadth was flat at 1 to 1 and underperformed by 50bps indicating investors are still tentative about aggressive re-risking.

More Sino-U.S. saber-rattling in the news this morning, as China denounces one cautious sentence on Chinese military spending contained in the U.S. Defense budget.  Recall that this is on the heels of Chinese anger over our sale of $6B of weapons to Taiwan and over Obama’s plan to meet the Dalai Lama.  Given that perspective, it’s worth pointing out the solid Gerald Seib editorial that appeared in the WSJ yesterday (pp. A4).  His thesis is that our budget deficit has moved from being an economic and domestic problem to a firm national security threat.  He gives four reasons why: 

n       Deficits make America vulnerable to foreign pressures…our government is dependent on the largesse of foreign creditors and subject to the whims of international financial markets.
n       Chinese power is growing…a lot of the deficit is being financed by China, which is selling the U.S. many billions of dollars of manufactured goods, then lending the accumulated dollars back to the U.S.  The IOUs are stacking up in Beijing
n       Long-term national security budgets are put at risk…these national-security budgets have been largely sacrosanct in the era of terrorism.  But unless the deficit arc changes, they will come under pressure for cuts.
n       The American model is being undermined before the rest of the world…the image of an invincible America had two large effects over the last century or so.  First, it made other countries listen when Washington talked.  And second, it often – not always, but often – made other peoples and leaders yearn to be like America

Note that CIA director Leon Panetta testified before Congress yesterday that a terrorist attack on the U.S. over the next 3-6 months is “certain.”  Looking more closely at the Obama Administration’s budget from Monday, not much has been made of the proposed tax increases on the wealthy.  According to the WSJ, the top rate would jump to 36% from 33% for individuals and to 39.6% from 35% for joint filers in the highest brackets.  Additionally, taxes on cap gains and qualified dividends would increase to 20% from 15% for individuals earning over $200k and couples earnings over $250k.  Recall those who argued vehemently during the 2008 election that they’d be “happy to see their taxes raised if Obama gets elected.”  We shall see – not sure that story is over yet.  Further, it’s still shocking to note – considering all the budget deficit talk – that Defense spending is projected to be $700B.  Note that Pre-9/11 it was roughly $300B.  Not to get political, but as Gregg Easterbrook points out in a terrific new book called Sonic Boom:  Globalization at Mach Speed (highly recommended, even though I am only on Chapter 2), wouldn’t it have been cheaper (if the invasion was about oil) for the U.S. to have simply bought all the oil in Iraq at this point, rather than attack and occupy it?  As most of us noted at the time, attacking Afghanistan made sense at the time – they had Bin Laden.  But Iraq?  I am still baffled…

Bank of America Merrill Lynch ups SCHW, BMO Capital ups IRF, Citi ups ASX & MEE, Deutsche Bank ups APKT & UPS, FBR Capital ups RJF, Goldman Sachs ups DKS & JCI, Jefferies ups GRA, JPMorgan ups EMR, HHS & SIVB, Keefe, Bruyette & Woods ups HT, Piper Jaffray ups AHII & APKT, RW Baird ups ARM & OMI, UBS ups AAUK & GENZ, Wells Fargo ups CLP & MTN, BMO Capital cuts CITP, Deutsche Bank cuts VRSN, Goldman Sachs cuts LOW & QSFT, Janney Capital cuts KNXA, Leerink Swan cuts TECH, Wells Fargo cuts CHRW.

Asia higher overnight.  Europe slightly lower.  Oil -25bps.  Gold -40bps.  USD +25bps.   

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
WESTERN UNION           16.94    -10.13%            295666
RYDER SYSTEM INC        34.02    -8.89%              4700
CH ROBINSON                52.80    -8.05%              54548
MANITOWOC CO            11.03    -7.39%              19270
VERISIGN INC                21.75    -7.13%              258925
POLO RALPH LAURE        79.80    -6.85%              107727
TESORO CORP               12.20    -6.01%              54252
JDS UNIPHASE               8.67      +3.58%             54230
ITT CORP                      48.70    -3.47%              2300
INTL PAPER CO              23.25    -3.21%              6683

Today’s Trivia:  What was invented in Rigby, Idaho in 1922?

Yesterday's Answer:  Drug-trafficking city Juarez, Mexico – just across the border from El Paso, Texas – suffered 2700 deaths in 2009 and 220 in January 2010, alone. 

Best Quotes:  “I thought in return for the pain we had all learned some lessons.  I was na├»ve.  Congress will probably stay in the pocket of the financial world, and few useful changes will be made.  Investors, traditionally reluctant to burn their fingers badly twice in a generation, line up to buy risk and bid down spreads as if eager to suffer for a third time in a decade.  Scientists believe that some wild animals that are threatened constantly by predators quickly forget the worst episodes lest they become so completely traumatized that they dare not return to nibbling grass.  Normally, investors appear to have longer memories than rabbits, but not this time!  And the Fed, having learned nothing, still worships at the Greenspan altar.  Overstimulus was painful in the 2000 break and exptremely painful in 2008, but the Fed soldiers on with it’s failed strategy like Field Marshal Haig in World War I (‘The machine gun is a much over-rated weapon.’)”   -- Jeremy Grantham, January 21, 2010. 

“The problem that the EUR faces is that it is losing its position as the world’s 2nd most important reserve currency in light of the fiscal/monetary problems facing Greece most publically, but facing Portugal, Spain, Ireland, Italy et al. Today is an important day for the EUR and for the European Union in its entirety, for Germany, France, Belgium, Luxembourg et al have no choice but to come to Greece’ aid monetarily. Something… anything… must be done by the monetary authorities in Brussels, Frankfurt, and Paris to quite literally paper-over the Greek fiscal problem. We are not debt crisis authorities here at TGL, and we never shall be. We’ve no idea… none, and nor shall we even try to put ourselves forward as having any idea as to who this “papering” shall be accomplished, but it must be and it must be done today or tomorrow under EU mandate. “   -- Gartman  Letter