Tuesday, June 8, 2010

Morning Note...

Futures ~50bps higher this morning as Europe trends off their session lows and the US markets – for the moment – hold a key line at S&P 1050.  For the moment, early futures strength here may simply reflect a “flight to quality,” as the big picture in Europe remains shaky as macro-type news continues to drive the current trading range and Gold trades – again – to record highs ($1254/oz overnight).  Note that Fitch made cautious comments regarding the debt levels in the U.K. (“The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy -- including a faster pace of deficit reduction than set out in the April 2010 budget”; see quote section below for more), Spain is set for a strike of ~75% of its 2.5 million civil servants (over austerity rules), and Germany announced roughly EU85 billion in austerity measures in hopes it will sent a pan-European example.  Further, Fed chairman Ben Bernanke was not exactly “exuberant” on markets during his ABC interview last night.  In general, he sees a continued recovery but at a very moderate pace.  Also, Dennis Gartman of the Gartman Letter took a more negative tone in a Bloomberg interview, saying, “This is not a pretty environment for equity investors…Prices are going to continue to move lower. We are revising down ‘guestimates’ for earnings. It’s the start of a bear market.”  Finally, PIMCO’s Tony Crescenzi described what he sees as a “Keynesian endpoint” in which “exhausted balance sheets leave policy makers with few options to bolster economic growth.”  In corporate news, UBS initiates the semis with “near term caution.”  McDonald’s global comp sales were better than expected, at +4.8% vs. the +4% estimate.  US sales were lower (+3.4% vs. +4.3% estimate), and European sales were higher (+5.7% vs. +3.4% estimate).  Also, it’s worth noting that this morning’s NFIB Small Business Optimism survey was better than expected, at 92.2 vs. the 91 expectation and the prior 90.6 reading for April.  Looking ahead, the Fed’s Beige Book will be released tomorrow and the ECB will hold it’s rate decision meeting Thursday morning.

Elsewhere, I thought these comments off the BofAMLCO trading desk summed up the general market tone quite nicely: 

Our S&P 500 price target assumes that a fair long-term return is 8% nominal and 6% real. Investors should earn such returns from a combination of capital gains and dividends. Because we believe that the S&P 500 can climb to 1350 in 12 months and still deliver an 8% nominal return over the long run, we describe ourselves as being cyclically (30%) and secularly (8%) bullish on the S&P 500.    Jeff Rosenberg talks about "Risk on, Risk off" environment.   May clearly a risk off month.  A new theme is making a case for the U.S. decoupling from the Europe's malaise.   You'd have to have guts to be buying this chart in the S&P here though.   Looks like it is on the brink.  At a interview with ABC News on Monday night, Bernanke said despite the recent European debt crisis the U.S. economy is on track for a modest recovery and “there are some signs that the private sector is picking up the baton” after several months of large government intervention.  I don't hear anyone talking about picking up spending, or hiring.  We are back in the grind.  1047 was yesterdays low. 1036.75 is the globex low 5/25, 1026 is a 7 month low.   1070 was yesterdays high.  I was thinking of buying SPYs this morning, but I don't have the guts.

For what it’s worth, interesting piece on NPR this morning about European luxury brands standing to benefit from the weaker euro.  Turns out that France is the largest exporter of luxury goods in the world, which makes perfect sense when you stop to think about it… In other news, did anyone catch Goldman Sachs “information dump” on the Financial Crisis Inquiry Commission?  WSJ story on it this morning.  Goldman – in a stall tactic, one presumes – dropped 5 terabytes of data on the FCIC…or 2.5 million pages of documents.  Wow.  In other public relations anecdotes, interesting Bloomberg editorial this morning on BP…the point basically was “stop trying to apologize and save face.  You will no longer do business in America, so there’s no point.  Instead, stop the PR campaign and fight all the lawsuits and work instead to protect shareholder interests.”  Here are some tidbits:

So far, BP has been playing this right out of the chapter in the spin doctor’s manual headed, “What to do when your company is about as popular as the Third Reich in 1946.” It has apologized, and apologized again. It has simpered, felt people’s pain, and promised to learn from its mistakes. Responsibility has been taken, errors owned up to… The trouble is, none of it is going to work. Iranian President Mahmoud Ahmadinejad has more chance of getting the Ford Motor Co. franchise for Lubbock, Texas, than BP does of staying in business in the U.S. So why not try a complete reversal of tactics instead? Tell everyone in the U.S. to go stuff it where the oil don’t leak.

Here are three reasons why it should:  First, the U.S. is guilty of crazy double standards. Hayward should go on TV and say: “Excuse me, which country is the biggest oil consumer on the planet? Who refused to do anything about climate change, or even to put sensible taxes on gas? Heck, your president even flies around in a 747 when a modest Gulfstream jet would get him there just as fast. So of course the oil companies have to drill in more and more dangerous places. If you insist on being addicted to cheap oil, you have to recognize there are risks attached. So grow up, and stop acting like children.” Next, BP likely is finished in the U.S. There is no form of apology that will make any difference. The average American consumer now hates BP and isn’t about to change that opinion for a generation or more. So BP should just hire the nastiest, meanest lawyers that money can buy -- the one commodity the U.S. has in over-abundance. Fight every lawsuit. Refuse every claim above the bare minimum. You’re going to get hammered anyway, so you might as well go down fighting.  Whatever you do, don’t waste a lot of money on an army of advertising agencies and public-relations consultants trying to restore your image. It’s not going to work, so there is no point even trying. Finally, BP needs to protect its shareholders. So sell your assets in the U.S. to one of the other energy majors while you still can. Just remember there’s a big world out there, with a lot of oil and cars in it. Your job is to look after the owners of the company, not make yourself acceptable to a country that doesn’t want you anymore.
Of course, doing this really will make Hayward the most- hated man in the country. But then, who cares? George W. Bush was the most-hated man in France, but since he wasn’t looking fo any votes in Bordeaux, it didn’t count for much. BP’s image in the U.S. matters only so long as it tries to do business in the U.S. If it cuts its losses and gets out now, it can carry on fine in Japan, France, Argentina and all the other countries where no one is really that bothered by what happens in the Gulf of Mexico. Just say: “Thanks for everything guys. It was good while it lasted. Sorry about the oil spill, but so it goes. Goodbye and goodnight.” It’s the only strategy that’s going to work now.

Solid earnings from retailers TLB and DG.  BERN ups GLW.  MSCO cuts TLAB, CVS.  CSFB ups CP.  GSCO ups BRS, ESV, NBR.  JEFF ups IPCM.  FBRC cuts BHI, DO, NE.  GSCO cuts ATW, DO, DRC.  SUSQ cuts BRCM, INTC.  ABB upgrade at GSCO.  AONE announces agreement with NAV.  SocGen ups DB. 

Asia higher overnight.  Europe roughly 60bps lower but off the lows.  USD index -5bps.  EUR/USD $1.1942.  Oil +30bps.  Gold +30bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
NABORS INDS LTD          20.40    +4.29% 1840
AVALONBAY COMMUN     89.04    -3.92%  100
MBIA INC                       6.15      +3.19% 1175
WENDY'S/ARBY'S-A        4.39      +3.05% 1000
JABIL CIRCUIT                12.38    +2.57% 164
AKAMAI TECHNOLOG      42.26    +2.52% 3087
CITRIX SYSTEMS           41.56    -2.46%  800
CORNING INC                 16.39    +2.44% 13945
SCRIPPS NET-CL A         44.185  +2.42% 1181
INTL PAPER CO              21.59    +2.42% 250
NOVELL INC                   6.09      +2.18% 100
FANNIE MAE                  .9288    +2.08% 96124

Today’s Trivia:  Hoping to continue the World Cup trivia all week as we lead into this weekend’s opening… Germany is 4-0 all-time in World Cup history in what?  (Hint, England is 0-3 in the very same category…) 
Yesterday's Answer:  Pele’s first name is either “Edson” or “Edison” depending on what source you mine.  And his full name is “Edison Arantes do Nascimento.”  

Best Quotes:  Commentary on the UK from John Mauldin…  “They are running very large deficits on the order of 11% of GDP. Clearly, that is unsustainable and the new government knows it. They are looking to cut L6 billion in their first effort, which sounds like a lot, but is less than 4% of the L156 billion deficit. There is a lot more cutting that needs to be done.

But spending cuts and tax hikes have consequences. The UK retail industry is warning that a feared hike in value-added tax to 20% from the Conservative-Liberal Democrat government would cost 163,000 jobs and cut consumer spending by L3.6bn over four years. And that tax hike is just for openers.

The classic hope for any country in such a dire strait is to be able to grow your way out of the problem. Martin Wolfe wrote in the Financial Times a few weeks ago that Britain needed to let the pound drift lower so that British exports would be more competitive. A cheap pound will drive up tourism. Their trade deficit can become a trade surplus.

Here is their dilemma. In order to reduce the government’s fiscal deficit, either private business must increase their deficits or the trade balance has to shift, or some combination. Lucky for them, they can in fact allow the pound to drift lower by monetizing some of their debt. Lucky, in they can at least find a path out or their morass. Of course, that means that pound denominated assets drop by another third against the dollar. It means that the buying power of British citizens for foreign goods is crushed. British citizens on pensions in foreign countries could see their locally denominated incomes drop by half from their peak (well, not against the euro which is also in free fall).

What’s the alternative? Keep running those massive deficits until ever increasing borrowing costs blow a hole in your economy reducing your currency valuation anyway. And remember, if you reduce government spending, in the short run that is a drag on the economy, so you are guaranteeing slower growth in the short run. As I have been pointing out for a long time, countries around the world are down to no good choices.

Britain’s is a much slower economy (maybe another recession), much lower buying power for the pound, lower real incomes for its workers, yet they have a path that they can get back on track in a few years. Because they have control of their currency and their debt which is mostly in their own currency, they can devalue their way to a solution.”