Wednesday, June 9, 2010

Morning Note...


Futures ~60bps higher this morning as yesterday’s late-afternoon rally continues, fueled by better-than-expected news out of China (exports for May +50% YoY – indicating global growth, as spurred by China, may not be fading after all), a move up to $1.20 on the EUR/USD, IMF comments that Hungary situation is “calmer now,” and despite concerns over a potential profit warning from Nokia, Mortgage Applications that came in lower (-12%) for the 5th straight week and now stand at a 13-year low, additional cautious comments from the IMF (risks to the global economic outlook have “risen significantly”), and the possibility that Spanish banks have been frozen from the interbank market.  Also note that the Chinese rally overnight was on supposedly *leaked* CPI data along with the blowout export number (Reuters cites “unidentified sources”), and that the official release is set for overnight Thursday.  Bernanke speaks on the Hill today and the Fed Beige Book data is due at 2pm. 

Regarding yesterday’s 3:30pm rally of +1%, many pointed to an S&P rating affirmation on California as the spark for the leg up.  Recall that many bears fear that deterioration of the credit rating of U.S. municipals (individually some of the largest economies in the world…California, when considered alone, is the 8th largest, for example) would be the next leg of the sovereign debt crisis, and while it still may be, yesterday’s action was taken as a mild positive.  On the political front, the financial bears are cheering last night’s victory in Arkansas for Senator Lincoln, the main proponent of a harsher financial regulation bill.  In other news Santander announces plans to buy the 25% stake in Santander Mexico owned by BofA.  Looking ahead, tomorrow’s ECB meeting will be closely watched, as will the previously mentioned overnight data (Thursday night for Friday trading) in China (PPI, CPI, Retail Sales, IP). 

In general, there is a LOT of interesting stuff to read out there all of a sudden – everyone has an opinion, it seems, and the raw amount of market commentary, investment letters, etc. appears to be marking some sort of inflection point one way or another.  I’ve included what I can, and also see the quote section below for more.  I thought this commentary (from Monday) from Strategas was insightful: 

One of the cruel ironies of the recent angst about global economic growth may be that the average American corporation may have never been as healthful as it is now. Data from the Fed’s flow of funds accounts reveal that cash as percentage of total assets and undistributed corporate profits are at all-time highs. And yet, as the charts on the next two pages suggest, companies remain loathe to part with their reserves in the form of dividends, M&A, or share repurchases. One could chalk this up as a natural cautiousness in the aftermath of the most perilous financial crisis in three generations, but we believe this phenomenon may be indicative of corporate sclerosis in the face of large and seemingly everchanging rules on business. The Roosevelt Administration faced a similar conundrum in the late 30s and, regretfully, decided to impose an undistributed corporate profits tax and to raise payroll taxes, further dampening animal spirits. If there is any good news in all this it is that any clarity of the rules may provide the basis for a meaningful pick-up in activities that, one would hope, could enhance shareholder value. Of course, the high levels of cash on corporate balance sheets is no doubt weighing on multiples – opening the coffers may entice investors to pay-up for growth.
           
            The companies below all have cash as a % of assets greater than their three year-average. We’ve listed the top 50.

ALTR Altera Corp.                      65.9      Information Technology
LLTC Linear Technology Corp.     63.3      Information Technology
VRSN VeriSign Inc.                     62.7      Information Technology
GOOG Google Inc. (Cl A)             61.8      Information Technology
ADI Analog Devices Inc.             60.8      Information Technology
NOVL Novell Inc.                         57.4      Information Technology
LO Lorillard Inc.                          57.2      Consumer Staples
HUM Humana Inc.                       56.8      Health Care
PCLN priceline.com Inc.               56.2      Consumer Discretionary
TLAB Tellabs Inc.                       54.2      Information Technology
A Agilent Technologies Inc.         54.2      Information Technology
NTAP NetApp Inc.                       54.2      Information Technology
FRX Forest Laboratories Inc.       53.1      Health Care
CRM Salesforce.com Inc.            50.5      Information Technology
QLGC QLogic Corp.                     50.0      Information Technology
CSCO Cisco Systems Inc.            49.3      Information Technology
MCHP Microchip Technology Inc. 48.3      Information Technology
MSFT Microsoft Corp.                 46.7      Information Technology
NVDA NVIDIA Corp.                    46.4      Information Technology
TDC Teradata Corp.                   45.2      Information Technology
XLNX Xilinx Inc.                          43.5      Information Technology
JDSU JDS Uniphase Corp.            43.4      Information Technology
EXPD Expeditors International      43.0      Industrials
MA MasterCard Inc. (Cl A)           42.6      Information Technology
ADSK Autodesk Inc.                    42.4      Information Technology
NSM National Semi Corp.            41.3      Information Technology
KLAC KLA-Tencor Corp.               41.0      Information Technology
CTSH Cognizant Technology        40.9      Information Technology
WDC Western Digital Corp.          40.4      Information Technology
WLP WellPoint Inc.                     39.5      Health Care
CF CF Industries Holdings Inc.     39.3      Materials
CEPH Cephalon Inc.                    39.2      Health Care
QCOM QUALCOMM Inc.               39.1      Information Technology
SYK Stryker Corp.                       39.0      Health Care
RSH RadioShack Corp.                37.0      Consumer Discretionary
AMD Advanced Micro Dev Inc.      36.9      Information Technology
ISRG Intuitive Surgical Inc.          36.9      Health Care
TER Teradyne Inc.                      36.5      Information Technology
LXK Lexmark International Inc.     35.5      Information Technology
AMGN Amgen Inc.                      35.0      Health Care
WAT Waters Corp.                     34.9      Health Care
NVLS Novellus Systems Inc.         34.5      Information Technology
LSI LSI Corp.                             34.4      Information Technology
URBN Urban Outfitters Inc.          34.1      Consumer Discretionary
ADBE Adobe Systems Inc.           33.6      Information Technology
DELL Dell Inc.                             33.1      Information Technology
MOT Motorola Inc.                      33.1      Information Technology
GPS Gap Inc.                              32.4      Consumer Discretionary
TSS Total System Services Inc.   32.0      Information Technology
SNDK SanDisk Corp.                   31.7      Information Technology

For the bears, here’s some interesting historical commentary from Bespoke Investment Group:

The question on every investor’s mind right now is whether the current correction (now at 14.4%) will end up staying just that — a correction within a bull market — or turn into a new bear market. A correction is typically considered to be a decline of 10% or more during a bull market that doesn’t hit the 20% decline threshold (which marks a new bear market). We analyzed the action of the S&P 500 going back to 1927 to see how often a decline of 10% or more during a bull market has ended up turning into a bear market (-20%+). If the –20% threshold wasn’t reached, it means the market went on to reverse and make a new bull market high.

Since 1927, there have been 58 prior declines of 10% or more from bull market peaks. Of these 58, 33 (57%) ended up just being corrections (a decline of 10% to 19.99% that then reversed and hit a new high), while 25 (43%) turned into a new bear market. The average correction within a bull market has lasted 104 days, so at 45 days, the current correction is still less than half the average length. The average decline during corrections has been –13.28%, so the current decline of 14.4% is already more than average.

The bad part about the current correction is that the we’re already down 14.4%. Of the 33 corrections within bulls that ended up just being corrections, only 7 declined by more than 14.4% and did not turn into a new bear market. In other words, only 7 of the 32 declines of 14.4% or more from a bull market high haven’t turned into a decline of 20% or more. Once you hit the –20% threshold, the average bear market decline is 35.49%.

For the technicians, this summary from Morgan Stanley reads bearish as well:

Dead Cat Bounce…After making what seemed to be a successful test of the February lows and potential double bottom, US equity markets were twice rejected at the 200-day moving average and headed lower.  We now find ourselves on the precipice of support once again at 1040 on the S&P.  As suggested last time, my view is that this shelf of support will ultimately fail and that real support lies closer to 950, rather than 1040.  The picture is below and seems pretty clear.  Triple bottoms typically don’t hold.  Note that we already made a fresh closing low on Monday. 


MDRX to buy ECLP for $22.10/share.  FSII announces 5.4M share offering prices at $3.05/share.  NOK lower on rumors of profit warning ahead.  BG announces $700M buyback.  THNK initiates BIDU at Buy.  BTU upgrade at BMOC.  CNP 22M share offering.  POT upgrade at UBSS.  RST cut at BARD and CFO departs.  STM initiated Buy at JEFF.  TTWO beats by 8c.  VALE upgrade at UBSS. 

Asia mostly higher overnight – Japan lower.  Europe roughly 1% higher, UK underperforms at +50bps.  USD index -66bps.  EUR/USD $1.2012.  Oil +188bps.  Gold -1%. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
CIENA CORP                  14.41    +4.1 %  26410
TELLABS INC                  6.60      +3.61% 14005
AMERICAN CAPITAL        4.47      +3.00% 5000
CENTERPOINT ENER       12.95    -2.85%  1210
PEABODY ENERGY           38.01    +2.67% 2500
PEPCO HOLDINGS           15.85    +2.59% 950
DEERE & CO                  56.34    +2.32% 200
WEATHERFORD INTL      13.00    +2.12% 15475
TEXAS INSTRUMENT      24.36    +2.01% 4012

Today’s Trivia:  What nation boasts the most total World Cup matches (not championships) won?  What nation has lost the most games?
                                                                                                                                                                        
Yesterday's Answer:  Germany is 4-0 all-time in World Cup penalty shootouts, and England is 0-3. 

Best Quotes:  Bullish commentary from MKM Partners yesterday… “With the stock market acting poorly, some are beginning to consider the prospects of a double-dip recession. Despite what is likely to be some slowing during the second half, high-frequency credit market indicators are not signaling a high probability of a double dip. Indeed, both interest rate swap and FRA/OIS spreads have remained off their May highs and three-month LIBOR settings have flattened out -- a bullish divergence considering that equities have fallen to new lows for the year (these spreads bottomed in March before stocks peaked in April). Moreover, the modest widening in high yield spreads from the 2010 lows is consistent with some temporary slowing, but not with a double dip. And, as we have noted before, a vertical yield curve spread is also not consistent with a double dip (or a long-lasting slowdown in growth). Yes, the economy faces headwinds. And Europe is a problem that may get worse before it gets better. But unless we are headed for a double dip recession and a commensurate decline in earnings—and we do not believe we are—equities are attractively priced here, in our view.”

Interesting trading desk chatter from DB…   “I believe HF's have been a significantly greater portion of this move lower than people think. Most have been aggressive in hopes to get in front of redemption long only selling.  Many of them want to go long but they don't know where the long onlys live and are trying to gauge what inning of the "long only redemption selling" we are in. Unfortunately this type of behavior could become self fulfilling. The AMG fund flows had the 1st monthly net outflow and first month of 4 weekly domestic equity outflows in May for 2010.  It was the biggest outflow (approximately $30 bil) since February and March of 2009.  Based on this data, there had to have been some redemption selling out there but I can only speak on what this desk has seen.  Our desk has not seen redemption selling of any kind.  It is possible but not likely that long onlys had cash on the side to take care of a portion of these redemptions, more likely these long only sell orders are not reaching sell side desks, these orders are being executed in machines.  The significant long only sell tickets we have seen have been in liquid defensive names that have outperformed but they are paired with an equal notional amount of an underperformer to buy.  I asked for trends between sectors but none stand out.  The AMG data tomorrow should be closely watched, but I’m getting the sense that too many people are waiting and watching for redemption selling to end.  Let’s cross our fingers that in the hopes getting ahead of redemption selling the hedge funds haven’t in fact created the need for it.”

Off the BCAP desk, at 7:20am… “Macro:  S&P futures are now up 25 bps as global markets all rallied into China's close due to speculation coming from a Reuters article that the economic numbers will be strong tonight (based on a leak from a senior government official).  If I were a trader being judged intraday I would be betting aggressively with my buy orders early today.  I could easily see a rally here on the same thesis.  Two big hedge fund articles today.  The WSJ C1 article is about how bad performance was in the month of May.  Meanwhile, Bloomberg is running an article around iconic hedge fund managers picking their successors so they can take a step back in the near future.”