Tuesday, June 15, 2010

Morning Note...


Futures ~60bps higher this morning as Empire Manufacturing data comes in slightly weaker-than-expected (19.57 vs 20/e) but nevertheless indicates the 11th straight month of growth (readings > 0 indicate growth) and month-over-month Import Prices were slightly higher-than-expected (-0.6% vs. -1.2%/e) but lower than the prior +1.1% reading and thus indicate no inflationary pressure.  It’s worth noting, however, that year-over-year Import Prices are up 8.6%, which is probably to be expected given USD strength.  Overseas markets are also higher – as is the euro – despite weak consumer confidence in Germany, where the economic expectation index dropped to 28.7 from the prior 45.8 reading in May, representing the biggest decline since the Lehman collapse.  A Spanish bond auction, however, did go better than expected.  In U.S. earnings news, retailer Best Buy (BBY; -5%) reported an earnings miss this morning (+36c vs. +50c/e) and comp sales were lower at +2.8% vs. the +4.5% expectation.  Credit Card Master Trust data expected today – should give some insight as to the state of the consumer.  Obama to address the nation re: BP’s Gulf Spill tonight.  BP Chairman Tony Hayward is also due to speak before Congress this week.  News Corp was rejected – thus far – in a bid to buy the 61% stake in BSkyB it does not own.  An EU summit is scheduled for later this week – expect some stabilization-type headlines out of that.  MSCO’s Stephen Roach made some bearish comments overnight but also offered some optimistic thoughts as well:

3:38 EST *ROACH SAYS EUROPE HAS BEEN MORE PREEMPTIVE THAN REACTIVE
            3:37 EST *ROACH SAYS EUROPE AS A WHOLE MAY AVOID DOUBLE-DIP RECESSION
            3:44 EST *ROACH SAYS STILL OPTIMISTIC CHINA WILL AVOID HARD LANDING

Couple other interesting quotes worth tossing out there… Rick Santelli was arguing with someone bullish on Europe this morning and cautioned “don’t mistake stabilization for a cure.”  That’s a pretty good sound bite.  It actually reminds me of a similar line from the recently passed basketball legend John Wooden, which neatly applies to government actions vis-à-vis markets/bailouts/deficits/quantitative easing/et al:  never mistake activity for achievement.  For more on this theme, see the quote section below for a SocGen piece published by John Mauldin last night.  Good quote from the BofAMLCO desk this morning – sums up sentiment nicely:

Still searching for the upside catalyst.  Yesterdays failure to advance above 1100 took it's toll on sentiment.   Today we release the Fund Managers survey, and they do sum it up best.  "Market over sold, but not compelling."  With markets down only 10% from recent highs, equities are nevertheless seen as the most undervalued (-38%) since March 2009 (-42%).   Investor sentiment is defensive, but pessimism is not yet extreme enough for a big buy signal on risk assets.   This morning we walk in, and it is a mirror image of yesterday.   Activity in the room we brutally slow.   Financial reform is likely to dominate the news, and it all reads poorly.  The market is telling you that it isn't good.  The FDIC, and Fed are telling you it isn't good.   This is election year, so headlines are needed to get votes.   The Crude chart looks good.  I expect a serious rally in the space, may that is the catalyst that we are looking for.  Bottom line, if we can't get above 1100, take your ball and go home…

Interesting call out of RW Baird this morning re: financials – regulatory impact is dilutive to earnings but already priced in:

With Financial Regulation taking up the majority of the headlines we put together a piece on the impact the legislation would have on the group.  We estimate the average impact on the group will be about 10% dilution to normalized EPS - 18% for BAC and 16% for JPM (these numbers are before any offsetting measures that may occur).  While these numbers look daunting we feel that they are mostly priced into the stocks. As headline risk continues to be the weigh on the group, I feel that any resolution to the current regulation would be cause for a relief rally in the group as valuations still appear very reasonable (BAC is trading at 7.2x normalized EPS when factoring in the total impact from the reform and is at JPM 7.6x).  Our top picks are JPM, BAC and WFC. 

NY Times reports that big clients are not leaving GS. WSJ defends APC amidst BP spill fallout.  WSJ article discusses Fed options if economy falters or double-dips.  BofAMLCO ups SSS, YSI.  BCAP ups JAZZ.  CITI ups FINL.  DBAB ups AMKR.  MSCO ups JCI, TRW.  UBSS ups BWA.  WEFA ups BMR, CVD, TROW.  BofAMLCO cuts APU.  FBRC cuts CMO, NLY.  SUSQ cuts LNCR.  CPST lower on earnings.  ELY pre-announces lower.  FCH to offer 25M shares.  HEV initiated Buy at NEED.  KFY beats by 6c.  PPO initiated Strong Buy at NEED.  RAME to review strategic alternatives.  SMBL lowers guidance.  THC raises 2010 outlook. 

Asia higher overnight – China still closed.  Europe up ~60bps.  Oil +90bps.  Gold +25bps.  EUR/USD $1.2288. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
BEST BUY CO INC           39.10    -4.75%  1149604
TENET HEALTHCARE       5.30      +4.74% 5600
JOHNSON CONTROLS     28.85    +3.11% 1950
JDS UNIPHASE               11.47    +3.05% 500
AMERICAN CAPITAL        5.46      +2.82% 200
CARNIVAL CORP             37.39    +2.8 %  15090
MANITOWOC CO            11.10    +2.59% 500
DISCOVER FINANCI        13.74    +2.54% 600
TRANSOCEAN LTD          45.85    +2.39% 108201
ANADARKO PETROLE      42.99    +2.36% 17750
CHESAPEAKE ENERG       25.14    +2.11% 9541
ANHEUSER-SPN ADR       50.57    +2.0 %  16721

Today’s Trivia:  When were yellow and red cards first introduced to the game of soccer?
                                                                                                                                                                        
Yesterday's Answer:  The first World Cup was in Uruguay in 1930.

Best Quotes:  “When that inflationary bias dictated lowering rates in the face of a threatened recession more quickly than you raised them in a recovery, it seemed harmless enough. But the crash of 2008 and its sovereign debt aftermath have changed everything. It's difficult to exaggerate just how dirty the phrase deficit monetisation was when I studied economics at university: loaded with evil images of political irresponsibility and short-sightedness, it evoked the haunting spectre of catastrophic and ruinous hyperinflation. It's what they did in Weimar Germany; it helped cause WW2; to say it had an image problem would be a grotesque understatement. No wonder it's been rebranded as quantitative easing.

When faced with the prospect of a financial crash causing a nasty recession - or worse, a depression - few doubted that Anglo-Saxon central banks would do whatever was necessary, including breaking the taboo of deficit monetisation ... sorry, engaging in quantitative easing. But the ECB was supposed to be different. The ECB was supposed to be genuinely independent. The ECB was modelled on the Bundesbank - itself forged in the white hot furnace of Weimar's hyperinflationary trauma ... So it was always going to be an interesting collision: what would happen when the unstoppable force of threatened financial wipeout met the immoveable object of the ECB's hard-money dogma?

Well, the force stopped and the object moved ... sort of. The market's panic over eurozone debt subsided ... for a while, and the ECB began quantitatively easing ... kind of. The EU's "shock and awe" $1trillion rescue was certainly a big number and reflected European governments going all in. But going all in is risky if you don't have a strong hand, and the EU's seems weak. Two-thirds of the rescue money comes from the EU itself, which means that the distressed eurozone borrowers are to be saved by more borrowing by ... er ... the distressed eurozone borrowers.

So there is virtually no new money coming into the European financial system. If a small bank goes down, the problem is solved when it is taken over by a bigger bank which injects new capital into it. If a bigger bank goes down, its problem is solved when it is taken over by the government, which injects new capital into it. If a government goes down ... well, then we're stuck. Where does the new capital come from now?

Enter central banks. In 2009, the BoE printed £200bn, thus completely financing the UK government deficit. It can't have felt good about doing it but since the alternative scenario was so scary - financial meltdown and possibly IMF support - it held its nose and did it anyway. It said it was going to sterilise the intervention, but on discovering that such was the financial system distress it was unable to, it just carried on regardless. In the US, the Fed printed $1.25 trillion to monetise the problematic mortgage market. It also said it was going to sterilise the intervention, but like the BoE it soon found it couldn't, and like the BoE continued anyway because the alternative financial meltdown scenario was too scary to contemplate.

Today, the ECB is buying insolvent eurozone government debt which it is promising to sterilise. Yet they face the same stark calculus faced by their Anglo-Saxon cousins in 2008. You can only worry about the economy's ‘price stability' if the economy hasn't already melted down! So here's my prediction: they won't sterilise, and the program will expand.

Dylan Grice, SocGen