Thursday, June 17, 2010

Morning Note...


Futures ~30bps higher this morning on the back of European strength – and EUR/USD strength – stemming from a better than expected bond auction in troubled Spain.  Thus leading to the best line of the morning, Who would have thought that Spanish bonds would outperform the European Champion Spanish soccer team?  (Who lost to Switzerland yesterday in a shocking upset for the non-futbol-ers.)  While the Spanish auction came at a higher yield that expected (bond prices were lower)), demand was strong and the spread between Spain’s bonds and Germany’s benchmark bunds narrowed by 15bps as a result.  Note that the U.K. (FTSE) and France (CAC) are working towards their seventh-straight positive session, and Germany (DAX) is working toward its sixth… As someone else speculated, with the euro flirting with the $1.24 level for the first time in nearly a month, perhaps the World Cup really is taking some of the focus of the “crisis” in Europe.  Here in the U.S., month-over-month Consumer Price (CPI) data was in-line with expectations, at -0.2%, thereby indicating little inflationary pressure. Year-over-year CPI was also in-line, at +2%.  However, Initial Jobless Claims were more bearish than expected, as they rose to 472,000 versus the 450,000 expectation.  Last week’s reading was also revised slightly higher to 460,000.  Philly Fed and Leading Economic Indicators data is due at 10am.

BP’s Tony Hayward set to be skewered on the Hill during testimony today – worth noting that there is FX chatter regarding GBP/USD weakness perhaps stemming from BP unhedging the Sterling it bought in preparation for the June dividend.  Always worth checking in with the deep-thinkers (is that an oxymoron?  can hockey guys be thinkers?) at Hedgeye…this morning’s note touches on the European landscape and indicates some skepticism about the current rally (ps…these guys like to name their themes – that is represented in bold below…you need to be a constant reader to get what they refer to…maybe they can start hyper-linking to a definition of their named themes?  Or footnote them below each piece?):

Here are some interesting thoughts from influential Europeans in this morning's news:

1.       UK - George Osborne (the new Chancellor of the Exchequer): "At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent."

2.       Russia - Igor Shuvalov (First Deputy Prime Minister): "I'd be very cautious about stock investments in this country. I would welcome real investors who can build factories, something new in this country."

3.       Italy - Claudio Artusi (CEO of City Life - Milan's $2.6B real estate project that's built the tallest building in Italy): "Our investors are more concerned about long term value than short term returns. The project is aimed at the top end of the market and won't be affected by the economic cycle."

Confusion from the Italian sitting on his perch at Club Myopia and, at the same time, admission of the new Age of Austerity that has been voted into the UK's political system. All the while Spanish and French governments are trying to convince the Russians to buy their broken promissory notes (more sovereign debt auctions this morning) as the Russians look to start taxing their almighty petrodollars (considering a tax on oil exports from tax-exempt Siberian oil fields).

The only way that this unsustainable Piling Debt Upon Debt plan changes is if we change the governments who plan to keep spending. Germany has a much better fiscal position than the US at this stage of the game and has already implemented austerity measures on the order of 2.7% of GDP. Part in parcel with Osborne's comments in the UK this morning is David Cameron getting rid of the FSA (Financial Services Authority). Why? Because it doesn't work.

You can't solve problems with politicians who perpetuated the problems. Change is good and it seems to me that those countries who have the political backbone to make changes first will win this race to the bottom in the end (you need to hit bottom before you bounce).

Levered markets, politicians, and financiers alike need to take a good, hard, and long look at the bottom before they change their ways. Artusi's fanciful expectations are a metaphor for an era that's passing us by. The score for Italy's latest version of an opulent "City Life" is on the board - only 90 of 390 luxury apartments sold. The Fiat Empire may not be burning yet, but the smell is becoming awfully familiar...

We covered our short position in the SP500 (SPY) yesterday on market weakness. That doesn't mean I'm not bearish. It simply means I think I can re-short the market higher. We will see if I'm right about that. My immediate term support and resistance lines are now 1101 and 1127, respectively.

KR beats by 4c.  WSJ bearish on NOK.  T nears FCC approval for purchase of $2.35B rural wireless licenses from VZ/VOD.  AOL sells Bebo for $10M after paying $850M for it in 2008 – actually creates major tax credit given the big loss.  DRE to offer 23M shares.  DRYS cut at CSFB.  FCH offers 27.5M shares.  CSFB ups FSLR.  Cramer positive NVDA and CRUS.  PIR beats by 9c.  TXT wins $546M contract.  BCAP ups SUN.  JEFF ups SE.  WEFA ups NEW.  BCAP cuts BP.  WEFA cuts DTV.  SocGen ups RTP.  NOK cut at UBSS.  EXC cut at MACQ.  UBS says Swiss Parliament approved a tax agreement with the U.S. 

Asia mixed overnight as China comes back on-line.  Europe ~50bps higher.  EUR/USD $1.2376.  Gold +107bps.  Oil -75bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
FREDDIE MAC                .645      -14.34%            612236
FANNIE MAE                  .483      -14.13%            3025887
KROGER CO                   21.25    +5.83%             98940
SAFEWAY INC                21.99    +3.34%             4456
JDS UNIPHASE               11.32    -3.17%              961
SUPERVALU INC             12.86    +3.04%             6291
SUNOCO INC                  35.25    +2.86%             21965
NVIDIA CORP                 12.10    +2.8 %              59444
DIRECTV-A                    38.23    -2.8 %              15060
TRANSOCEAN LTD          48.28    +2.68%             217053
QUEST DIAGNOSTIC       55.00    +2.52%             536
INTERCONTINENTAL       123.78  -2.49%              8677
TEXTRON INC                20.50    +2.4 %              2350

Today’s Trivia:  Most people know that Brazil has won the most World Cups – with 5 – but who has won the second-most?
                                                                                                                                                                        
Yesterday's Answer:  Slovenia, with a population of 2M, is the smallest nation represented in the World Cup, and is also USA’s opponent at 10am tomorrow. 

Best Quotes:  Asia mixed, Europe higher across the board along with a stronger Euro.  SPX futures stronger and have now matched the highs of yesterday on the e-mini contract (1119).  While Europe normally doesn't lead the US equity market, it appears to be the case with stronger sentiment again this morning.  European equities have now rallied 7 straight sessions, the longest stretch since last September, and are again higher today on decent Spanish 10 yr and 30 yr auctions.  While the spread on the Spanish 10 yr continues to be near the highest level in a decade, the fact Spain can still raise money at all is a positive.  Worth watching, as Spain has 24.7 Euro's worth of debt maturing in July.

So three things were noteworthy yesterday-

1.  We closed flat, which is news in and of itself.  Only the 4th time in last 17 sessions we didn't close on high/low of day.

2.  For the first time in the last 15 sessions, we saw a reversal in the last hour of trading.  We saw a sharp 3 pm selloff (6 SPX pts) only to see that move reversed in the final 30 minutes to close unchanged on the day.

3.  Volume came back (somewhat).  Yesterday's global volume for US names was 20% higher than the average of the previous 4 sessions.  NYSE volume was also better, but marginally so.  BP's not included in those statistics.

ICI data out late yesterday again not great for US equities.  The week ending June 9th saw US equity outflows of $3.6B.  The last 5 weeks have seen total domestic outflows of $26B, highest since the crisis levels of Oct '08.  Next weeks flow data will cover the week of June 16th, which began the recent rally, so we'd expect to see flows got "less bad".

--RBC trading commentary