Friday, June 18, 2010

Morning Note...


Futures ~15bps lower on a quiet news-flow morning ahead of today’s option expiry and S&P rebalance.  In Europe, the EUR/USD is stable at $1.2365, Spanish banks are said to handily pass stress tests there, and Spanish/German bond spreads have tightened.  In some sense, the market may be asking “what’s next?”  Speaking of which, next week brings the FOMC decision (June 23rd, no change expected) and the G20 summit in Toronto.  In corporate news, it appears CVS and WAG have kissed and made up, and have agreed to a new PBM arrangement.  CVA reaffirms guidance and trades higher premkt.  Speculation continues that Tony Hayward will be replaced at BP CEO.  Gold nears another new high. 

Technicians point out that the S&P has closed above the key 1108 session twice now, in an important consolidative move above that support line.  A break below that and a close below 1075 would turn technical indicators bearish.  Volumes remain light, however, and most technical analysts caution that recent moves may not “hold” one way or another without high volume confirmation.  Regarding volumes, expect heavy action on the bell and on the close, but perhaps not much in between today.  And beware the 9:35am to 11:30am doldrums as the USA/Slovenia game will surely be on every TV set on every trading desk.  (Sorry, CNBC…)

Interesting WSJ op-ed from Greenspan this morning…he warns that Treasury yields could spike without warning.  Also interesting that the Financial Times reports that stock buy-back levels are at their highest since February, at $18.5 billion last week. 

Quick note on yesterday’s testimony…the winner for me?  Goldman Sachs!  I was struck by the difference in testimony, the smarmy smart-guy arrogance that continually kept the politicians on their heels when the Goldman traders testified.  It was in stark contrast to the contrite, beleaguered Hayward.  Honestly, I think he should have stolen a page or two from GS’s book and been more defiant.  The U.S. is addicted to oil…these same politicians passed legislation allowing companies like BP to drill offshore…there was an accident…and now these politicians are grabbing – as always – the public spotlight and chastising BP.  Yeah, they cut corners…and yeah, they screwed up.  But the “holier-than-thou” stance of these politicians and the media is kind of hypocritical…

Good trader commentary out of BofA/MLCO this morning:

Good Morning -  Anyone think Greenspan is short Treasuries?  Reading his comments would have to make you leery of the future of lending.    "The United Sates and the rest of the developed world, is in need of a tectonic shift in fiscal policy.  Incremental change will not be adequate."   The U.S. Treasuries have benefited from the safe haven trade from the European crisis, but that can't last.   I have my doubts that our government can find restraints.    Could we see the mother of all asset allocation trades happen?   I hope so.  Option expiration today, and it is very quiet.   S&P rebal today so be careful of your vwap orders.   1117.50 is the weeks high in the futures, 1125.20 is the 100 day moving average, 1133.60 is the 50 day.   1100 was yesterdays low, and 50% of the weeks range.  I doubt the market breaks either way today.   "Stuck in the middle." by Stealers Wheel.  Have a good day.

Given the continued speculation around financial regulation, I thought it would be interesting to re-visit a very good WSJ article on hedge funds and hedge fund history.  The basic point is that hedge funds get a bad rep, but are more important to the world of finance – and more successful – than most people realize.  See the quote section below. 

Here’s a taste of politics on a Friday morning (can’t help that I was a Poly Sci major)… Hard to take Ben Stein seriously sometimes when all I think about is “Anyone?  Anyone?  Bueller?” but this editorial from the American Spectator Wednesday makes an interesting broad point re: capitalism vs. socialism.  Does our President have a right to dictate terms to a business without due process?  In Stein’s eyes, it sets a very dangerous precedent (ps, Caudillo refers to a military or political leader with authoritative power):


Our Caudillo President  By Ben Stein on 6.16.10 @ 6:10AM

As I write this on Monday night, there are rumors around that BP will agree to President Barack Obama's demand that the oil giant "voluntarily" put about $30 billion into a fund to be administered by the government to compensate victims of the Gulf of Mexico oil disaster.

Now, no one disputes that this is a real disaster and that BP acted irresponsibly in commissioning Trans-Ocean and Halliburton to drill for oil in waters so deep that if a failure occurred there would be no way to fix it -- at least until major damage had been done. BP, Trans-Ocean, and Halliburton, as well as the individuals involved, have much to answer for.

But the action of the President in demanding this immense transfer of the stockholders' wealth without any legislation or court decision is extremely worrisome.

We live in a Constitutional Republic. The President's job under the Constitution is to enforce the laws made by the elected Congress. His job is not to create new laws and enforce them all by himself. His job is as magistrate under the Constitution, not as Caudillo. He is not the law. He is supposed to enforce what Congress decides.

The BP behavior is reminiscent of how, immediately after assuming office, Mr. Obama, with no Congressional authority or administrative allowance, simply made a phone call to fire the head of GM. When I called the White House press office to ask under what law or regulation Mr. Obama was acting, I was told he did not need a law. If the government put a lot of money into GM, it could call the shots at GM, I was told. But under what authority, I asked. "None needed," was the final answer.

Without any new legislation, President Obama has used returned TARP money as a political slush fund to prop up favorite industries. This is the same problem: serious executive action without legislative authority.

The same goes for Mr. Obama's demand that BP pay the lost wages of oil and gas workers suspended from work because of the moratorium on Gulf of Mexico underseas drilling. There simply was no legislation allowing this kind of specific demand. Mr. Obama's demand was in the nature of a threat, more than a Constitutional act.

Of course, every President tries "jawboning" to restrain steel company price increases or something similar. But to create specific enactments and actions without any authority -- now Mr. Obama's specialty -- is so at odds with the law of the land that it terrifies me. These are not the acts of a teacher on Constitutional law. These are the acts of a big city boss or a third world dictator. If you want to know why business has pulled in its horns and hunkered down, and why people at tea parties and elsewhere are scared, look no further than Barack "I Am The Law" Obama.

Is there anyone in Congress to stop him? Is there anyone in a black robe to stop him? Or is everyone already too scared to challenge the Duce in the White House?

BEN cut at GSCO.  BofA/MLCO cuts KR, SWY, FMC.  S shares under pressure on possible CLWR acq, according to Auriga.  FST, SWN cut at GSCO.  WMB raised at GSCO.  HCP to issue 12M share secondary.  EPB announces 10M offering.  JEFF cuts LNCR.  OPCO cuts NVE.  ubSS ups CTCM.  GSCO ups NPD. 

Asia mixed overnight.  Europe mixed to slightly weaker.  Oil -65bps.  Gold +83bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
WALGREEN CO               31.54    +7.76% 840993
FANNIE MAE                  .405      -5.59%  1179913
CVS CAREMARK COR      33.35    +4.74% 256870
HCP INC                        32.90    -4.22%  155287
TRANSOCEAN LTD          51.40    +3.99% 268124
WILLIAMS COS INC        21.80    +3.46% 21114
FREDDIE MAC                .525      +2.94% 394241
MEDCO HEALTH SOL       59.98    -2.49%  8595
SOUTHWESTRN ENGY     43.58    -2.22%  1940
M&T BANK CORP            87.52    -2.04%  3800

Today’s Trivia:  What percentage of penalty kicks are successful?
                                                                                                                                                                        
Yesterday's Answer:  Brazil has won 5 World Cups, Italy 4, and Germany 3.   

Best Quotes:  On defending hedge funds, from the WSJ last weekend… (bold is mine)

Because they are largely free of regulatory impediments, and because their reward structure has attracted the best brains, hedge funds have continued in the Jones tradition of outperforming rivals. Whereas mutual-fund managers, as a group, do not beat the market, the best analysis suggests that hedge funds deliver value to their clients. In a series of papers, Roger Ibbotson of the Yale School of Management has examined the performance of 8,400 hedge funds between 1995 and 2009. After correcting for various biases in the data, and after subtracting hedge funds' large fees, Mr. Ibbotson and his co-authors conclude that the average fund generates positive "alpha"—that is, profits that could not be earned from exposure to a market index. In the United States, only rich individuals and institutions are allowed to reap the benefits of hedge funds. But in Europe and Asia, they are increasingly marketed to ordinary savers.

Of course, neither endowments nor individuals should put all their money in hedge funds; like any investment, they can blow up spectacularly. The most famous hedge-fund collapse came in 1998, when Long-Term Capital Management lost almost $6 billion. Eight years later, a Ferrari-driving 32-year-old trader at a fund called Amaranth lost $6 billion on disastrous gas bets; a year after that, several quantitative funds hit trouble all at once, setting off a panic known as the "quant quake."

But even these exceptions to hedge funds' generally good performance serve to underline one of their virtues. When Amaranth failed, another hedge fund named Citadel swooped in to buy the remains of its portfolio—one hedge fund had caught fire, but a second stabilized markets by acting as the fireman, and taxpayers did not have to cover any of the losses. Likewise, the quant quake of 2007 was over even before the public realized it had begun. The one partial exception was Long-Term Capital, whose failure was destabilizing enough to cause the New York Fed to broker a $3.6 billion rescue. But even in this case, public resources played no part in the bailout: The Fed convened Long-Term's bankers and told them to cough up the money to stabilize the fund.

The independent culture of hedge funds stood them in good stead during the recent mortgage bust. Spurred by the carrot of the performance fee, a then-obscure manager named John Paulson created a $2 million budget to buy the largest mortgage database in the country and hire extra analysts to figure out patterns in default rates. Meanwhile, because of the stick of having their own savings at risk, hedge funds that did not undertake similar research at least had the wit to avoid buying subprime paper. Lazier investors piled into collateralized debt obligations on the strength of their triple-A seal of approval. But most hedge funds were too careful to rely on the advice of ratings agencies.

In 2007, the year the mortgage bubble burst, hedge funds were up 10%—not bad for a crisis. Even more remarkably, the subgroup of hedge funds specializing in mortgages and other asset-backed securities was flat for the year—in other words, the hedge funds that might have been expected to get hit generally dodged the bullet. In 2008, admittedly, the turmoil following the collapse of Lehman Brothers hurt hedge funds' returns. But even then, they did better than their peers. They were down 18 % by the end of the year, a decline half as severe as that of the stock market.

The real humiliation of 2008 did not befall hedge funds. It befell banks, insurers, government-chartered housing lenders, and money market funds—and especially the mightiest of all Wall Street titans: investment banks. Until the financial crisis, the brain-power of these behemoths was presumed to be the force that made global markets work. If you were impertinent enough to ask how trillions of dollars of exotic trades could slosh across borders without risking a breakdown, the answer was that Lehman Brothers and its ilk had designed the instruments, modeled the risks, and had all bases covered.

Now that this answer has been exposed as a lie, the puzzle is how to erect a new scaffolding for global finance. The leading answer in Washington, expressed in the reform package emerging from Congress, is to regulate the investment banks and other traditional risk takers. This is a worthy project that must be attempted, but it would be naïve to expect too much from it. The crisis proved the fallibility of regulators from the Securities and Exchange Commission to the respected Financial Services Authority in London to the highly professional Federal Reserve. When multiple overseers fail in multiple places, one must accept that even smart reforms may not change the pattern decisively.

…Given the difficulties with financial reform, legislators should embrace a complementary approach: As well as struggling to tame financial behemoths, they should promote boutique risk takers. With only a few exceptions, hedge funds have the powerful virtue of being small enough to fail; indeed, some 5,000 went out of business in the course of the past decade, and none imposed losses on taxpayers. Mythology notwithstanding, the average hedge fund's leverage is more sober than that of banks and investment banks...