Wednesday, June 23, 2010

Morning Note...

Futures ~30bps higher ahead of this afternoon’s FOMC rate decision.  No rate change is expected, and most pundits agree the Fed will maintain its “low rates for an extended period” language because its primary concern is a double-dip recession.  See the paragraph below for a specific discussion of the consensus FOMC expectation.  In earnings news, ADBE (-1.5%) beats by 1c and announces a $1.6 billion buyback, and JBL (+9%) beats by 7c and guides higher.  RAD beat expectations and trades higher.  Additionally, PM guided down due to euro currency exchange levels.  In Europe, the most recent BofE minutes indicated a 7-1 vote for the recent decision to leave rates unchanged at 50bps.  Investor George Soros made cautious comments regarding the euro, and CDS spreads are generally wider across the Continent (and Greece is the widest since May 7th).  In U.S. political news, General Stanley McChrystal is due at the White House today to answer for his recent Rolling Stone interview critical of our strategy vis-à-vis Afghanistan.  The Obama Administration says “all options are on the table” in reference to possible dismissal of the General.  Elsewhere, the Obama Administration’s moratorium on drilling was rescinded late yesterday afternoon and an appeal to the decision is expected.  In financial regulation news, the chatter continues that Senators will soften the Volcker Rule as it relates to banks sponsoring hedge funds due to intensifying pressure from lobbyists.  New Home Sales due at 10am today, just as Team USA takes the field at the World Cup.  BBBY and NKE report after the bell today. 

Looking ahead, the WSJ discussed expectations for Q2 earnings (which kick off July 12th with Alcoa) this morning: 

…it seems that stocks could be coiled and looking for a reason to spring higher. We’re still down some 7.6% from the April 23 peak for the S&P. But the worries about Europe seem to have faded in volume. China feels confident enough in its economic growth to start to appreciate the yuan. And most importantly it seems that stateside equity analysts have been getting a little bit more realistic about the outlook for profits, and trimming back their revisions.

…Although we reserve the right to revisit this if we get a surge in stocks ahead of earnings, say, from the June jobs report (July 2), or ISM numbers (July 6).

Regarding the FOMC announcement due at 2:15pm today:

This meeting will be interesting given its been a while since the FOMC last met on rates (the prior communiqué was published on Apr 28). The biggest room for potential change vs. the last statement on Apr 28 will be on the discussion of the economy – data points over the last 1.5 months has turned a bit more negative (esp. on the labor front), something that will prob. be acknowledged. The one big wildcard will be Europe and how much the Fed discusses the risks from this region to the US. A review of the major points to watch:

1.  Economic Growth/Activity
What they said on Apr 28: “Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability”
Expectations for June 23: the economic data since the last meet has stalled out and in some cases turned lower. In particular, the labor market remains stubbornly weak (the May 7 BLS number beat expectations but the only out June 4 was very disappointing and jobless claims remain very elevated). Housing appears to have softened meaningfully since the expiration of the tax credit in Apr. On the financial markets front, the Fed may note the recent widening in some risk spreads (like the back-up in LIBOR, etc) due to the European sovereign problems. The WSJ recently reported that the Fed was considering potential options in case growth started to really falter and turn back lower – this will prob. be talked about at this meeting although most likely won’t make it into the statement (this is something that would come out in the minutes).

2. Inflation
What they said on Apr 28: “With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time”
Expectations for June 23: the language will prob. remain pretty consistent when it comes to inflation (if anything, the recent numbers continue to point to falling inflation pressures; JPMorgan’s M Feroli this week moved out his forecast for the first rate hike to Q4:11 mostly b/c of subdued inflation pressures).

3. Policy actions
What they said on Apr 28: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.
Expectations for June 23: the Fed is widely expected to reiterate the “low for long” mantra when it comes to rates.

4. Voting
What they said on Apr 28: “Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly”
Expectations for June 23: given Hoenig’s intra-Q commentary, he will prob. wind up dissenting again at this meeting (for a lot of the same reasons).

5. Other items of note
Europe – while the last rate-setting meeting was held on Apr 28, the Fed held an intra-meeting gathering and decided to re-open the temporary US$ liquidity swap facilities w/foreign central banks, something that will prob. receive a mention in this week’s statement. Its not clear at the moment how room the Fed will devote to the topic of Europe (too much and they may sound concerned) or if they will describe the situation there as still weakening, stabilizing, or showing signs of improvement (Fed vice chairman Kohn told the WSJ on Fri that he felt Europe would be able to pull through its issues.)

Some of you may recall that I have made mention in the past of those key words that seem to be “climbing the charts” relative to news flow and trading desk chatter.  Past words include Katrina, Crisis, Bailout, and Spill.  The latest dark horse word creeping up the charts is Doldrums, for obvious reasons.  (And for those trivia buffs that are interested, Doldrums is a nautical term that refers to the area of low pressure around the equator where winds are calm and sometimes absolutely non-existent.)  Volumes are light and many desks are concerned by the lack of investor activity.  It is worth pointing out, however, that despite a smattering of bad news and despite the light volume, the market (if you are a glass half-full type of person) could be viewed as being quite resilient.  BTIG’s Mike O’Rourke made mention of recent volumes and price action, and the technical takeaways, in last night’s note:

The slow, sloppy and indecisive nature of this tape keeps the technical patterns in the forefront.   The S&P 500 again broke below its 200 day moving average amidst the weakness and quickly broke below its 1100 support level.  The most disconcerting aspect of all of today’s technical action is the setup being created for a “potential” Head & Shoulders top (see Chart).  The pattern being formed is far from textbook.  It lacks symmetry, or balance in the distance from the left shoulder to the head and from the head to the right shoulder.  For an ideal symmetry, the right shoulder would occur in late July/early August.  Instead, the pattern currently has a truncated right shoulder in both distance and height.  Although the pattern lacks textbook qualities, it is important to recognize that a Head & Shoulders top is potentially forming.  The Neckline is the 1050 level, it would need to be broken to complete the pattern.  A traditional 6-12 month price target measurement if the neckline is broken would be 883.  That is derived by subtracting the distance between the neckline and the head from the neckline itself.  Since the pattern is not close to completing yet, we would not be betting on such a decline, but it is import to be cognizant and alert that the potential is out there.

Interesting tidbit from RBC this morning:  As Myles Zyblock points out this am…..Cash as a percentage of assets stands at a record high in the post-war era. There is $707 billion of cash, equivalent to 7.6% of assets, currently sitting on S&P 500 (ex-Financials) balance sheets. The S&P 500 Tech sector stands out as the biggest cash hoarder, amassing $163 billion which is equivalent to 15% of the sector’s total assets. Health Care (at 9.4%) and Industrials (at 8.8%) round out the top three on this measure.

KMX to replace XTO in S&P500 (many had expected COV, TYC, or ACE).  WSJ reports that BAC and GS have unloaded $2.3 billion of loans used to finance the Hilton buyout in 2007.  WEFA lowers estimates for large cap banking sector:  BAC, GS, JPM, MS.  CIM announces 100M share offering.  EW upgrade at GS.  MED to be added to S&P 600.  OPCO ups MWW.  Canaccord ups PDS.  PRGS beats by 5c.  RGLD prices 5.2M shares at $48.50/share.  ZGEN upgrade at UBSS. 

Asia weaker overnight.  Europe ~50bps weaker.  EUR/USD $1.2271.  Oil -140bps.  Gold -35bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
JABIL CIRCUIT                15.05    +10.74%           400145
AMERICAN CAPITAL        5.78      +3.58%             65000
WILLIAMS COS INC        20.96    +3.40%             100
FREDDIE MAC                .500      +3.09%             81724
AFLAC INC                     44.77    +2.28%             600
TITANIUM METALS         20.08    +2.03%             100
ADOBE SYS INC              32.10    -2.02%              259355
AUTONATION INC           20.60    +1.95%             1400
TELLABS INC                  6.56      -1.94%              200
WENDY'S/ARBY'S-A        4.23      +1.93%             2936
HUNTINGTON BANC        6.07      +1.8 %              52100
ALLEGHENY TECH           51.30    +1.79%             100
APPLIED MATERIAL         13.29    +1.76%             10000
MANITOWOC CO            10.79    +1.7 %              600
STARWOOD HOTELS      47.03    +1.69%             100
INTUITIVE SURGIC         350.90  +1.68%             225
PNC FINANCIAL SE         61.62    +1.65%             550
MICRON TECH                9.80      +1.63%             68609
KEYCORP                       8.30      +1.59%             1732
MEDTRONIC INC             37.50    -1.52%              5120

Today’s Trivia:  Relative to the total number of World Cup Champions (18), how many have been won by European nations and how many by South American nations?
Yesterday's Answer:  199k people were in attendance for the 1950 World Cup final between Uruguay and Brazil

Best Quotes:  Good Morning -  Just like Monday we saw a the pre market bid sell off, but unlike Monday there was no short cover rebound leaving everything to settle near the days lows.   The small caps took the brunt of the selling pressure with a 2.1% drop for the Russell 2000 index.  Transports took a beating yesterday, raising fears. about the consumer.   There wasn't one clear headline that got us running to the downside, more of a collection of negativity that resulted in a full blown buyers strike.  Breadth was 3-1 decliners to advancers.  Volume was slightly better that the prior days.  USA World Cup game highlights the day.  Housing Starts also this morning, and FOMC later this afternoon.  We are positive on the Refiners, and it appears to be out of consensus. We are revising 2Q10 expectations by 92%.  That seems like a lot.   I can’t get positive in this action so I'd sell the pre market bid.  1100 is the 200 day, we fail there again today.   1084 was last weeks low   GO USA.  –trader commentary