Wednesday, June 30, 2010

Morning Note...

Futures had been ~50bps higher this morning as ECB short-term debt rolls went better than expected overseas, but retreated by ~60bps on the 8:15am release of the ADP employment change, which dropped to +13k from the +60k estimate and the +57k prior reading.  As a result, futures are now hovering between unchanged and -10bps.  European markets also turned lower on our ADP release.  See below for some solid quotes re: strategy and sentiment from sell-side traders.  Here’s the Bloomberg piece on this morning’s ECB roll – and note the EU442M debt repayment (bold) expected tomorrow:

ECB Lends Less Than Forecast in Three-Month Tender 2010-06-30 10:34:16.632 GMT By Gabi Thesing
June 30 (Bloomberg) -- The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists forecast and a sign that the region’s financial industry may be stronger than investors estimated. Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said. Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.”

Note that today marks both month- and quarter-end, and typically some window-dressing is to be expected.  However, given recent participation levels as measured by volumes and anecdotal evidence (see quote below) that many hedge funds are running at very “lean” net exposure levels, will we see any window-dressing at all?  Looking ahead, note that China, EU, UK, and US ISM data is due tomorrow, and official June U.S. unemployment data is due Friday.  Note that U.S. 2-year note yields closed at an all-time low yesterday, at 0.5857%.  It had never before closed below 0.60%.  Given that “flight to quality,” do equities hold the key S&P 1040-ish level??

Regarding the FinReg vote and yesterday’s back and forth regarding the proposed $19 billion “bank fee” that had been tacked on, it appears a resolution has been achieved.  According to FBR,

In a move to secure the 60 votes necessary to clear the financial regulatory reform bill through the Senate, the House/Senate conference committee abruptly called a meeting last night to axe the $19 billion bank and hedge fund tax. In its place, the committee moved to pay for the bill with a combination of new FDIC assessment fee minimums and an early termination of the TARP program. These changes should assure Senate passage, but the timing remains unclear. The House is now scheduled to pass the revised final bill as early as today. Some say that the Senate will work into the weekend to finish the bill, but Senator Chris Dodd (D-CT), Chairman of the Senate Banking Committee, said he viewed Senate passage this week as “doubtful,” and that Majority Leader Harry Reid (D-NV) has assured him that if they are unable to finish it this week, it will be the first thing on the agenda the week of July 12, when the Senate returns from their July 4 recess.        

Ratings agency Fitch is on the tape this morning with comments about the global landscape.  Somebody please tell me if this reads positive or negative…despite a college degree, I have no idea:

The global recovery has strong momentum, and Fitch's base case is that global GDP will grow 3.1% in 2010, after contracting 2.5% in 2009, helped by a rebound in world trade, a turn in the inventory cycle and accommodative fiscal and monetary policies. Emerging market (EM) economies are providing the main impetus to growth, helped by a gradual recovery in US consumption and a strong rebound in Japan. However, activity in the euro area remains sluggish. The extension of loose monetary policy should support continued expansion in 2011 - albeit at a weak pace relative to previous recoveries - despite the fiscal consolidation plans currently mapped out by major advanced countries. However, the high degree of macroeconomic uncertainty is highlighted by the presence of inflation and deflation risks, and the scope for policy misjudgements is high.

Regarding “trader sentiment” following yesterday’s weakness, here are a few quotes:

…Yesterday, the S&P 500 closed below the February low of 1044.50 and is at risk of breaking this key support ahead of a deeper correction into our 1000-950 support zone. This would equate to 5% to 10% decline from yesterday’s close and an 18%-22% drop from the April high.  Volume expanded yesterday to 6.3bn shares on the consolidated tape as a strong 90% down day pointed to sellers coming back into the market. This suggests a deeper decline and the levels to watch on the downside are 1000 to 950 on the S&P 500.   The average mid-term year intra-year correction is 20%. This also supports the case for a decline into the 1000-950 area. June is typically a down month in the mid-term year and MTD, June 2010 is down 4.4%. Based on the mid-term year pattern, there is a slight upward bias in July, but summer rallies tend to be capped with lower lows in the fall.   US equity market remains under pressure, the assets we believe should provide positive returns are gold, bonds, and cash.  (BofAMLCO)

…Asia Lower overnight on follow through from US; European markets stronger as funding stress is not as dire as feared after better than expected results in 3month ECB auction…"thin", "liquid", "lean", more and more hedge funds we talk to are describing there portfolio's as such. 35%-50% invested seems to be the new norm. (feel free to challenge that, as it is far from an "official" stat).  We have now tested and held the 1040 level for the 4th time in the last 5 months. Chinese growth continues to be a key focus. Our emerging markets desk points out following yesterday’s news that the Conference Board index registered a smaller increase in April than previously estimated (due to a calculation error), today there have been rumours that the official PMI to be released tomorrow will fall to less than 50 in June (from 53.9 in May and an expectation of 53.2). This rumour seems less credible than others in recent months, but it is very likely that we will see some moderation in activity.  Feels like today is setup to give us a light volume bounce before tomorrow really gives us a solid direction. As our London desk pointed out yesterday, Thursday we'll have China/US/UK/EU ISM numbers, plus the expiry of the €442bln of 12 month Long-Term Refinancing Operation (LTRO) for European banks.  (RBC)

…Even traditionally multi year mutual funds get worried about short term performance in markets like these.  The mutual funds have been taking one of two approaches.  Some are literally doing absolutely nothing and staying close to benchmark weightings until more clarity comes into the marketplace.  On the other hand, there are some funds that were traditionally long term investors flipping around positions if/when they get these 20% type moves in a matter of days or weeks.  The staying power simply isn't there FOR ANYONE.  Like we pointed out a few weeks ago, THE DURATION OF POSITIONS BEING HELD BY THE ASSET MANAGEMENT COMMUNITY (especially hedge funds) IS THE LOWEST WE HAVE EVER SEEN IT IN OUR 10 YEARS TRADING.  I'm very consensus right now.  I think we bounce but any major bounce is probably a sold.  (Barclay’s)

Something to think about today will be the potential rebalance for mutual funds and some pensions with regards to their weightings in bonds/equity. It will be especially interesting this month given the move we have seen in bonds recently on the back of the current macro backdrop. As we have stated in the past, this event when looked at statistically over many years has been a difficult to handicap. The obvious conclusion has not shown any consistent statistical significance over When it is apparent that stocks should be to buy and bonds should be for sale the price action on the day of the event has been a 50/50 result at best.A competitor of mine for example is calling for large equity to buy today as result of the move in bonds. Also of note is that most sophisticated pensions make large decisions semi-annually. Given where we are in the calendar this could be important today. Also important is that most bench their TSY exposure to the Barclays Aggregate Bond index (formerly LEH index). Pension Fund liabilities are inherently short duration. As index duration extends they need to buy longer dated issuance. The current Barclays Aggregate bond index effective duration stands at 4.08 last month it was 4.02. The bond desk notes that they will likely see the interest from passive funds and index funds to match the index at 3:00 PM today. No one wants to take tracking error. (DB)

GIS lower on in-line earnings with reduced 2011 guidance.  SCOT ups LPX.  BA to acq STST for $34.50/share.  STEM announces $6M equity financing.  DBAB ups BTU.  OPCO ups NEE.  BofAMLCO ups CNS, EV.  FBRC ups NE.  JEFF ups AZN.  JPHQ ups AZN.  CSFB, MSCO cut CMST.LI.  CELG to acquire ABII for $71.93 in cash and stock.  ETRM 1-for-6 reverse split. 

Asia lower overnight.  Europe trending lower after being up 1%.  EUR/USD $1.2239.  Oil -15bps.  Gold -40bps.  USD -15bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
CELGENE CORP              50.65    -4.86%  122382
GENERAL MILLS IN          35.15    -4.74%  19700
VORNADO RLTY TST      70.64    -4.5 %  100
GOODYEAR TIRE            10.68    +4.50% 1220
TYCO ELECTRONICS       26.80    +4.48% 200
FREDDIE MAC                .437      +4.4 %  13200
KIMCO REALTY               13.02    -3.98%  100
PACTIV CORP                28.75    +3.98% 200
NOVELL INC                   5.98      +3.82% 100
ANADARKO PETROLE      35.50    -3.19%  42441
LSI CORP                       4.86      +3.18% 5000
FORD MOTOR CO           10.18    +3.04% 2339970
FANNIE MAE                  .360      +2.86% 13860
HERSHEY CO/THE           49.49    +2.61% 100
RAYTHEON CO               49.84    +2.24% 200
INGERSOLL-RAND           36.04    +2.15% 200
WESTERN UNION           15.25    +2.07% 100

Today’s Trivia:  Which nation is responsible for the largest margin of victory in a World Cup game?  (They did it twice, beating El Salvador 10-1 in 1982 and Korea 9-0 in 1954.) 
Yesterday's Answer:  Pele, at 17 years and 239 days, was the youngest player to ever score in a World Cup game (1958). 

Best Quotes:  Here’s the annoying TV ad that constantly runs on CNBC that I ranted against last week… The phony French accent cracks me up, not to mention the use of a French trader given the SocGen Jerome Kerviel scandal and American attitudes toward the French: