Tuesday, July 6, 2010

Morning Note...

Futures ~1.5% higher this morning as global markets rebound from short-term oversold conditions and hope to buck the recent downward trend.  Today’s strength is being attributed to bullish global commentary from the Reserve Bank of Australia, which also left rates unchanged at 4.5%.  Despite this morning’s ebullience, however, note that GS is out with a cautious GDP reduction this morning (bold is mine):

This is a significant report given we acknowledge meaningful downside risks to our 2011 US growth forecasts for the first time. Essentially, absent additional stimulus measures, we are know recognizing that a reacceleration in growth may be a challenge

Following a series of disappointing US economic datapoints last week, Jan Hatzius and team argue that clear indicators of the 2H2010 slowdown are now emerging. We reiterate our 1.5% (annualized) GDP growth forecast for the second half of the year, and believe this rate of growth is more consistent with the visible weakness seen in ISM manufacturing index and labor market data. As the inventory cycle ends, we forecast a drop in ISM to levels of ~50, down from the 60 peak. In our view, June’s 56.2 reading was demonstrative of this trend. We also note that early manufacturing slowing was visible in labor market data, with the manufacturing work week falling by a ½ hour (4th percentile in month-to-month changes).

With regard to broader employment trends, the payrolls report was much weaker than the “in line with consensus” headline would suggest. Private payroll additions were much weaker than expected, and the employment / population ratio showed the second consecutive drop to 58.5% and is moving back to the 25 year low rate of 58.2% seen last December. We also now acknowledge downside risk to our 2011 growth forecast, which calls for a gradual reacceleration of growth at a rate of ~3% from 4Q10 to 4Q11 (official 2.5% growth forecast for FY11). It appears that without additional fiscal stimulus measures, growth will likely be more tepid. See our full report for our comprehensive forecasts and additional discussion of our US economic outlook.

Given the lack of significant news, consider the following statistics from the Barclay’s desk: 

(1) Friday marked 9 of the last 10 days SPX closed red.  This is only the 10th time since 1999.  In the most recent 3 times down 9 of 10 happened, here is the 10-day performance in SPX after:  +11.8%, +2.9%, +2.5%.

(2) SPX has closed red for 5 straight sessions.  This is the first time it's happened since March 2009.  Down 6 of 6 has only happened 7 times since 1999.  Down 7 of 7 only happened once.

(3) If Tues closed red, that would mark down 10 of the last 11.  This has only happened twice since 1999.  In those two instances, the streaks ended at down 10 of 11, and down 11 of 12.  As proof of the pain trade, the day that marked the end of both streaks was a big rally in SPX, +11.6% and +2.4% on that day alone, respectively.

(4) NDX 100's close on Fri marked down 10 in a row for the index.  This is the first time that has ever happened since the index's inception in 1985.

(5) SPX is down 8.5% in the last 2 weeks.  The last time we had a 2 consec week stretch this bad was in late Apr/early May and SPX proceeded to bounce +2.2% on the 3rd week.  Prior to that, the last time there was a 2-week stretch this bad was March 2009 when SPX bottomed sub-700.

Note that the Agricultural Bank of China IPO is expected to raise $20 billion today.  (Worth noting, then, that Harvard Prof. and former IMF Chief Economist Ken Rogoff said “China’s property market is beginning a collapse that will hit the nation’s banking system” during a weekend interview in Hong Kong.)   Obama is due to meet Israeli PM Netenyahu today in WashingtonEurope is higher on news that European bank stress test results will be released July 23rd and will waylay concerns there.  As a result, European CDS have tightened.

After catching up on some reading this weekend, I am amazed by the amount of outright bearishness out there… I am not sure if Richard Russell, John Mauldin, or Fred Hickey are now considered “consensus,” but each is decidedly negative about the current state of the world and in particular the U.S. and its fiscal & monetary policies.  From a trading perspective, it’s unclear if this rampant negativity is a call to take the contrarian view, or just a realistic take on the global economy as it stands.  Regardless, it was interesting to read all this against the backdrop of Independence Day.  Here are some selected tidbits:

The end of Keynesianism? Yes, I think we're seeing it now. Fed Chief Bernanke in his writing blamed the Great Depression on the Fed for shrinking the money supply. In fact, Bernanke even apologized on the part of the Fed for "causing the Great Depression." Bernanke, wrote a famous piece explaining to "us know-nothings" that the Fed has a magic instrument, it was the ability to print money, and, if necessary, to drop this Fed-created money to the American people from helicopters. With his magic power, concluded Ben, there was no way the US could slide into another Great Depression.

It was great and comforting concept, but it didn't work. After leaving rates at zero, printing over two trillion "dollars" and backing billions of dollars in stimulus plans, unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning.

The spending plans of the Obama administration and the expansion of money by the Fed has left the US in worse shape than ever. Unemployment is still high, and the US has taken its place along with Greece and Portugal as another "half-broke banana republic."

How did this horror story befall the once "greatest nation on earth" and the one-time "Arsenal of Democracy?" If a house is built on sandstone and with rotten timber it's not a question of whether that house will fall apart -- it's a question of WHEN. Ever since the end of World War II, Americans have been enjoying the greatest standard of living the world has ever seen. How did we do it? Was it hard work, sweat, original thinking, risk-taking or pure luck? Hardly any of those, it was through borrowing and creating a gigantic house-of-cards. The cards were the newly-created bits of paper that we call dollars (actually, they are Federal Reserve notes backed by nothing). 

--Richard Russell, Dow Theory Letter, 6/30/10

It’s not easy watching your country “go to hell in a handbasket.”  For those of you not familiar with this phrase, it means: rapidly deteriorating, on a course for disaster.  For the last several years I’ve disagreed with virtually every major policy action our government leaders have taken.  We’ve dramatically grown the size of the government, increased our citizen’s dependence on the welfare state, increased the burden of regulation, increased the debt burden on our children, bailed out crony capitalists and begun the process of socializing medicine (17% of our economy).

Over the next few years we’re planning to dramatically raise takes on our most productive citizens, while excluding nearly half the population from paying any federal income tax – thus ensuring the votes to continue the warped tax policies.  Our country badly needs more savings and investment, but our answer is to offer savers 0% interest rates for “an extended period” (years on end) and, over the next few years, to nearly triple the top tax rate on dividends and to increase the tax on long-term capital gains by 59%.  It’s enough to make a grown man cry.

--Fred Hickey, The High-Tech Strategist, 7/2/10

There's a reason economics is called the dismal science, and weeks like this just give it further meaning. In economics, there is what you see and what you don't. This week we are going to examine the headline data we all see and then take a look for what most observers do not see. Then we'll try to think about what it all really means. With employment, housing, and the ISM numbers, there is a lot to cover. And this letter will print out longer than usual, as there are a lot of charts. Warning: remove sharp objects from the vicinity and pour yourself your favorite adult beverage. This does not make for fun reading.

The unemployment numbers this morning were just bad, even though the spin doctors were out in force. Of course we knew that because of census workers being laid off the number would be negative, and it was, down 125,000. But the "bright spot" we were told about was that private payrolls came in at 83,000 new jobs. Let's look at what you did not see or hear.

First, last month's dismal (there's that word again) private job-creation number was revised down from 41,000 to 33,000. So in two months, total private job creation is 116,000 jobs. We need 125,000 jobs per month just to keep up with population growth.

But it is worse than that. The headline number we look at is from the Establishment Survey. That means they call up existing businesses they know about and ask them how many people are working for them, etc. One of the first things I do when the employment numbers come out is look at the birth/death assessment on the BLS (Bureau of Labor Statistics) web site.

For new readers, the birth/death assessment has nothing to do with people dying, but rather is the BLS's attempt to estimate the number of new businesses that have been created or have "died" within the last month, and they use these numbers to adjust the employment total. They use historical, seasonal numbers to create a model from which they make these estimates. There is nothing conspiratorial about the numbers - they have to make an attempt at such an estimate, otherwise the employment number would be badly off. But the birth/death number can skew the totals a lot more than is typically realized.

Take the last two months. Using the birth/death model, the BLS assumes that 362,000 jobs were created somewhere. That is three times the number of jobs in the headlines we read. Those extra jobs were added into the total because that is what the model told them to do. And over a complete business and employment cycle, those numbers will average out to be pretty close to right. But as I said, they can also be misleading in the short term.

We were told that the unemployment number dropped from 9.7% to 9.5%. That's a good thing, right? Well, no, not really. The number dropped because the number of people counted as being in the labor force dropped. If you haven't looked for work for four weeks, you are not counted as unemployed. If you add those who were taken off the rolls back in, the unemployment number would have risen to 9.9%. In the past two months nearly one million people have dropped out of the labor market.

If you counted all the people who would take a job if they could find one as unemployed, the unemployment number would be closer to 11%. As an aside, if I have any real beef with the BLS over how they create their data, it is this last point. If you would take a job if you could get one, you should be counted as unemployed. Period.

The Household Survey was rather dismal. (This is where they call households and ask about their employment situation.) The survey showed a loss of 301,000 jobs, or 363,000 jobs if you adjust it to match the Establishment Survey. Not pretty.

Maybe a better way to look at unemployment is to look at the percentage of the total population that has a job. That number has been rising off and on for almost 50 years as more and more women have moved into the labor force. But notice the large drop over the last year - almost 5% of working people in the US have lost their jobs.

--John Mauldin, Frontline Weekly, 7/2/10

BCAP ups oil svcs and drilling sectors.  Barron’s positive ARO.  MACQ ups BUCY.  FIS reaffirms and announces tender offer and buyback.  CSFB ups FR.  JPM ups GS.  JASO announces multi-year deal with WFR.  Barron’s positive PBR.  CITI ups PGR.  FBRC ups WLT. 

Asia higher overnight.  Europe higher.  Oil +160bps.  Gold -50bps.  EUR/USD $1.2598.  USD -40bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
TELLABS INC                  6.85      +5.71% 150
INTL PAPER CO              23.75    +5.14% 200
FIDELITY NATIONA         27.55    +4.32% 18313
MICRON TECH                8.56      +4.14% 97460
AMERISOURCEBERGE      32.18    +4.08% 1300
KLA-TENCOR CORP         28.29    +3.97% 600
OFFICE DEPOT INC         4.25      +3.91% 1500
TENET HEALTHCARE       4.30      +3.61% 2500
US STEEL CORP             39.00    +3.56% 53748
PROGRESSIVE CORP       19.28    +3.54% 2630
AK STEEL HLDG              12.10    +3.33% 35420
FANNIE MAE                  .3449    +3.26% 67167
JABIL CIRCUIT                13.44    +3.23% 2500
FREEPORT-MCMORAN    60.40    +3.18% 49122
HERSHEY CO/THE           49.70    +3.09% 200
MASCO CORP                11.03    +3.08% 200
GAP INC/THE                 20.08    +3.08% 150
FIFTH THIRD BANC         12.18    +3.05% 7072
COVENTRY HEALTH        18.03    +3.03% 200
HUNTINGTON BANC        5.50      +3.0 %  7800

Today’s Trivia:  What World Cup trend/fact are semi-finalists Germany, Spain, and the Netherlands hoping to defeat in South Africa 2010?
Yesterday's Answer:  Uruguay is the smallest nation to have ever won the World Cup. They did it twice, in 1930 and 1950.   

Best Quotes:  From BofAMLCO desk… A correction seems to be taking place early this morning.  The markets were likely over sold on a short term basis heading into the long weekend, and into all the negative economic data.   Dollar this am weakening, stronger Euro also helping the bid this morning.  Commodities all bid across the board as a result.   Financials are getting a pre market bid this morning as well.   Most of all the negative news in regards to financial reform has been factored in, it's just the economy now that is the drag.    Earnings kick off in week.   I almost feel that we are in a good spot this week for a rally.   Only 4 trading days.   Post a slug of data, and into earnings with low expectations.   I think we are second half team.   Buy the dips this week.