Wednesday, July 28, 2010

Morning Note...


Futures are ~20bps lower this morning as the stream of earnings releases continues and June Durable Goods Orders came in weaker than expected, at -1.0% vs. the +1.0% expectation.  As for earnings, this morning’s tepid action seems to indicate another underwhelming response to the recent beats:  Sprint (S; +5% pre-market) surprised to the upside; Boeing (BA, -1.5%), Norfolk Southern (NSC, -2.3%), Aflac (AFL, -1.4%), Aetna (AET, -1.6%), Broadcom (BRCM), WellPoint (WLP, +2.3%), and Comcast (CMCSA, +2.2%) all beat expectations; and Massey Energy (MEE, -2.5%) and Newmont Mining (NEM, -1.4%) missed analysts’ estimates.  Steel giant ArcelorMittal (MT) also beat estimates but offered cautious forward guidance.  CVS (-3.5% pre-market) misses slightly and lowers guidance but wins a long-term AET PBM contract.  Restaurateur PFCB missed by 2c but comp sales were slightly better-than-expected, whereas PNRA sales slowed.  BWLD also showed major improvement in comp store sales.  LVMH is higher overseas as their fashion/leather goods segment was notably strong.  Also, Moody’s affirmed a negative outlook on financials Bank of America (BAC), Citigroup (C, -75bps), and Wells Fargo (WFC, -1%).  Finally, AT&T (T, -60bps) was also placed on the S&P ratings watch list.  In M&A news, HES agreed to buy AEZ in an all-stock deal.  Across the pond, Portugal and Italy had successful debt auctions, and Bank of England monetary policy member David Miles borrowed from Bernanke and called the economic outlook “unusually uncertain.” 

The Fed’s Beige Book report is due at 2pm.  For a refresher, the Beige Book is formally known as the “Summary of Commentary on Current Economic Conditions by Federal Reserve District.”  (Thus the need for a shorter title.)  This report is published eight times per year.  Further, Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.  (www.federalreserve.gov)

Regarding recent market action, I think Mike O’Rourke summarized things nicely last night:

When thinking about today’s trading action, the term “summer doldrums” is a fitting description.  The S&P 500 spent 75% of the trading day in what was approximately a 50 basis point range.  Trading volume remains unimpressive.  We suspect the tight trading action is representative of a distribution day in the equity market.  As the S&P 500 runs into upside resistance, some investors took the opportunity to sell into the early strength to do some profit taking.  The 1120 level which the S&P 500 tested on the open today is  important resistance.  It was the level where the market ran out of steam during the June rally.  It is also just below the level where the flash crash rally stalled.  The level was only exceeded by the EU’s announcement of the “Shock and Awe” package a few of days later, which, as we all know, was a selling opportunity.  The market running out of gas as it hits resistance should not be viewed as a negative.  Taking a breather at the appropriate levels should be expected and is constructive.  Currently, the S&P 500 is up 8% month to date, and a little consolidation would be the healthier course.  On the positive side, it was impressive that today’s reversal halted after pulling back 1%, and did not become an all out rout in this Jekyll and Hyde market that shifts from no offer to no bid  on a dime.

In today’s trading, Treasuries finally down-ticked enough to drive the 10 year yield above 3%.  That being said, the yield’s close proximity to 3% is a sign that despite the equity rally, there is still a cautious tone in the financial markets.  We believe we may be witnessing early signs that investors are willing to increase their exposure to risk, notably equities, but in a defensive manner.  Most sectors are posting a strong performance in July as one might expect with the S&P 500’s big rally.  What has caught our attention are the Utility, Telecom and Consumer Staples sectors.  The Utility sector is up 10.4% this month and on track for its best monthly performance since March 2002.  The Telecom sector is up a less impressive 8.7% on track for its best monthly performance since May 2007.  Consumer Staples are up 7.4%.  Although they are mildly underperforming the S&P 500 this month, they outperformed the S&P 500 by 259 and 346 basis points, respectively, the previous 2 months.  The kicker is that Consumer Staples are on track for their best monthly performance since October of 2000. 

If you are a BP-watcher, I thought this quick BBERG story was interesting:

BP Oil From Spill Is Biodegrading, Easing Threat to East Coast 2010-07-28 07:03:13.744 GMT

July 28 (Bloomberg) -- Oil from BP’s GoM spill is biodegrading quickly, probably eliminating risk it will hit the East Coast, National Oceanic and Atmospheric Administration says.
                        * Oil has been evaporating since BP stopped well flow on July 15 and crude that’s dispersed into the sea is being gobbled up by bacteria
                        * Seasonal shifting of Loop Current also eases threat
                        * Risk of oil reaching more shoreline in northern Gulf is also decreasing
NOTE: By yesterday, ~640 miles (1,030km) shoreline in northern Gulf, northwest Florida had been tarred by oil, govt. said

WSJ “Heard on the Street” cautious on DB.  CITI ups ENTG.  BARD ups PCAR, TOMO.  SocGen ups BEAV.  WEFA ups AHGP, ARLP.  BARD cuts HSII, OMI. 

Asia higher across the board overnight.  Europe has weakened slightly throughout their session.  EUR/USD $1.2981.  Oil -115bps.  Gold flat.   

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
EASTMAN KODAK           4.57      -7.3 %  44805
SLM CORP                     11.83    +5.44% 22580
CH ROBINSON                64.52    +5.42% 46500
SPRINT NEXTEL CO        5.07      +4.97% 24233008
INTL GAME TECH            16.02    -4.07%  7500
FAMILY DOLLAR ST        41.01    +3.9 %  119023
CVS CAREMARK COR      29.50    -3.59%  845823
IAC/INTERACTIVEC        24.49    +3.2 %  500
WYNDHAM WORLDWID   24.00    +3.14% 100
FISERV INC                    46.19    -3.02%  1688
TENET HEALTHCARE       4.34      -2.91%  5501
MASSEY ENERGY CO       28.91    -2.5 %  62775

Today’s Trivia:  What type of tree is most commonly struck by lightning? 
                                                                                                                                                                       
Yesterday's Answer:  The Devil’s Tower in Wyoming was designated by Teddy Roosevelt in 1906 as the first national monument.   

Best Quotes:  “Good Morning - Earnings vs. Economy continues.  Durable goods at 8:30 Est. and Beige Books at 2 est. could be a drag on the current momentum built by the earnings trend.  How about this for a month we are up 8% in the S&P 500.  Doesn't feel that good, but a move that can't be ignored.  It feels like the cover trade has taken place, so what little risk that was out there may have been covered, and with the earnings trend shorts may be hesitant to be put back on.   I am a buyer of all dips through earnings season, maybe through September.   Equities at some point have to come back into vogue.  Maybe Dividend increases are the catalyst.  Growth expectations are tepid at best, but if companies with these large cash balances can give dividend incentives maybe the yield s and valuations gets folks out of Treasuries.   1118.75 is yesterdays high, 1122.30 is the 100 day moving average.  Have a good day.”  --trader talk