Monday, August 9, 2010

Morning Note...

Futures are up ~40bps on a relatively quiet Monday ahead of tomorrow’s official FOMC decision and rate announcement.  HPQ rebounding slightly in pre-market action (-6.5%; had been down 10% Friday afternoon) after Friday’s surprise CEO resignation.  McDonald’s same-store-sales better-than-expected to +7% for July.  Looking ahead, tomorrow also brings the NFIB Small Business Optimism Index, and Friday we’ll get the CPI reading.  In Europe this week, we’ll get IP & GDP for the Eurozone.  In Asia, we’ll get the July economic release from China (Trade Balance, PPI, CPI, Retail Sales, IP) Tuesday night for Wednesday morning.  Interesting revision out of GSCO late Friday afternoon:

As announced on Friday afternoon, Jan Hatzius and team have cut their 2011 GDP growth forecast to 1.9% from 2.5% yoy growth. We reaffirm our view that US GDP will grow at a 1.5% annualized rate in both 3Q and 4Q 2010. Our 2011 forecast cuts are due to heavy political resistance to any additional fiscal stimulus measures in the context of mounting federal debt. Meanwhile, headwinds to private sector growth continue to persist. We anticipate GDP growth will remain at 1.5% growth (qoq) in 1Q11 and will accelerate to 3% by 4Q10. This suggests a 2.25% yoy growth rate from 4Q09 to 4Q10, almost 0.9 percentage points below our previous forecast. This slower growth forecast leads us to raise our unemployment rate peak forecast to 10% (from 9.8%). Our forecasts still do not project a full double dip recession for two key reasons:

(1) We expect the FOMC will resume unconventional policy leasing by late 2010 or early 2011 as unemployment surges back to 10%. We do expect the FOMC to announce reinvestment of MBS paydowns into US treasuries at this week’s meeting. This is an important “baby step” back towards easing
(2) Private sector spending on durable goods is unlikely to fall much further as it has already been depressed by the previous recession.

So essentially GSCO is betting that political pressures against further stimulus injections (and subsequent debt) will rule the day.  Interesting timing, considering  Barron’s over the weekend argues for further stimulus to stave off a Japan-like period of deflation. 

Additionally, Goldman also cut their S&P 500 year-end target to 1200 from 1250.  Interesting to note that there seem to be more than a few downward revisions coming out of the sell-side recently.  It’s almost as if analysts are announcing “recent earnings had the potential to break this market to the upside on definitive volume and conviction…since that did not happen, and since there is little on the horizon to drive this market one way or another until November elections (barring the unforeseen, which is always a possibility), we need to take numbers down.”  Obviously I am over-simplifying things, but – for what it’s worth – that’s seems to be the sentiment of late.  Or at least the sentiment that I am – perhaps erroneously, who knows - interpreting…

Regarding recent market and currency action, a few things from this past weekend’s WSJ caught my eye:

Some See the Hand of China in Recent Yen, Euro Rallies  By TOM LAURICELLA And ALEX FRANGOS

After a big surge through the first five months of the year, the dollar has slumped against the euro and yen, with many traders pointing to softer U.S. economic growth and stabilization in Europe as the catalyst.

In currency markets, the buzz among traders is that there is another factor at work, too: China.

In recent months, traders believe, China has stepped up its buying of yen- and euro-based investments. This is likely because it is trying to diversify its $2.5 trillion of currency reserves away from holdings of U.S. Treasurys, some analysts say.

Perhaps not coincidently, some say, such a move would have the effect of pushing up the currencies of economic competitors, helping to keep Chinese exports priced competitively in the world markets.

Given ultralow U.S. interest rates, if there was a smart time for China to rebalance its currency reserves away from dollar-based investments, it is now.

"When looking at selling out of U.S. fixed income, China has to pick the right time to do so," says Douglas Borthwick, head of trading at Faros Trading, in Stamford, Conn. Based on the relative levels of interest rates, "it is one of the best times on a yield basis to sell U.S. fixed income and buy Japanese and European fixed income."

Also, relative to recent bond action (bold emphasis is mine):

The bond market, however, has remained a picture of bearishness. The 10-year Treasury yield tumbled immediately after the release of the jobs data and never looked back, closing at 2.826%, the lowest since April 2009. The two-year yield dropped to 0.514%, the lowest on record dating back to 1973.

Treasurys are starting to revisit levels seen in the darker days of the credit crisis. They appear to be pricing in economic outcomes that are bleaker than the stock market expects, including slower growth and a greater risk of deflation, or a decline in prices that drags on economic activity.

"I don't know how anybody can not be gloomy in this outlook," said Dave Rovelli, managing director of equity trading at Canaccord Adams. "It's horrible—everywhere you look the economic news is borderline horrible. We're two years into this recession, and we're not getting any better—we can't even add jobs. Companies are doing well because they've slimmed down, but they're not hiring."

It could be that stock investors believe large companies will be able to keep earnings per share afloat in a slow-growth environment with buybacks, cost-cutting and exposure to faster-growing overseas markets. It could also be that the stock market is overly optimistic about the outlook, or that the Treasury market is overly pessimistic.

ACM initiated Neutral with $28 target at GSCO.  Barron’s very bullish on V & MA. Barron’s also positive on TGT.  SLE CEO resigns.  BERN ups MYL.  DBAB ups DHI, MTH, RYL.  LSCC CEO resigns.  CELM higher on earnings and guidance.  PCS cut at BERN.  SFD initiated Buy at GSCO.  JEFF ups SKH.  SWSI higher on earnings.  GSCO rates TSN as Conviction Sell. 

Asia mixed overnight.  Europe trading roughly 1.5% higher.  EUR/USD 1.3252.  USD +15bps.  Oil +115bps.  Gold +23bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  Name the last President to be elected by all male voters.

Yesterday’s Question:  What interesting immunity do sharks possess that has scientists buzzing over shark cartilage studies?
Yesterday's Answer:  Sharks are immune to cancer.

Best Quotes:  Good Morning - Market is up after Fridays brutal employment data?   On the hope that the Government will extend efforts to shore up the economy?  I hate to be a pessimist but isn't that what we’ve been doing for the past two years?   At what point do they take a step back and admit the current course of action is ineffective.   Lots of head shaking over here.   Below is a  copy of Peggy Noonan opinion piece from the weekend edition of the WSJ, it is an interesting read.  1130 is the key level for the S&P 500 to break through.  Volumes continue to be anemic, making for choppy trading.  There is no data due out today, so lets hope for a boring climb.  Have a good day.   –MLCO trader commentary

America Is at Risk of Boiling Over
And out-of-touch leaders don't see the need to cool things off.

It is, obviously, self-referential to quote yourself, but I do it to make a point. I wrote the following on New Year's day, 1994. America 16 years ago was a relatively content nation, though full of political sparks: 10 months later the Republicans would take the House for the first time in 40 years. But beneath all the action was, I thought, a coming unease. Something inside was telling us we were living through "not the placid dawn of a peaceful age but the illusory calm before stern storms."

The temperature in the world was very high. "At home certain trends—crime, cultural tension, some cultural Balkanization—will, we fear, continue; some will worsen. In my darker moments I have a bad hunch. The fraying of the bonds that keep us together, the strangeness and anomie of our popular culture, the increase in walled communities . . . the rising radicalism of the politically correct . . . the increased demand of all levels of government for the money of the people, the spotty success with which we are communicating to the young America's reason for being and founding beliefs, the growth of cities where English is becoming the second language . . . these things may well come together at some point in our lifetimes and produce something painful indeed. I can imagine, for instance, in the year 2020 or so, a movement in some states to break away from the union. Which would bring about, of course, a drama of Lincolnian darkness. . . . You will know that things have reached a bad pass when Newsweek and Time, if they still exist 15 years from now, do cover stories on a surprising, and disturbing trend: aging baby boomers leaving America, taking what savings they have to live the rest of their lives in places like Africa and Ireland."

I thought of this again the other day when Drudge headlined increasing lines in London for Americans trading in their passports over tax issues, and the sale of Newsweek for $1.

Our problems as a nation have been growing on us for a long time. Their future growth, and the implications of that growth, could be predicted. But there is one thing that is both new since 1994 and huge. It took hold and settled in after the crash of 2008, but its causes were not limited to the crash.

The biggest political change in my lifetime is that Americans no longer assume that their children will have it better than they did. This is a huge break with the past, with assumptions and traditions that shaped us.

The country I was born into was a country that had existed steadily, for almost two centuries, as a nation in which everyone thought—wherever they were from, whatever their circumstances—that their children would have better lives than they did. That was what kept people pulling their boots on in the morning after the first weary pause: My kids will have it better. They'll be richer or more educated, they'll have a better job or a better house, they'll take a step up in terms of rank, class or status. America always claimed to be, and meant to be, a nation that made little of class. But America is human. "The richest family in town," they said, admiringly. Read Booth Tarkington on turn-of-the-last-century Indiana. It's all about trying to rise.

Parents now fear something has stopped. They think they lived through the great abundance, a time of historic growth in wealth and material enjoyment. They got it, and they enjoyed it, and their kids did, too: a lot of toys in that age, a lot of Xboxes and iPhones. (Who is the most self-punishing person in America right now? The person who didn't do well during the abundance.) But they look around, follow the political stories and debates, and deep down they think their children will live in a more limited country, that jobs won't be made at a great enough pace, that taxes—too many people in the cart, not enough pulling it—will dishearten them, that the effects of 30 years of a low, sad culture will leave the whole country messed up. And then there is the world: nuts with nukes, etc.

Optimists think that if we manage to turn a few things around, their kids may have it . . . almost as good. The country they inherit may be . . . almost as good. And it's kind of a shock to think like this; pessimism isn't in our DNA. But it isn't pessimism, really, it's a kind of tough knowingness, combined, in most cases, with a daily, personal commitment to keep plugging.

But do our political leaders have any sense of what people are feeling deep down? They don't act as if they do. I think their detachment from how normal people think is more dangerous and disturbing than it has been in the past. I started noticing in the 1980s the growing gulf between the country's thought leaders, as they're called—the political and media class, the universities—and those living what for lack of a better word we'll call normal lives on the ground in America. The two groups were agitated by different things, concerned about different things, had different focuses, different world views.

But I've never seen the gap wider than it is now. I think it is a chasm. In Washington they don't seem to be looking around and thinking, Hmmm, this nation is in trouble, it needs help. They're thinking something else. I'm not sure they understand the American Dream itself needs a boost, needs encouragement and protection. They don't seem to know or have a sense of the mood of the country.

And so they make their moves, manipulate this issue and that, and keep things at a high boil. And this at a time when people are already in about as much hot water as they can take.

To take just one example from the past 10 days, the federal government continues its standoff with the state of Arizona over how to handle illegal immigration. The point of view of our thought leaders is, in general, that borders that are essentially open are good, or not so bad. The point of view of those on the ground who are anxious about our nation's future, however, is different, more like: "We live in a welfare state and we've just expanded health care. Unemployment's up. Could we sort of calm down, stop illegal immigration, and absorb what we've got?" No is, in essence, the answer.

An irony here is that if we stopped the illegal flow and removed the sense of emergency it generates, comprehensive reform would, in time, follow. Because we're not going to send the estimated 10 million to 15 million illegals already here back. We're not going to put sobbing children on a million buses. That would not be in our nature. (Do our leaders even know what's in our nature?) As years passed, those here would be absorbed, and everyone in the country would come to see the benefit of integrating them fully into the tax system. So it's ironic that our leaders don't do what in the end would get them what they say they want, which is comprehensive reform.

When the adults of a great nation feel long-term pessimism, it only makes matters worse when those in authority take actions that reveal their detachment from the concerns—even from the essential nature—of their fellow citizens. And it makes those citizens feel powerless.

Inner pessimism and powerlessness: That is a dangerous combination.