Thursday, August 12, 2010

Morning Note...

Futures are ~100bps lower as CSCO earnings (post-market close yesterday) did little to quell selling pressure.  It’s not every day that you see a bellwether blue chip like Cisco down 8.5% in pre-market trading.  We’ll see if CEO John Chamber's commentary – due any minute – helps things.  Additionally, Initial Jobless Claims came in worse than expected this morning, at 484k vs. the 465k expectation, reaching a five-month high.  Continuing Claims were in-line, at 4.452M vs. the 4.535M expectations.  For those keeping score at home, this does not seem to represent progress.  (And I have to wonder how the guys at Barclay’s did yesterday with their willingness to bid for stock on the open.) 

Regarding “market feel” from my bleacher seat, I don’t ever honestly recall – at least in my ten years in this business – markets and market commentary being this…manic.  In terms of news flow, all it takes is one -2.5% day, and the entire wall of worry – so prevalent in early July – returns in earnest.  It’s amazing…just how short are people’s attention spans these days?  These things did not go away, but sure enough, CDS weakness in Greece, Ireland and Spain is once again being cited, and the world is once again a horrible place.  But it is worth noting that a few investment managers were on television this morning expressing their view that the bond market – which has been flashing “danger” for some time now – is dead wrong.  Interesting, considering I am of the belief that stocks (or bonds) don’t lie, but people do…

Since I am tettering on a rant instead of useful commentary, let me turn things over to a quasi-guest writer, Dan Brooks of BofAMLCO, whose note had me chuckling this morning.  In my opinion, it pretty much says it all (and he doesn’t even mention Cisco):

Good Morning - Australian employment growth slowed, India's industrial output rose at the slowest pace in 13 years, and Greece's economy contracted for the 7th straight quarter, and The U.S. economy is in a free fall.  Why do we still ask the question why is the market off? GM is expected to print a billion profit after losing 88bln since 2004.   That is a company that knows how to make things happen.  Continuing claims at 8:30, and AMG inflows later this afternoon.  Volumes were higher yesterday, and the market got pounded.   It also appears that yesterdays lows will be today's highs, if we are lucky   What little confidence earnings season gave us, it seems to be crushed by the brutal macro data.  Hard to pay a multiple on future growth, when the data is telling you there isn't any.  1083.70 was the 50 day moving average, I don’t see anything real until 1050 on the downside support.   1106.70 seems so far away it is hard to believe we were north of there 2 day ago.   Sell the rallies.  

For more interesting reading, let’s turn back to yesterday’s Hedgeye note.  Yes, I have been quoting them a lot lately, but I also think they’ve been spot-on (and wait for the De Tocqueville quote near the end…powerful stuff…especially considering Cuba’s Fidel Castro made a similar comment during his first speech in some time the other day):

"Perfection of planned layout is achieved only by institutions on the point of collapse."  -Northcote Parkinson

Parkinson was a well known British scholar who specialized in naval history. Before he passed away in 1993, he authored 60 books, including "The Devil to Pay", "Dead Reckoning", and "So Near, So Far." His writings recognized patterns of behavior in administrations and institutions in a way that makes we modern day chaos theorists proud. Patterns repeat.

The point of collapse is generally crystal clear in the rear-view mirror. Professional politicians in Japan have been telling stories for 20 years as to why they can prevent economic stagnation. In the US, the storytelling started in 2007. All the while, stock market and real-estate prices have every opportunity to rally to lower-highs, then collapse to lower-lows.

Despite all of the dissimilarities between Japan and the US, there is one similarity that continues to matter most in our risk management model - debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the "perfection of planned layout" to quantitatively ease, is also similar. We agree with Reinhart & Rogoff that crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth.

On July 2nd, as part of our Q3 Hedgeye Macro Themes presentation, we cut both our Q310 and full year 2011 GDP estimates for the US to 1.7%. At the time, these US economic growth estimates were about ½ the Bloomberg consensus estimate. Now we're starting to see both the sell-side and the Fed gradually cut their estimates, but not by enough. Our estimate for 2011 is still too high.

Growth slowing, both domestically and in China, is core to our bearish views on both the US Dollar and US Equities. There will be a downward bias to our US growth estimates as long as debt-financed-deficit-spending continues to remain the answer to the Fiat Fools prayers.

Markets trade on expectations. Yesterday's setup in the SP500 was unlike most Augusts in America. That's because the 'government is good' crowd leaked an idea to the Wall Street Journal that QE2 was coming, and that Ben Bernanke was going to solve for buy-and-hope begging.

To think that we have institutionalized market expectations in this great country to this degree is downright frightening. All things rallies start and end with rumors about what a humble looking man of government will represent at 215 PM EST on an August afternoon. Sadly, this kick starts thoughts of what another thoughtful European mind, Alexis De Tocqueville, warned about American style democracy in the 19th century.

So now what?

What do we do with this big Keynesian intervention that has delivered the fear-mongering national marketing message? Have we sufficiently scared the horses? While we've been getting paid, has this "perfectly planned layout" of telling Americans that this is a "great depression" worked?

With 40.8M Americans on food stamps (record high) and 45% of the unemployed having been seeking employment for 27 weeks or more (record high), now what?

Should we start begging for QE3? Should we cancel the bomb of an Existing Home Sales report for public release on August 24th? Or should we get back on TV after checking our I-pads and drinking our $5 mocha-frap and tell Americans to bite the bullet on ZERO percent returns-on-savings while we pay Washington to continue to lever-up our future to the point of economic collapse?
Before the Fiat Fools run out campaigning for QE3, never mind decisions made in 1997 Japan, maybe they should analyze some real time market results to yesterday's announcement of QE Light:

1. The US Dollar is battling for resuscitation after 9 consecutive down weeks at $80.80 (down -9% since June)
2. US Treasury yields are making record lows on the short end of the curve, with 2-year yields striking 0.49%!
3. The Yield Spread (10yr minus 2yr) continues to collapse, down another 4bps day-over-day to 223bps
4. US stock market futures are diving below the beloved 200-day Moving Monkey line of 1115
5. US Volatility (VIX) is spiking from its intermediate term TREND range of support (22-23)
6. QE Specialist (Japan) got smoked overnight, closing down -2.7% to down -11.9% YTD

Now what?

De Tocqueville's answer: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

My immediate term TRADE lines of support and resistance for the SP500 are now 1099 and 1138, respectively.

Best of luck out there today,

Random observational anecdote 1:  CNBC just spent 10 minutes (a lifetime in terms of television segments) discussing golf.  8:15am-8:25am.  No idea what that means, but amidst all the uncertainty in financial markets today, it must mean something… complacency? 

Random observational anecdote 2:  There is the slightest creeping trend away from “main stream” advertising on CNBC and towards the oddball, “lower ticket” items (like the Snuggie, for example) that marked restricted corporate advertising spending in 2008-2009.  Yesterday I caught a commercial for a “balance bracelet” at the relative financial “prime time” hour of 9am.  This bears watching…

BERN ups HSP.  BRY cut at GSCO.  EL misses by 1c; down 5%.  Cisco Systems beats by $0.01, reports revs in-line; guides 1Q11 revs to grow 18-20% YoY, equates to ~$10.6-10.8 bln vs Thomson Reuters consensus of $10.95 bln.  KSS beats by 2c but guides lower.  XLNX cut at BMOC. 

Asia lower overnight.  Europe ~50bps lower.  USD +40bps.  Oil -230bps.  Gold +130bps. 

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

Today’s Trivia:  What beloved children’s book - #4 on the all-time English language children’s book sales list – was published 50 years ago today?

Yesterday’s Question:  Today marks the first day of Ramadan, a month-long period of dawn-to-dusk fasting for Muslims.  But what does Ramadan actually commemorate?
Yesterday's Answer:  Ramadan commemorates the month during which the first verses of the Qur’an were revealed to the Prophet Muhammad. 

Best Quotes:  Really good read from a few days ago…

It’s Time to Invest in America
By Bill George | Posted: 08-10-10 | 12:53 PM | E-mail Article
You don’t have to be an economist to recognize the U.S. economy is in trouble.
Ten years ago, the U.S. economy was booming. American business was the envy of the world. Stock prices were soaring. Dozens of new companies were created every day. Private sector investments were at an all-time peak. Most importantly, the federal government had generated budget surpluses for three consecutive years.
What Happened?
Two successive administrations and the Federal Reserve shifted the focus from investment to stimulating consumer spending with low interest rates, easy money, high leverage, low personal tax rates, and increased government spending. The result? The federal deficit will hit $1.4 trillion this year, with cumulative debt reaching $18 trillion by 2015. That’s $60,000 for every American.
Since early 2009, economists have promised economic growth of 3%-4%, saying that job growth--"a lagging indicator"--will surely follow. Eighteen months later, things have not improved. Estimates of growth in gross domestic product continue to decline, as do durable goods orders. Twenty-six million Americans (16% of the workforce) cannot find full-time jobs. After their 2009 rebound, stock prices are declining, reflecting growing pessimism.
While the fundamentals are awry for the United States, leading American companies are doing well. Second-quarter corporate earnings consistently exceeded expectations, as companies reported solid productivity gains. Corporate coffers have $1.8 trillion in cash. Yet companies are not investing--at least, not in America.
In talking with dozens of chief executives, I hear pragmatic managers focused on building their businesses and earning fair returns for shareholders, yet extremely concerned about government policy. Here are the real reasons they are not investing in America:
1.      They expect no real domestic growth for the foreseeable future. In contrast, they foresee emerging markets sustaining double-digit growth. A chief executive at a large consumer products company told me: “Half our revenues already come from Asia; within 10 years it will be 70%. Naturally, we are shifting more operations there.”
2.      To compete with local companies, global companies are investing overseas in factories and sales and marketing personnel. Foreign governments like China and Singapore make investments very attractive. One chief executive noted that he chose China for his $62 million factory because local subsidies reduced his investment to only $13 million.
3.      Companies are also moving infrastructure support from the United States to lower-cost areas in Asia. Unable to obtain visas for its Indian employees, a major computer software company moved most of its software operations to India, where well-educated employees enjoy higher standards of living at one-quarter of the cost.
4.      Without domestic growth, there is no need for additional employees. Instead, companies are achieving productivity gains by running lean. Mounting costs of doing business and increased benefit costs have created so much uncertainty that chief executives are reluctant to hire, especially small business owners.
5.      Chief executives feel they have access in Washington, but limited influence. Without any business people in the Obama administration, there are no advocates for sound business policies. A successful commercial banker described how open the president appeared to his concerns, yet the next day--without any consultation--the administration announced a new $50 billion bank tax.
Ask yourself: if you were faced with these conditions, would you be investing in the U.S. and hiring more people? Unless the climate in Washington changes dramatically, this no-growth, no-jobs environment will continue indefinitely.
How Can the Administration Reverse This Economic Malaise?
To get the country growing and Americans back to work, the government must shift course to invest in the U.S. Tax policies and incentives should stimulate private-sector companies to invest domestically in research, innovation, manufacturing, infrastructure, and exports.
Here are six specific ways to accomplish this shift:
1.      Double the investment tax credit for new tangible assets to encourage investment.
2.      Double tax credits for increases in research and development to stimulate research and innovation.
3.      Introduce a graduated capital gains tax based on length of time assets are held, with rates declining to zero after 10 years.
4.      Offer a capital gains tax holiday the first time companies are sold to encourage investment in startups.
5.      Grant special loans and job credits for small businesses, where 70% of jobs are created.
6.      Offer export tax credits for the next two years to reinvigorate export growth and rebalance trade.
This set of pro-investment, pro-growth policies would supercharge U.S. investment, rekindle innovation, create millions of sustainable jobs, and restore continued economic growth. This would result in increasing tax receipts that would pay back these tax credits many times over.
Most important of all, this would make the U.S. competitive once again, focusing on our strengths of entrepreneurship, innovation, and creativity.
It’s time to invest in America once again.
Bill George is a professor of management practice at Harvard Business School and a former chairman and chief executive of Medtronic and the author of four best-selling books, including “True North.” Mr. George currently serves on the boards of Exxon Mobil and Goldman Sachs.
Bill George is a professor at Harvard Business School, best-selling author of 7 Lessons for Leading in Crisis, former chair and CEO of Medtronic, and board member for ExxonMobil and Goldman Sachs.