Tuesday, August 17, 2010

Morning Note...

*Please note there will be no Morning Note tomorrow, August 18th*

Futures are ~75bps higher this morning on successful debt auctions in Spain & Ireland (and subsequently tightening CDS spreads there), better than expected leading economic data from China (their LEI rose again), and speculation that Japan will inject further stimulus into their economy.   However, Germany’s ZEW survey (essentially consumer confidence) for August came in weaker than expected.  In economic news, U.S. producer prices were largely in line with expectations but rose from prior levels.  Housing Starts and Building Permits were weaker than expected.  In other news, according to a US government report, China reduced its holdings of treasury notes in June to US$840 billion, a fall of 2.4% month-over-month or US$21 billion—the largest amount recorded.  In M&A news, PTV has agreed to acquisition by New Zealand’s Rank Group.  And POT has reportedly rejected BHP’s $39 billion unsolicited bid, taking fertilizer stocks higher globally.  In earnings news, there are releases from four major players this morning.  Barclay’s Jason Feinberg has a solid summary:

1) HD:  Beat 2Q eps, comps missed as expected, guidance is in line with the street.  Although worse than LOW, this was better than expected and stock should trade quite well.  I'm guessing +2.25%?

2) URBN:  Beat 2Q eps on stronger than expected top line.  Everyone still negative on valuation but that won't matter today.  Expect strength.  +5%?

3) ANF:  This is always a tricky one.  The headline $0.08 beat was helped $0.04 by tax rate and they are going to have to explain a really funky and potentially ugly inventory number (+47%?).  This stock could honestly be up or down 5% today depending on how the call goes.  Punch buggy red no punch backs. 

4) WMT:  No one expect this release to be sexy and it wasn't.  This in line Q was very non-eventish to me.  I would expect WMT to trade up 2% today on the headline guidance raise which only puts them in line with the street.  

In other news, here’s a summary of the recent US Fund Manager Survey results from BofAMLCO:

Consensus is cautious on global growth and risk.   78% of investors do not expect another recession, but only 5% forecast stronger global growth in the next 12 months.   Global asset allocators remain stubbornly underweight bonds (exposure dropped to -23% from -15%) and modestly overweight equities (broadly unchanged at a net 12% ow).   Big drop in exposure to US, with a net 14% UW the market, the lowest level since Jan'08. Big rotation into European and UK equities. GEM remains the most preferred region (+38%) for asset allocators.

Looking ahead, are midterm elections the next catalyst to break this market out – one way or another – of our S&P 1050-1125 range?  Food for thought (bold emphasis is mine):

The Mid-Term Election Cycle: Good News for Stocks (Posted Aug 13th 2010 12:20PM by Steven Halpern)

"The period around mid-term elections is nearly always conducive to stock market gains, regardless of the political outcome," suggests market historian and money manager Jim Stack.

The editor of InvesTech Market Analyst explains, "We are now coming up on the strongest 3-quarter period of the 4-year Presidential Election Cycle.  In fact, the fourth quarter of the mid-term election year has the highest average return of all quarters in the cycle (6.3%). Looking back over the last 20 election cycles since 1929, the average cumulative gain over the upcoming 3-quarter period starting in October is a healthy 18.1%.

"Why is this period so strong? For one thing, most recessions occur in the first two years of a Presidential term, including the early months of the present Administration. By midterm, all actions (both political and monetary) are aimed at getting the economy back on firm footing. The environment is so accommodative that only one recession since 1929 has started in the year that follows midterm elections, and that was in December 2007.  Another powerful stimulant may be the hope that always springs eternal when a newly elected Congress convenes with expectations that changes will be for the better.

"While nothing is assured, the odds that the market will see a gain for the fourth quarter of this midterm election year are impressive.  The Election Cycle probability of a gain from this upcoming October through December period is about 85%, the highest of any quarter during the cycle.  A loss in the quarter is so rare that it has happened only three times since 1929.  If we look at the full 3-quarter period from the October before midterm elections through June, the track record is even better with losses for only two periods that occurred during the Great Depression of the 1930s.

"Moreover, the outcome of the mid-term election doesn't appear to have an impact on these results, even in contentious elections.  In the last 80 years, control of Congress has shifted at the mid-term only five times.  In each instance the market ended the fourth quarter higher, with just one minor exception ... in 1994, the Democrats lost control of both the House and Senate while Bill Clinton was in the White House. That year the market lost 0.7% in the fourth quarter, but it went on to rally more than 18% in the first six months of 1995.

"Whatever the reasons behind this unique Presidential Election Cycle pattern, we need to be aware of it as we plot our course ahead."

For another relatively bullish view of the future, here’s the recent trading call from Barclay’s:

Macro View

We believe it is time to start buying stocks. Our short and medium term view has turned very positive. We have turned quite bullish on equities for a number of reasons that we will go through in this presentation. Below is an outline of our bullish thesis.

Valuation. The equity risk premium, 5.60%, is the highest it has been over the last 30 yrs with exception of the depths of swoon down to 666 in SPX. And balance sheets are in better shape now than they have been in years. The market is only 35 handles away from having the same equity risk premium asearly March 2009, 5.89%.

The market has been digesting "the recovery is slowing" theme for over three months now. During this time, we have seen economic numbers come in weaker than expected, investor's GDP mental outlook come down significantly, and chance of double dip in investor's minds go up significantly. Bottom line is that the economic bar has been lowered in a meaningful way.

Fiscal policy has been a significant drag on the economic recovery as the uncertainty around healthcare, financial reform, and taxes has created significant uncertainty for business. As bad as it seems now, the winds in Washington are changing with the big catalyst being the Nov elections.

Risk levels on investor's books continue to be very low and fearremains in the market. This leaves significant dry powder when the market starts to gain some upward momentum. After 3 months of risk levels being low, there will likely be more of an urge to chase upward momentum, especially as the summer comes to a close.

The QE2 put option. If signs of deflation start to show up, we will likely see the fed embark on QE2. Yes, rates are low already. But the back end of curve would be pushed down further, lowering borrowing costs further, forcing everyone to move up risk curve, and flooding the system with dollars. This is a nice put option for economy.

BofAMLCO ups TGT.  JPHQ ups AGU.  JPHQ cuts DLTR.  BARD cuts ATHN.  WEFA cuts CPIX.  A beats by 6c.  AGU, BG, IPI, MON, MOS trading up with POT.  CF upgrade at GSCO.  Cramer bullish on OC.  SKS beats by 4c.  URBN beats by 3c.  MTB higher on takeout whispers (Santander). 

Asia generally higher overnight.  Europe up over 1%.  USD -40bps.  Oil +120bps.  Gold flat.

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

Today’s Trivia: On the 2001 New Zealand census, ~53k people listed their religion as what?

Yesterday’s Question: According to the Mental Floss website, Sesame Street character Snuffleupagus actually has a first name.  Any guesses?
                                                                                                                                                             
Yesterday's Answer:  Snuffleupagus’ first name is Aloysius. 

Best Quotes:  Interesting thoughts from FBR Research this morning…

“The Big Squeeze--Implications of a 4.0%, 30-Year Mortgage
 
30-year conforming mortgage rates have dipped below 4.5%, and given the trajectory of the 10-year Treasury, they could reasonably hit 4%. Some investors may say "So what? Most banks don't portfolio many resi mortgages, this is only a problem for a handful of thrifts." On the contrary, first-lien mortgages and investment securities (largely RMBS) make up 33% of total assets at all depository institutions, 90% of which are commercial banks. For reasons we can not entirely explain, over the past year many borrowers with economic incentive to refi have not done so. Today, we believe approximately half of conforming borrowers have both the economic incentive and equity to refinance. If rates continue to fall, a refi boom could swamp banks and thrifts with cash flows with no obvious place to invest. With newly issued agency MBS yielding approximately 3.5%, banks and thrifts face considerable reinvestment risk. As we dug into the numbers, we were surprised to find that while the thrifts do have greater exposure to resi assets, better efficiency provides a significant buffer to weaker revenues. We consider earnings at some of the less efficient regionals most at risk, and consider companies with meaningful mortgage banking operations and smaller resi mortgage exposures best positioned to offset the pressures of lower mortgage rates. Further, if rates remain low for an extended period, we would expect an increase in bank M&A activity as challenging prospects convince some to sell, and others choose to consolidate and grow earnings by cutting duplicative costs.”

New Hedge Fund performance data from CSFB:

Dow Jones Credit Suisse Hedge Fund Index Performance
Index / Sub Strategies
Value
Jul 10
YTD
1 Year
Annl*
Std Dev*
Sharpe*
Dow Jones Credit Suisse Hedge Fund Index
425.54
1.59%
2.22%
10.29%
9.13%
7.74%
0.73
    Convertible Arbitrage
342.62
2.22%
4.92%
17.89%
7.71%
7.16%
0.59
    Dedicated Short Bias
62.55
-3.52%
-6.19%
-14.98%
-2.79%
16.91%
-0.37
    Emerging Markets
353.15
3.52%
2.69%
13.59%
7.91%
15.37%
0.29
    Equity Market Neutral
227.68
1.67%
-2.95%
-1.87%
5.09%
10.70%
0.15
    Event Driven
492.44
1.56%
3.43%
14.11%
10.09%
6.09%
1.09
      Distressed
569.38
1.10%
4.11%
15.82%
11.06%
6.67%
1.14
      Multi-Strategy
457.84
1.90%
2.89%
12.85%
9.61%
6.48%
0.95
      Risk Arbitrage
315.51
1.61%
1.47%
5.71%
7.17%
4.18%
0.89
    Fixed Income Arbitrage
226.92
1.20%
6.79%
17.39%
5.07%
5.99%
0.27
    Global Macro
681.70
0.65%
4.88%
11.16%
12.27%
10.13%
0.87
    Long/Short Equity
476.53
2.53%
-0.77%
6.36%
9.87%
10.01%
0.64
    Managed Futures
262.23
-1.50%
-1.24%
0.10%
5.99%
11.74%
0.22
    Multi-Strategy
351.10
1.66%
2.15%
10.08%
7.99%
5.47%
0.83