Interesting morning which requires a prologue: futures had been higher early on (but not really since a 3:59 PM sale of SPX 1100 calls in an illiquid market created 50,000 eminis for sale on the bell and took us lower at 4PM – thus this morning’s early futures strength was really bringing us back to “flat” relative to fair value), they rallied on the M&A news of Intel (INTC) buying network security firm McAfee (MFE) for $48/share, and have since sold off post-8:30am jobless data.
Now, back to “real-time” commentary: futures are flat this morning as Initial Jobless Claims for the week ending August 14th fell short of the 488k estimate and came in at the troubling “headline-inducing” round number of 500,000. Continuing Claims for the week ending August 7th were 4.478M, slightly better than the 4.5M estimate. Stay tuned to the 10am Philly Fed release for more potential market impact. In other news, as mentioned above, INTC is buying MFE for $48/share in cash, or $7.68 billion. This represents a 60% premium over last night’s $29.93 MFE close. GM officially filed for its IPO and the government plans on selling an as-yet-unannounced amount of its GM stake in the deal. Overseas, Europe is higher on the Bundesbank raising Germany’s full-year 2010 growth forecast to +3% from the prior +1.9%. July Retail Sales in the
were also higher than expected. Looking a bit further abroad, the flooding in Pakistan is getting zero coverage (no one is sure why) but reports indicate this is a disaster on the scale of Haiti’s earthquake, New Orleans’ Katrina, and the Indian Ocean’s tsunami. Also, an overnight article in Der Spiegel regarding U.K. offered a cautious reminder of the issues that remain there: Greece
The austerity measures that were supposed to fix
's problems are dragging down the country's economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back. Greece
Plenty of earnings news in the retail sector, thus I will borrow this summary from BCAP:
One Page Summary: Overall most of these releases seem "not good enough" to me
1) SPLS earnings in-line but guidance fine when you add back tax rate
2) SHLD earnings in-line but top-line was soft and lots of one timers helped
3) PETM up 7% in the box last night after beating eps and raising guidance
4) LTD reported in line with pre-announcement and then raised guidance
5) WSM beat eps and raised guidanced as expected; talked about good trends qtd
6) RSH boosting buyback by $210M implying company may no longer for sale?
7) PLCE beat eps handily but guided below consensus for 3Q and FY
8) DLTR big 2Q beat, guided 3Q light vs FC, and FY better than consensus
9) DKS beat 2Q, guided 3Q light and FY better than consensus.
10) WSJ likes SBUX growth plans but worries about costs and competition
11) WSJ saying
casinos could rival the Vegas Strip Singapore
12) BarCap initiating coverage of WYNN with 2-Equal Weight and $92 PT
13) Competitor Research / Technicals / Earnings Calendar and Implied Moves
My predictions/take: I'm not sure if I woke up on the wrong side of the bed this morning (or whats going on) but I have the "its not good enough" feeling on a lot of these names. It feels like overall 2Q is fine, 3Q guidance is dicey, and FY guidance is in line with the street. I think a lot of these names could have their high of the day put in by 10am. I'm still broadly bullish for a bounce higher in the group but I wouldn't be shy to take some profits on the open in a number of these "event" securities. Feel free and ping me with questions in individual names but I have a feeling my answer will be to sell it early on b/c a number of these names could potentially get weaker as the day goes on ...
Regarding M&A, market pundits argue that the current BHP hostile bid for POT, rumors surrounding NOK, and the agreement between INTC and MFE indicate that “A-ha! Now corporations – flush with cash – will kick off a massive spending spree…now we know, with certainty, where all that money will go.” Maybe, maybe not. Sounds a little too glib to me. In our recent low-volume, low-M&A environment, it’s easy to attribute hyperbole to recent action, but I would argue that “green shoots” of M&A do not necessarily a recovery make. The experts would have us believing that the corporate coffers are now open and are extremely bullish on this recent action, but my personal emotions are tempered by other worries, including unemployment (see below). In the end, as always, we shall see…
Speaking of “other worries,” this caught my eye the other day…nothing new to the “state and municipal default” story, but it’s always worth a reminder that the potential is out there:
Recession Continues to
Budgets; State Responses Could Slow Recovery Batter State
By Elizabeth McNichol, Phil Oliff and Nicholas Johnson
The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps. At least 46 states struggled to close shortfalls when adopting budgets for the current fiscal year (FY 2011, which began July 1 in most states). These came on top of the large shortfalls that 48 states faced in fiscal years 2009 and 2010. States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs. States face:
Budget problems in 2011. Fiscal year 2011 gaps — addressed with spending cuts and revenue increases by most states — totaled $121 billion, or 19 percent of budgets in 46 states. This total is likely to grow over the course of the fiscal year, which started July 1 in most states. It may well exceed $140 billion and would be higher still without federal assistance. The fact that the gaps have been filled and budgets are balanced does not end the story. Families hit hard by the recession will experience the loss of vital services throughout the year, and the negative impact on the economy will continue.
Uncertainty for the future. States’ fiscal problems will continue in the current fiscal year and likely beyond. Already 39 states have projected gaps that total $102 billion for the following year (fiscal year 2012). Once all states have prepared estimates these are likely to grow to some $120 billion.
The effects of gaps in 2010 budgets. These new shortfalls are in addition to the gaps states closed in their fiscal year 2010 budgets. Counting both initial and mid-year shortfalls, 48 states addressed such shortfalls in their budgets for fiscal year 2010, totaling $192 billion or 29 percent of state budgets — the largest gaps on record.
Declining federal assistance. Federal aid to states provided in the American Recovery and Reinvestment Act has lessened state cuts in services and tax increases. But the aid is now mostly gone; only about $40 billion remains to help with 2011 fiscal problems. The federal government could avert deep additional budget cuts that would further harm the economy by extending assistance over the period during which state fiscal distress is expected to continue rather than cutting it off before states have recovered.
Combined gaps of $260 billion for 2011 and 2012. These numbers suggest that states are dealing with total budget shortfalls of some $260 billion for 2011 and 2012. When all is said and done, states will have closed shortfalls of more than $500 billion since the start of the recession.
Regarding unemployment data, plenty of numbers have been floating around but I recent read something in the Boeckh Letter that stuck: In order to keep up with labor market growth,
needs to create 240k jobs per month. And in order to get back to even relative to our current recessionary environment, we’d need to create 365k per month for three straight years. That’s a bit sobering… Given the potential for deflation (no demand) and higher taxes in our immediate future, just where exactly is the growth going to come from? America
BCAP highlights the weakness in Copper this morning…many investors see Copper as a proxy for global growth. According to BCAP, **FOR COPPER, THE 10% DECLINE IS THE LARGEST SINCE THE TURN OF THE CENTURY & A STARK CONTRAST VS. SEASONAL 30% TYPICAL IN SUMMERTIME**
MSCO says oil may rise to $100. BofAMLCO takes down
smallcap estimates. CITI cuts EV. DBAB cuts PH. Soleil ups TEG. U.S.
S&P 500 PreMarket 8:30am (last/% change prior close/volume):
Today’s Trivia: What is the origin of the word “Jaywalker?”
Yesterday’s Question: On the 2001
census, ~53k people listed their religion as what? New Zealand
Yesterday's Answer: In the 2001
census, 53,000 people listed their religion as “Jedi.” New Zealand
Best Quotes: Good Morning - Futures closed very cheap to fair value due to futures hedges off of an August 1100 call trade in SPX generating 50,000 e-mini’s for sale in last 10 minutes of trade. Market is acting like it’s trading higher on headlines out of German Bundesbank raising growth forecasts but in actuality, SPU’s on globex are simply taking back the cheap settlement to fair value, so market looks unchanged so far this morning. Credit: HY +1/4, LCDX +1/8, IG in 1%. Some economic upside surprises,
Germany's GDP grew at its fastest pace in 2 decades, posted a smaller budget deficit than expected. Britain 's GDP rose more than expected. China Mobile and Cnooc both exceeded estimates. Jobless Claims 8:30, Philly Fed and Leading Indicators at 10am, CAT analyst meeting, GGP seeks to send creditors exit plan. AIG said close to testing debt markets with 1st new issue in 2yrs post Aug9th filing. GM files long awaited IPO, SEC now has 30 to 90 days to review. GM seeks to sell Pref's to raise capital and existing holders will sell the common. Breakdown: Govt 61%, UAW 17.5%, Taiwan 11.5%, Bonds 10%. After yesterday’s lack of economic releases, we make up for it today. First up at 7:30 am, is the release of initial jobless claims for the week ending August 14th. Jobless claims are likely to come in flat at 484k. At 9:00 we will get two economic indicators: Philly Fed and the Conference Board Index of Leading Indicators. The Philly Fed is likely to decline to 3.0 in August down from 5.1 in July. After declining by 0.2% in July, the Conference Board Index of Leading Indicators is expected to rise 0.2%. Technically, SPU stil trading in short term band between 1080-1100, with two rejections of 1100 in last two sessions. I still think rallies are for sale. Have a good one. (BofAMLCO commentary) Canada