Friday, August 20, 2010

Morning Note...

**Please note that I am out Monday morning and thus there will be no Morning Note...**

Happy summer Friday.  As you might imagine, things are quiet…  Futures are down ~50bps on U.S. earnings releases, possible risk-trimming ahead of the weekend, and chatter from the ECB that markets are too fragile to begin to exit from its stimulus policies.  In earnings news, DELL (-2% premkt) beat by 2c and reaffirmed 2011 guidance.  Hewlett-Packard (HPQ; -1%) is trading lower despite posting in-line numbers.  Retailer Ann Taylor (ANN) is lower on earnings and news of a buyback.  Gap Stores (GPS; -2%) also announced a buy-back but big inventory build issues remain.  In other single-stock news, MSCO downgraded Blackberry-maker RIMM and Tyco (TYC) is trading higher on news it will replace SII in the S&P 500 index.  Note that Asia was weaker overnight, led by -2% in Japan and -1.7% in ShanghaiEurope is tracking down ~1% thus far.  Oil is down 1% and Gold is up 50bps.  The USD is higher (+85bps) against a basket of currencies.  The euro is lower, at 1.2694 vs. the USD.  Bond prices are once again higher as yields continue to drop.  The ten-year currently yields 2.56% and the two-year yields .48%.  As many market experts have wondered of late, what is the bond market trying to tell us?  Whatever it is, for the moment, it ain’t pretty…

Here’s more on retail from BCAP:

1)  ARO earnings in-line, 3Q guidance looks light, lack of blow up good enough
2)  GPS eps in line, big buyback positive, bear case still in tact (inventories)
3)  FL earnings better but comps worse, watch for guidance on 9AM call
4)  HST enters into new $400M financing agreement
5)  JWN announcing new $500M buyback (~7.3% of mkt cap)
6)  BarCap #1 II Andrew Lazar upping RAH estimates on AIPC acquisition
7)  Barron's positive on PEP citing emerging mkt growth and cost saves
8)  UA believe it or not sentiment trying to get a little better, competitor +
9)  HIBB missed eps on SG&A spend.  DKS could be weak on promotional env. 

Regarding yesterday’s jobs disappointment, BTIG’s Mike O’Rourke had this to offer:

Claims Games.

A week ago we warned that “Investors need to be aware that the next 8 weeks through the first week of October are the toughest stretch of seasonal adjustments for this data for the year.  On average, the adjustment will add 24% per week.”  So although we are disappointed to see a 500,000 print on Initial Jobless claims, we are not surprised.  On one level, we are actually modestly encouraged that today’s Non Seasonally Adjusted (NSA) reading edged out the reading of two weeks ago to be the new 3rd lowest print since September 2008.  As we did last week, we reiterate that printing new lows in the NSA is inconsistent with a reversal of trend.  In addition, with the exception of the Labor Day week, this week has the highest seasonal multiplier of the 8 week period.  The next two weeks will also be tough, so we expect prints in the vicinity of 500,000 but improvements should begin in September when the seasonal multipliers start getting smaller.  Last year, the week reported today (2nd week of August) was the peak week for the Seasonally Adjusted  number for this period where the seasonal multiplier weighs heavily.  The next two weeks made small improvements and additional improvements materialized in September.  Thus far, we appear to be following a similar pattern.  Additionally, back in 1983 during that recovery, there was a similar spike in the August Seasonally adjusted data and the 2nd week was the peak.  We have to admit we don’t expect the rapid improvements that occurred in Q4 1983, but today’s market is not currently on track for a 17% gain as it was in 1983.  The Philly Fed data is not as easily explained and will keep the focus upon the other regional manufacturing surveys as they come in to see if they offer confirmation. 

In other intelligent commentary, this was posted earlier in the week by Hedgeye, but is worth a read for its consideration of inflation in a world where everyone is consumed by deflation:

Yesterday (August 16th) the S&P 500 closed flat on the day on anemic volume; it feels like everyone is on summer vacation.  We learned yesterday that the Chinese are selling their holding of US Treasuries in favor of Europe and Japan.  We are financially dependent on foreign lenders and our biggest creditor is saying "no mas" - on this news the S&P 500 traded flat on the day.   

The dollar sent the right message yesterday, declining 0.50% and it is headed lower.   The actions of the Chinese are telling the rest of the world to flee dollar-denominated paper assets.  This is a problem for the dollar as the Federal Reserve appears to be a lender of last resort for the U.S. Treasury.  While the selling of foreign-held dollar-denominated debt has been orderly so far, the inflow of foreign-held dollars into the U.S. will debase the dollar and lead to higher inflation.  Despite what the FED sees (it's focused on the "core" figure), the signs of inflation abound in the economy. 

(1)    Gold traded higher yesterday (looking to gain for a fourth day in a row) and has rallied 3.1% in the past month.
(2)    Copper traded up 0.8% yesterday and is up 13.3% over the past month.
(3)    Last Friday, the US CPI number crept higher and will again in August.
(4)    Today's UK inflation reading is above the BOE target rate
(5)    The US PPI number will also post an upside surprise

Since the US does not have the balance sheet to execute on any creditable plan and the world has little faith in our political leaders, it's hard to see a way out.  The "Fiat Fools" in Washington have already done everything in their power to spend or to create whatever money was needed to prevent systemic collapse in 2008. 

Yet, today we seem to find ourselves in a precarious position.  While the situation is not overly similar to 2008 (yet); Lehman Brothers' collapse is one important difference that shocked markets. Many facets of the economy are on a knife edge: housing is once more coming to the center of people's attention as a concern and unemployment remains at elevated levels. 

Should inflation meaningfully take hold, it would be a death knell for the margin story embedded in the current estimates for the S&P 500.  The only action that will expeditiously calm the markets is more spending or creating of U.S. cash (which creates inflation).  Daryl Jones has written extensively on this; our economy is addicted to foreign financing just as acutely as it is addicted to foreign oil. 

JPHQ cuts China growth estimates.  COCO -5% on earnings.  CRM +7.5% on earnings.  HRL beats by 4c.  INTU beats by 5c.  MRVL reports in-line and announces $500M buy-back.  RIMM downgraded at MSCO.  BCAP ups TX.  DBAB ups MWV.  GSCO ups RSG.  UBSS ups SYMC.  FBRC cuts MFE.  GSCO cuts SRCL.  JEFF cuts GLW. 

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

Today’s Trivia:  What do the letters in “M&M’s” stand for?

Yesterday’s Question:  What is the origin of the word “Jaywalker?”
Yesterday's Answer:  “Jay” was once slag for “foolish person.”  Thus, when a pedestrian ignored street signs, he/she was referred to as a “jaywalker.”   

Best Quotes:  BofAMLCO trader note… Good Morning - Markets lower to kick off the day.  AMG data shows that equities continue to be the black plague of investing.   Equities suffered their largest weekly outflows since July 7th and gave back all of the inflows for the prior month.  There has been a lot of talk about the low yields on the bond market, but it appears there is zero confidence that the economy is improving at all.   Therefore it seems like the asset allocation trade is a long way off.   M&A has been a big topic.  In a healthy environment I'd say it is a good thing.  Companies have historically high levels of cash and they are starting to spend, although it seems like it wont be to the benefit of a dividend or buyback.   Also the negative side of M&A is unemployment.   I watched it first hand, mergers lead to job loss.