Wednesday, September 8, 2010

Morning Note...

Futures reversed initial weakness (as European stocks recovered) and are currently up ~20bps ahead of today’s anticipated Obama stimulus speech.  (Bear in mind, nothing Obama says will be voted on before November, so it will have little actual effect outside of the rhetorical.  Speech is due at 2:30pm)  Europe rebounded on a successful Portuguese debt auction in the face of the widest credit default swaps spreads on record in Ireland.  Additionally, a Bloomberg article speculates that the ECB is buying up the debt of troubled EU countries, thus ramping up bind purchases in order to stabilize the European market.  This morning’s Wall Street Journal headline discusses increased healthcare costs, and probably tilts public opinion further away from the Democrats leading into midterms.  Meredith Whitney last night said she expects 80,000 Wall Street job cuts within the next 18 months.  Bank of Canada raises key interest rates to 1%.  Oil is slightly (10bps) higher, Gold is down 10bps but hovers near breakout territory, and the USD is slightly weaker by 10bps.  The Japanese Yen (JPY) hit a 15-year high against the USD and Asia – led by -2% in Japan – was weaker overnight.  Treasuries are slightly weaker and thus yields are higher.  The Fed’s Beige Book release is set for 2pm. 

Good to see BTIG’s Mike O’Rourke back in the saddle, and last night’s note summarized the past few sessions quite nicely:

It has been an interesting 7 trading sessions since we last published a note.  The S&P 500 has rallied 4.25%, including today’s selloff.  The yield on a 10 year Treasury has actually risen 10 basis points, including today’s bond market rally.  Gold has rallied nearly 2%, but more notable is that the metal appears to have set the stage to breakout from a 4 month consolidation to new all time highs.  Gold is screaming inflation and Treasuries are screaming deflation and the irony of that is not lost on us.  We view them both as indications that there is lots of money out there looking for a home but there is still fear related to owning equities.  As usual, we expect such fear to be a positive for equities.  In the interim, it will be good to see the inflation/deflation battle waged in the very strong momentum moves in Gold and Treasuries.  It is highly unlikely that both will simultaneously sustain their current moves.  Some will argue that they both represent flight to quality bids and therefore might both be sustainable.  To refute that one need only remember that Gold’s flight to quality bid post Lehman in October 2008 was quickly erased by a 25% decline in 3 weeks, when deflationary fears began settling in.  This time around we expect Gold to be the victor.  The deflationary threat in the economy still lingers, but the Fed’s decision to reverse its exit strategy during its last meeting and conduct replacement purchases of assets will likely continue to keep deflation at bay.

More important than that, the rally in the equity markets over the past week and a half were catalysts behind the move.  The sequence of events started with Chairman Bernanke’s Jackson Hole speech.  To us, the key takeaway is that, as a result of the refinancing boom, the FOMC’s exit strategy of letting its asset portfolio mature and be pre-paid was advancing at double the rate the Fed expected in March.  Considering the soft economic data, the Fed could not allow the exit strategy to accelerate as it had been, thus explaining the FOMC move.  The ensuing economic data released last week broke in favor of the Fed Chairman.  The better than expected ISM Manufacturing report was led by an employment component that tied readings in 1983 and 1978 for the highest reading  in 37 years.  That was followed by the jobs report that had several important positives.  Besides beating expectations, the previous two months experienced upward revisions of 123,000 jobs, which is important when the economy is only adding approximately 90,000 jobs per month.  Another positive is that over the past 6 months, the private sector has added an average of 114,000  jobs per month, and the Census only has 82,000 (NSA) jobs to wind down in coming months.  The Household survey, which lost an average of 165,000 jobs per month over the previous 3 months, added 290,000 jobs.  While these figures are still below preferred levels of a consistent 150,000-200,000 non-farm payrolls jobs per month necessary to bring the  Unemployment Rate down, they are far better than the  trajectory many believe we were heading on a couple of weeks ago.  In addition, with the Fed halting and backpedaling part of its exit strategy and a likely upcoming attempt by the Federal government to buy votes over the next seven weeks after neglecting the economy all year, it will certainly make for an interesting  Autumn.

On the topic of midterm elections, I’d like to offer one unconventional thought from a weekend spent on vacation at the Jersey shore.  (Suppress the snickers…it’s not like THAT Jersey Shore…none of those people are actually from Jersey.)  In NJ, Chris Christie became the first Republican governor in 12 years, and succeeded Wall Streeter Jon Corzine, who left fiscal issues unresolved and essentially taxed the wealthy and the corporations right out of the state.  At first blush, and facing massive debt, Christie was decidedly panned as he made tough cuts.  He sought to promote austerity rather than simply re-establish pro-business practices.  But an interesting thing happened – again, anecdotally, and just from talking to middle-class folk – as people began to agree with the austerity and to embrace the cuts as necessary and proper.  People now seem to be universally behind Christie and are ok with “taking their medicine.”  I mention this because the general assumption is that a Republican midterm victory in the House will be a boon to Wall Street, as pro-business comes to the fore.  However, beware the Christie path…what if a Republican victory means a massive elimination of stimulus and increased austerity?  What then for equities in the short- to mid-term?  Food for thought…  

VOD to sell its stake in China Mobile for $6.6B.  ALTR raised Q3 guidance last night.  AMZN reports +62% year-over-year same store sales.  AEO will see a share decrease of 1M shares in the S&P400 tonight.  BERN urges CSCO to initiate dividend.  ARMH is a rumored AAPL takeout candidate.  BP rating upgrade at Fitch.  MGM upgrade at Soleil.  PVH higher on earnings.  UDR 13.5M secondary.  BMY to acquire ZGEN for $9.75/share.  GSCO ups COST, SPLS.  UBSS ups CTV.  BofAMLCO cuts BLL, PTV, WY, LMT, RTN, V.  CITI cuts BAX.  GSCO cuts DKS.  HSBC cuts AWK.  OPCO cuts HRB.  Soleil cuts LVS.  UBSS cuts INTC, HPQ. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Today’s Trivia:  Sonkaj√§rvi, Finland hosts the World Wife Carrying Championships each year…what is first prize?

Yesterday’s Question:  What is a “tittle?” (hint, you can find the answer within the question…twice!)
Yesterday's Answer:  A “tittle” is the name for the dot over the letter “i.”   

Best Quotes:  Irish Bank in Capital Crisis Sells Artworks; Others May Follow 2010-09-07 23:00:00.0 GMT By Scott Reyburn
     Sept. 8 (Bloomberg) -- Bank of Ireland Plc is to start selling its art collection after Standard & Poor’s estimated the government-backed recapitalizing of the banking system may cost as much as 50 billion euros ($64 billion).
     The collection, begun in the 1970s primarily to support emerging Irish artists, has about 2,000 works including local favorites such as Paul Henry, Louis le Brocquy and Robert Ballagh. It is expected to raise more than 4 million euros ($5.1
million) in funds for charity over the next five years, Audrey Nolan, the bank’s head of corporate social responsibility, said.
     The sale by the country’s biggest lender by market value, which said Aug.11 its first-half profit fell 66 percent, may be followed by some of its rivals, which also have art collections and made losses in the first half. Bad debts also surged at Allied Irish Banks Plc and Anglo Irish Bank Corp. after a decade-long real-estate boom collapsed during the credit crisis.
Debts could be reduced by state aid or larger asset sales; S&P on Aug. 24 cut Ireland’s credit rating to AA-, the lowest since 1995, and raised its estimate for the cost of the rescue from the previous figure of 35 billion euros.
     “It’s an exercise in face-saving,” Dominic Milmo-Penny, a Dublin-based art dealer, said in an interview. “The banks have to show they’re doing the right thing. It’s not going to have much of an effect on their financial situation.”