Friday, September 10, 2010

Morning Note...

Futures +30bps on light news this morning.  Today marks the close of a low-volume, holiday-shortened week and it’s very likely that theme will continue – barring an unforeseen catalyst – and stocks will limp along our current trading range right through the 4pm close.  Data on Wholesale Inventories for July are due at 10am.  In corporate news, National Semiconductor (NSM; -5%) beat by 2c but lowered forward guidance.  Nokia (NOK; +5%) was upgraded at RBCM but the firm downgraded Cisco.  Asia was mostly higher overnight save for Oz.  Europe flat to mixed at the moment.  Oil +2%, Gold -65bps, and the USD +11%.  Looking ahead, note that the Basel Committee meeting this weekend in Switzerland.  According to Bloomberg news, the “U.S. wants to cap the implementation period for banks to comply with new capital ratios at five years, while Germany wants to extend the period to ten years.”

Obama speaks at 11am today…not sure that’s a great idea given the criticism of his speech earlier this week in which he accused Republicans of partisanship and then played partisan and electoral politics himself by urging stimulus that – had he really thought was a good idea – he could have urged earlier when it actually had a chance of passing.  As a result, the President’s recent comments are seen as little more than jawboning and today will probably mean more of the same.  Unfortunately, his relevancy is coming under fire into midterm elections.  Not good for any of us. 

Regarding tomorrow’s anniversary…for those of us who were in NYC and witness to September 11th’s tragic events, it’s worth taking a moment to reflect back and remember friends lost.  Hard to believe it was nearly 10 years ago – that day is seared in my head like it was yesterday…

For the Gold bugs, here’s something interesting caught by the guys at CSFB:

Bangladesh and Thailand join ranks of official gold buyers

Bangladesh buys 10 tonnes direct from IMF

The IMF this morning disclosed that it had sold 10 tonnes (321,507 oz) of gold to the Bangladesh Bank, the country’s central bank. The sale realised $403 million for the IMF, equating to just over $1,253 /oz. The transaction almost quadrupled the country’s total gold reserves to 13.5 tonnes (434,000oz).

This is the fourth sale made direct to counterparties by the IMF under its ongoing disposal programme, following previous sales to India (200 tonnes), Sri Lanka (10 tonnes) and Mauritius (2 tonnes). With a further 88.3 tonnes having been sold in to the OTC market (as of the end of July), the Thailand takes 15.5 tonnes from the market

While the Bangladeshi purchase has made headlines today, of just as much interest is the fact that the Bank of Thailand has also been an active buyer of gold from the market. According to IMF data Thai official reserves of gold increased by 15.55 tonnes (500,000 oz) in July to 99.5 tonnes (3.2 million oz) – a sizeable rise of 18.5%. Even so, based on the Bank of Thailand’s latest weekly reserve report, gold still only accounts for around 2.5% of the country’s total international reserves of $157 billion.

The Bangladeshi and Thai activity in the gold market continues a trend that has evolved post the global financial crisis, of Asian central banks increasing their reserve holdings of gold.

In terms of commentary, I really liked the presentation and honesty of yeterday’s Hedgeye note.  If nothing else, it’s very well-written, calls out some global political nonsense, and offers a solid perspective to chew on:

This morning's global macro risk management setup feels as strange as it has since September of 2007.

As most market historians will recall, the S&P 500's run from Labor Day of 2007 until the first week of October 2007 was the final countdown to get out. That's not to say that the shorts who pressed the August of 2007 lows didn't get run over in September of 2007 by the way. I, for one, got crushed.

I'm not one to say that market history repeats, but I am a big believer that patterns of market behavior rhyme. Think about both the absurdity of the prices paid by Private Equity and LBO firms in 2007 and then rewind the quality of yesterday's "rumor mill" about everybody buying everybody. The sad reality of our business is that the hopes and desires of low quality market players trying to make a living on rumors is many years outlived by actual performance.

The performance of the S&P 500 from September 4th - October 8th of 2007 was +4.3%. The month-to-date performance of the S&P 500 for September of 2010 is +4.7%. You can tell me what parts of the "M&A" rumor mill is driving this low-volume rally to lower-highs. I can tell you that it's not insignificant.

I can also tell you that there are significant and strange developments occurring across global markets this morning. Remember, managing the risk associated with a rally in US Equities requires analyzing the multi-factor and multi-duration price action that's driving this globally interconnected ecosystem. The best I can do this morning is summarize how strange this is all feeling by major geography.

Before I dig in geographically, it's worth mentioning that there is one major factor governing news-flow worldwide right now - professional politicians fundamentally believing that they are the arbitrators of all our desires. Strange.

1.       Asia
Other than Japanese equities crashing again (Nikkei 225 down -20% from its April peak) and few in the Manic Media acknowledging that Japan is a much larger long term issue than Greece, isn't the following comment from Japan's Finance Minister, Yoshihko Noda, this morning strange?

"I feel strange that China can buy Japanese government bonds while Japan can't buy theirs."

Capitalistic note to bureaucratic self: the world's largest creditor can buy whatever they damn well please. You, Captain Debtor Nation, shouldn't feel strange at all now that you have compromised and constrained your economic system with systemically impairing levels of leverage.

By the way, this is how a spokesman at China's Foreign Ministry, replied in Beijing today. "We will decide whether or not to buy one country's bonds according to our own needs." There's nothing strange about that.

2.       Europe
Watching Bloomberg TV's Andrea Catherwood interview Greece's Director General of Public Debt Management Agency, Petros Christodoulou, this morning was beyond strange. Never mind what a professional politician is doing with a title that long, what in God's good name do market participants expect him to say about Greece's debt?

In Q2 of this year, we introduced a Hedgeye Macro Theme called "The Sovereign Debt Dichotomy." The long term cycle work on the sovereign debt default cycle was backed by Reinhart & Rogoff and our core thesis remains long term as cycles like these are. The bottom line is that sovereign debtor nations will be forced into restructuring or default at different points in time for the balance of the next 3 years. They won't all happen at once!

Is it strange that Denmark (up +22% YTD) is trading up +0.79% this morning and Greece (down -28% YTD) is trading down again after getting clocked yesterday? Is it strange that Petros "rules out restructuring"? or is it just strange that a professional politician like this actually matters to markets?

3.       USA

Price action in US Equities is definitely improving. I can call that strange - I certainly did in 2007! But strange can remain longer than a short seller can remain solvent. Learning from my mistakes and evolving the risk management process is where I'm focused on improving.

Both the weekly ABC/Washington Post Consumer confidence (-43 vs -45) and MBA Mortgage Application (+6.3% week-over-week) reports were better than expected yesterday. For the two big things that matter for US economic growth (consumer spending and housing), there should be nothing strange about the fact that the only moves I made in the Hedgeye Portfolio yesterday were buys and covers. As facts change, I need to.

While these data points appear strange in the immediate term, they are real. It's also important to Distinguish Our Immediate Term Duration from the Intermediate Term bearish TRENDs we continue to forecast in both US consumer spending and housing.

While I don't think it's strange that the US market won't focus on something like Harrisburgh, PA defaulting on its September 15th payment until they actually miss the payment, it's sometimes strange to just think about these things out loud from the fishbowl that is my office in New Haven, CT.

Whether its in CT, IL, or AZ, these states and the municipalities that they house are going to be feeling more and more strange as they march down the Road To Perdition that many European states have already trekked. Will Illinois be the next Greece?  Will the US Federal Government be forced to bail out municipalities and states like the EU had to with Greece, Spain, and Portugal?

If China is selling US Treasuries and buying Japanese Government Bonds, where will we get the money? There should be nothing strange about asking yourself these risk management questions.

My immediate term support and resistance levels for the SP500 are now 1086 and 1107, respectively. If 1086 can hold, I'll continue to be far less aggressive with my shorts this September than I was in 2007. This Time Is Different.

KR was mentioned positively in Barron’s.  JEFF ups CSC.  LULU beats by 6c and raises 2011 guidance.  NOK upgrade at RBC.  CITI ups RBS.  SWHC beats by 1c but guides lower.  TRW announces 7.5M offering.  BSX cuts at MSCO.  RBCM cuts CSCO.  KBWI raises CMA.  JPMS cuts SFD.  Yesterday’s news of a DB capital raise continues to raise questions for the European banks. 

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

Today’s Trivia:  What is hotter, a lightning strike or the surface of the Sun?

Yesterday’s Question:  The choice for state bird of Utah is somewhat…odd.  Why?

Yesterday's Answer:  So it turns out that the state bird of Utah is – huhn? – the California Gull.  Go figure. 

Best Quotes:  Trader commentary…Yesterday the S&P 500 advanced 0.5%, on light volume.   I don’t see how that trend will change today.   The telecomm and health care sectors led the way. The basic materials sector was the one that finished in the red. In the fixed income market, Treasuries sold off after a weak 30-year bond auction. The 10-year sold off 10bps to 2.76% and the 30-year 11bps to 3.84%.   The two day sell off in bonds is a welcome sign to the equity market.   Risk appetite may be showing some signs of life.  It’ll take more of a substantial roll in order to get the asset allocation chatter moving, but it’s a start.   Mortgage rates inched up for the first time in a while.   Maybe higher rates will help push some folks into the market afraid of a spike in rates,   although historically money is still cheap.   AMG data shows broad inflows into fixed income, equities had a nice bounce back with the markets.  Equities had $18bln in outflows for the month of August.  1/3 of those dollars returned this week.   We get wholesale inventories at 10am; the market is looking for a 0.4% MoM increase in June after a 0.1% increase in June.   1110 is unchanged on the year.  Seems like we’ve had a ton of moves this year, and to be unched at this point feels like a win.  Obomb talks today on the economy, expect nothing new there(maybe some shorts put on for a trade).  Buy the dips.  Market tries to get into the green for the year today.”