Thursday, September 16, 2010

Morning Note...

Futures ~40bps lower this morning despite in-line Producer Price data and slightly better than expected Initial Jobless Claims.  Month-over-month PPI for August came in at +0.4% vs. the +0.3% expectation, and the year-over-year reading was spot on at +3.1%.  Regarding Initial Jobless Claims, recall that there was some concern surrounding last week’s number because of the Labor Day holiday and its estimated effect.  As a result, one would think that this morning’s 450k reading – which beat the 459k expectation – would have been met with more positive sentiment.  Maybe, however, an even better number was expected?  Regardless, I’ll guess as to three reasons why investors aren’t exactly jumping for joy this morning.  First, don’t underestimate the sentiment-effect of global economic bellwether stock FedEx (FDX; -3%), which missed on earnings, announced 1700 job cuts, and issued downside guidance.  Second, perhaps the damper on equities this morning is the new record high set by Gold this morning at ~$1275/oz.  Gold certainly seems to be telling us something about the general state of the world, and smarter commentators than I can tell you exactly what that is, but I can at the very least convey that Gold’s move certainly leans cautious-to-bearish in terms of a read-through on investor sentiment.  Third, investors continue to digest the recent political results, which are less positive for the GOP (and thus less bullish for equities) than perhaps expected.  In other news, Asia was lower overnight as investors continue to digest the huge yen intervention (recall that the BoJ has been selling yen and buying the USD).  Europe is trending roughly 50bps lower as UK retail sales disappoint.  Oil is down ~1%.  The USD is down 20bps, and previously discussed Gold is up 50bps. 

In terms of market commentary, good thoughts on the consumer from Gartman this morning:

THE CONSUMER IS INDEED “A’ HUNKERIN’ DOWN:” We have argued time and time and time again in these pages over the course of the past many months that the American consumer is, as we say here in the South, “Hunkerin’ down.” That is, the consumer is doing what he or she can do, and as swiftly as he or she can, to patch up his or her balance sheet. The consumer is cutting back on expenditures; is driving less; is buying less and is saving more and more and more of his/her income. This process of “hunkerin’ down” isn’t going to end any time soon, for the damage done to the consumer’s collective balance sheet as equity prices melted several years ago and as housing prices followed has wrought havoc upon the collective psyche of the consumer… and has especially done so to the Baby Boomers who are facing retirement in the eyes and have blinked first.

This process of “hunkerin’ down” was perhaps never more evident than it was earlier this week when retail sales were reported and they were, at first blush, stronger than expected. However, tearing into the report a bit we noted this striking aspect of the report: they were buying what they needed and only what they needed, avoiding the up-scale non-necessities en masse. Good, gas, medicines and clothing purchases were up 2% and this was the second month in a row that these necessities were up sharply. However, the “nice things in life”… the purchases at restaurants; furniture; autos et al… were down 0.4% and they’ve been down for three of the past four months. Shaving cream and toothpaste? yes… we need’em so let’s buy’em. But high end furniture? Not so much.

Oh, and the savings rate? It’s going up… and up and up. Back in ’05 when the world was taking the US to task for not saving enough, the savings rate was down to just barely above 1%. It has been rising, almost relentlessly since. By mid-’08 it was 2%; by mid-’09, 5.5% and recently 6.1%. We have said for years that one of the biggest problems that the world and the US shall face in the coming years will be that the American consumer’s savings rate will soon be back to 8-10% and that where we were taken to task for not having saved enough we shall soon be taken to task for saving far too much. We stand by that assessment. It’s coming; it is only a matter of time.

Interesting anecdotal note from MSCO last night – seems they did an informal survey of the buy-side:

conversations w/ various senior pm's / traders, key(general) takeaways

-not out of the woods yet, not '08 or a 'double dip' but still concerned, positioning defensively

-suspicious of a two wk september 7% rally, paper coming in size

-worried about high correlation not softening (realized is also high), wonder if market is under-pricing probability of an 'event/sell off' b/w now and mid oct(long gamma?)


-risk on is the trend post labor day, since '90 there have been only six instances when the sp500 has been up at least 1.5%  by mid-september, in those instances, gains were held throughout september and into october...

what we see

-convincing trend / 'buy in' by investors that china, brazil, korea present higher growth, lower valuation, better risk reward than other equity markets

sp500 is at the top of its 4m trading range, a break above could see forced participation.

jon garner(em strategy) and jerry lou(china strategist, has  a year end hang seng 18% upside pt) like china,  hangseng futures open interest increased $2.6B in the first two weeks of sep,  hsi dec '10 110% calls are sub 1.00%

brazil ibov could see selling pressure over the next week, ibov oct '10 97%-92% put spreads are less than 1.00%, > 5:1

AIR beats by 5c.  ERIC estimates lowered at Svneska.  FDX misses by 1c, guides Q2 lower.  PIR beats by 1c.  SI added to GSCO Conviction Buy List.  WMB lowers guidance.  BCAP ups F.  CSFB ups NFLX.  JEFF ups MRX.  BARD ups IEX, RBC.  BCAP cuts LEA, BWA.  OPCO cuts SVNT.  UBSS cuts NETC. 

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

Today’s Trivia:  What is the important distinction – other than the most obvious – between male and female mosquitoes?

Yesterday’s Question:  In 1943 the Philip Morris company ran an ad that actually acknowledged smokers cough.  But what did they claim caused the cough?

Yesterday's Answer:  The Philip Morris ad claimed smoker’s cough was actually caused by smoking other brands…

Best Quotes:  The highlight headline of the day was the Japanese intervention in the currency markets by selling Yen and buying Dollars.  If the situation was reversed  (buying Yen/selling Dollars), there would be an obvious concern in the Equity market that carry traders who are short the Yen would be forced to derisk and sell U.S. assets to cover the shorts.  The current intervention should be much less ominous, but market participants chose to exercise patience and watch for any unforeseen potential consequences.  Nobody wants to get caught paying up at an important resistance level in a short term overbought tape.  Instead, investors appear to be taking the “white’s of their eyes” approach.  They want to wait until the last possible minute and buy only if a breakout is occurring.  As they wait, there is a plethora of economic data due over the next couple of days, which will offer several chances for inspiration for a breakout or a breakdown back into the consolidation that has formed over the past 6 months.  --BTIG