Tuesday, September 21, 2010

Morning Note...

Futures ~25bps higher this morning as U.S. Housing Starts (598k vs 550k estimate) and Building Permits (569k vs 560k estimate) surprise to the upside and European bond auctions prove successful in both Ireland and Greece.  As a result, the EUR is bid up to $1.3118 against the USD and European markets are up ~75bps on average.  The other big story of the day – of course – is today’s upcoming 2:15pm FOMC decision.  The general consensus expectation is “no change,” but there are some growing rumblings of a potential easing.  Or, at the least, the FOMC may set the table for easing at the November 2-3 meeting.  In Asia, markets were mixed overnight and the Chinese yuan continues to creep higher against the USD.  In corporate news, Bank of America Merrill Lynch (BAC) announced up to 400 job cuts, ConAgra earnings disappointed (-6%), and Clorox (CLX; flat) announced the sales of its auto care business.  Oil is down 70bps. Gold is down 15bps but remain near its $1280/oz high.  The USD is roughly 30bps lower.  All eyes on 2:15pm…

Regarding the European bond auctions, Barclay’s posted a quick summary this morning:

EUROPEAN DEBT AUCTIONS – Ireland Strong, Greece Good, Spain Slightly Disappointing
•       IRELAND AUCTION … Very strong auctions w/full size done. 2014 bond saw the strongest demand, w/bid-to-cover at 5.1x. 2018 bond also well received, coming in 15c over at stop and 25c at avg, bid-to-cover 2.9x.  Ireland CDS tightened as a result.  Viewed as most important of 3 European auctions today, in light of recent concerns re: Irish banking system & longest duration debt issued.
•       GREECE AUCTION … bills auction demonstrates strong increase in demand, w/bid to cover ration 6.25 vs previous 3.85.  Sld a total of €390M in 13-week t-bill yield 3.975% vs previous auction 4.05%
•       SPANISH AUCTION… slightly disappointing given lower bid to cover ratio and higher yield paid …. Briefly took EURUSD lower, though mkt shrugged this result off as much larger issues at hand ….

Good read from FBR this morning in light of yesterday’s NBER contention that the recession troughed in June 2009:

Yesterday the NBER reported that the economy hit a trough in the recession back in 2009.  Although I don't know how you enter a recession with unemployment at 4.7% and exit at 9.8%, I thought it to be a good idea to look at the typical business cycle and the performance of various sectors versus the S&P.  As most know, strength in the Utilities and Consumer staples sectors usually coincide with a down market as investors seek these two sectors for safety, while Energy and Materials should do the worst due to excessive quantitative easing (Phrase of the month is QE apparently) and its subsequent effect on the dollar.  According to the business cycle, the market will need to see financials and consumer cyclicals lead us through the late contraction phase and into an early expansion which are led by Technology and Industrials.  Below is a chart of the performance of the 9 leading sectors' relative strength versus the S&P 500.  As you can see, in the past month to date, Utilities and Consumer Staples, both have which have broken their uptrend in past week, have underperformed the market the most signaling the market is set to take on more risk and the economy is recovering.  All the while the strongest sectors month-to-date are Technology, Industrials, Consumer Discretionary, and Financials. 

So, judging by the performance of the various sectors, we are clearly on our way to recovery and hopefully entering a period of early expansion.  But we have never seen a recovery without the strength of financials and will need that sector, along with technology, to take more of a lead in the market. 

BTIG’s Mike O’Rourke discussed this same topic, and added the political angle given yesterday’s Obama made-for-tv event:

Spin Cycle.

Talk about impeccable timing, NBER officially releases the date (June 2009) of the trough of the Great Recession the same day that the President holds a town hall meeting directed at the business community.  Among those on Wall Street, we probably give the President and his economic policies more credit than most.  We generally supported (and still do) the stimulus and most of the intervention policies as well as the Treasury Secretary when most did not.  When it was passed, we believed the systemic risk warranted it.  While many of the results are not what people wanted, we do believe we are in a better place today than we would have been otherwise.  Most of our criticism has been directed at the loss of focus on economic recovery in 2010.  Now, approximately 6 weeks from a congressional election, the focus is starting to reappear.  The President has decided to take his message to Wall Street through today’s town hall on a business cable television network.  With the exception of one question, all of the questions appeared to come from Obama supporters. 

The bottom line is that the President did not budge on any of his current policies or plans.  When it comes to the most highly watched policy measure, the extension of the Bush tax cuts, the President unequivocally held his ground.  There were times when the President advocated that he is “pro-business,” but it was rhetoric similar to what the President has espoused in the past.  There were feeble attempts by commentators to spin some of the boilerplate rhetoric as a “pivot” or a “tack” to the middle.  Some interpreted the market not selling off as an endorsement, but since the President did not say anything substantively new, let’s not confuse coincidence with causation.  Maybe consolation was provided to those in the audience as they voiced their concerns to the President directly, but as far as the business community he was theoretically targeting, the effort definitely missed the mark.   

QCOM initiated Buy at Canaccord.  BERN raises S target.  TSLA opens Paris showroom.  BCAP ups HIG.  JEFF ups RUE.  GSCO cuts BRS.  JPHQ cuts SAFM.  AAWW ups FY2010 guidance.  CAG misses by 5c, lowers 2011 guidance, and raises dividend.  CBZ announces $100M convert offering.  CWH to offer 5M shares.  CYS to offer 10M shares.  EXAR guides lower.  HCN to offer 7M shares.  HTS to offer 5M shares.  MMYT upgraded at Soleil.  NBR upgrade at GSCO.  NOK lower on new smartphone delays.  SNDK cut at Sterne Agee.  SWKS guides higher.  TCAP to offer 2M shares.  TNAV guides Q1 in-line and guides 2011 lower.  CSFB cuts WFMI. 

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

Today’s Trivia:  What percentage of Americans do not read at least one book a year?

Yesterday’s Question: Under what name was Kool-Aid originally marketed?

Yesterday's Answer:  Kool-Aid was originally marketed as “Fruit Smack.” 

Best Quotes:  Yesterday’s wrap-up from JPM…

Stocks stage an impressive rally, breaking up through not only the technically important 1130 level but also the critical 1140 point as well.  The SP500 ended at a 4-month high today.  Some of the fundamental items cited for the strength today: 1) M&A activity continues to pickup (esp. in tech, where we saw deals involving NZ and ID today); 2) shareholder friendly actions (the robust pace of corporate buybacks was discussed in a Bloomberg article pre-open); 3) couple earnings releases came in strong (LEN beat and on its call spoke of an uptick in activity in Sept while DFS also came in ahead of plan although keep in mind that last week’s disappointing FDX print wasn’t enough to knock the broader tape); 4) Washington/Obama – the president’s performance during the CNBC special this afternoon was received well by stocks (“Obama’s silence is golden” was the Cramer takeaway on thestreet.com) as his tone was viewed as more conciliatory towards business and Wall St.  While he didn’t give ground on the Bush cuts, he did reiterate his intention to cap dividend rates at 20% and left the door open to additional job creating moves (like a payroll tax cut or a cash repatriation holiday); 5) anticipation of the Fed on Tues – there has been increasing talk in the press that the Fed will at a minimum signal further QE coming in the near-term (not necessarily at the Tues meeting, although this is a possibility, but definitely in Nov).  This could explain the fact that both Treasuries and stocks rallied into the afternoon; 6) decent eco #s – the calendar was pretty light, although there were some positive export numbers out of Taiwan (which is being viewed as a positive for the tech sector – see below for details).  That said, today’s NAHB survey fell short.  Despite this list of 6 items though, the newsflow really was remarkably quiet today and the upside catalysts are really just a continuation of trends that have been in place for the last several weeks.  As strong as the move was, aspects of the rally leave a lot to be desired.  Volumes weren’t too heavy and the desk was relatively quiet; there wasn’t a lot of “vanilla” participation behind this move.  Meanwhile, Treasuries rallied along w/equities into the close and gold held in (this is probably due to anticipation of Bernanke tomorrow unveiling new QE measures but equities would still feel better about the sustainability of this stock rally if risk-free assets sold off).  The move today seemed to take people by surprise, the continued ramp into the bell….there is def. some performance anxiety setting in, esp. as we head into the end of the month/Q (the SP500 is up ~9% MTD and +11% QTD).