Thursday, September 23, 2010

Morning Note...

Futures had been lower this morning on weaker-than-expected economic data in Europe, but then took another leg down to -80bps on the 8:30am release of higher-than-expected jobless claims here in the U.S.  In Europe, markets are ~1.25% lower on disappointing Eurozone PMI data – Germany’s PMI was especially disappointing and contributed to an overall September reading of 53.8, down from 56.2 in August.  Further, Ireland’s & Portugal’s bond spreads (vs. the German benchmark) have widened to all-time highs as a debt auction in Ireland was underwhelming.  Thus the euro is weak, European financials are down and credit default swaps on sovereign debt have widened.  On this side of the world, Initial Jobless Claims for the week ending September 18th were 465k versus the 450k expectation and the 453k revised prior reading.  Continuing Claims were 4.489M versus the 4.473M expectation.  Most Asian markets were closed for holidays overnight.  In corporate news, Bed, Bath, & Beyond (BBBY; +5%) beat by 7c and guided 2011 higher.  Drugstore retailer Rite-Aid (RAD; -11%) missed by 7c and lowered 2011 guidance.  Software company Red Hat (RHT; +5%) beat earnings estimates and guides higher.  Luxury retailer Tiffany’s (TIF; -4%) was downgraded at GSCO.  McDonald’s raised its dividend by 11c.  BofAMLCO lowered bank and broker estimates (following DBAB yesterday) across the board on weak summer volumes on Wall Street.  Existing home sales data is due for release at 10am this morning.  Nike quarterly results are expected today.  The Chinese yuan was actually down ahead of this morning’s meeting between Obama and Wen.  Oil -85bps.  Gold +11bps.  USD flat. 

Interesting blurb hit the tape late yesterday:  According to the S&P, total Q2 buybacks for S&P500 companies were up 220% year-over-year and up 40.5% quarter-over-quarter to a total of ~$77 billion.  Of that amount, 27.3% were buybacks in the tech sector.  Warren Buffet also made +/- comments regarding the job market:

Buffett Says His Hiring Is Lagging, Will Continue to Lag 2010-09-23 10:27:18.949 GMT By James Holloway
             Sept. 23 (Bloomberg) -- Warren Buffett, commenting on CNBC, says great majority of his businesses are coming back, railroad will add a fair number of people.
             * Says recession lasting until real GDP per capital comes back
             * Says govt did the “right thing” to get economy going again
            * Small businesses have a reasonable amount of equity

Given the near-certainty of QE 2 (as presented in Tuesday’s FOMC wording), it’s always worth checking in with the guys at Hedgeye for a colorful rant (bold is mine):

"Lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings."
-Ben Bernanke

While it's entertaining, it's also quite frightening to watch the same failed policy makers and the pundits that pander to them fundamentally believe that they understand exactly how this "QE" experiment is going to play out. Fortunately, Ben Bernanke is not one of those people.

Now that they've been liberated from Larry Summers assuring them that he knows exactly what he is doing, here's a simple risk management exercise for Groupthink Inc in Washington today. Consider this part of your post Summers rehab - baby steps guys:

1.       Re-read the aforementioned quote
2.       Then count how many times you hear the media say QE today
3.       Then re-read that quote again before you go to bed tonight

Now we don't purport to have "precise knowledge of the quantitative easing effects" on the US economy either. Einstein himself said that "if we knew what we were doing, it wouldn't be called research, would it?" That said, our fundamental macro research does point us toward Japan's experiment with QE as being an unsuccessful one.

While the United States of America in 2010 may not "precisely" be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day (see below) that overlays the Japanese real estate bubble with ours. *Note the duration.

For really advanced stage rehabilitation from the Academic Dogma that's been driving Ben Bernanke and Larry Summers policy making decisions, you can overlay Japanese Government Bonds Yields (JGBees) with US Treasury Yields (QE Mees). While we don't have "precise" measurements on how low the rate-of-return on America's aging population's hard earning savings accounts can go, we do see ZERO percent as a credible gravitational force.

We'll be expanding our Japanese research effort in Q4, but if you'd like a taste of the contrarian Hedgeye cool-aid, please send an email to and we'll get you a solid report from our Hedgeye Jedi, Darius Dale, who punched out a not yesterday titled, "Japanese Pensions: Risks to the Global Economy."

Post-rehab students of objective macro-economic research have learned that the Japanese demographic curve started to age before America's baby boomers did. Importantly, this doesn't mean America can't age in due course. Advanced research studies on campus here in New Haven have revealed that time, as a risk management factor, is actually quite hard to reverse.

All the while (alongside time), there's this other little research critter we monitor here at Hedgeye called price. Again, this is getting into the really advanced stuff folks, so try to "dumb this down" if you attempt to explain this to anyone in Congress, but TIME and PRICE are significant factors in a modern day risk manager's search for more "precise" knowledge about future probabilities.

Now let's go to the future state - if we really want to dial up Washington's fully loaded rehab research engine we gotta go where Heli-Ben has never gone before. As Buzz Lightyear would say, "to infinity and beyond" - the cosmic galaxy of the hedgie universe - REAL-TIME PRICES!

I know, I know... this is deep. But let's suspend disbelief for a moment and take a gander into the cosmos of Hedgeye REAL-TIME PRICE research and look at what we see:

1.       Currencies: The US Dollar is down for the 14th week out of the last 17, breaking to lower-lows that we havn't seen since mid-April when chaos theorists in New Haven said something about May Showers. Sounds serious, because when you Burn The Buck at the stake, it starts to become a very bad thing - importing crazy critters that Bernanke has never seen (like inflation, shhh...).

2.       Bond Yields: US Treasury yields are getting pulverized again this morning on the short end of the curve, with 2-year yields in America hitting their lowest levels ever. Ever, of course, is a long time... and while we can't tell you "precisely" how poorly this ends for a lot of people in this country, we can assure you this ended poorly in Japan.

3.       Equities: US stocks have backed off of the line I said I was going to walk this week (1144 in the SP500), leaving our intermediate term TREND line of resistance intact. Whether or not the perma-bulls want to admit that lower-highs in everything US equities since 2007's leverage-cycle-peak matter or not is something that Nikkei bulls in Japan have been powdered by since Gordon Gekko's last 1980's dance.

QE ain't for me.

My immediate term TRADE lines of support and resistance for the SP500 are now 1127 and 1146, respectively.

Best of luck out there today,

DBAB positive AONE.  GSCO cuts TIF.  BMR commences 13.5M share offering.  JPHQ cuts CGV.  CPRT misses by 5c.  PIPR cuts CVVT.  NEWN reaffirms guidance.  BMOC upgrades NVDA.  O announces 3.M share offering.  WPZ announces 8.25M offering.  COV raises dividend 20c.  GSCO ups AMTD.  MSCO ups WCRX.  UBSS ups ENDP.  BofAMLCO cuts BCRX.  GSCO cuts OXPS.  MSCO cuts FRX. 

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

Today’s Trivia:  Who is Hector Boiardi?

Yesterday’s Question: Obviously I’ve been researching the benefits of reading to my newborn daughter…what percentage of American inmates are illiterate?

Yesterday's Answer:  60% of the nation’s inmates are illiterate. 

Best Quotes:  From BofAMLCO…  “Good Morning - Concerns about Ireland triggering weakness in Europe, specifically in the financials and said weakness is currently rippling into the States.  Jack Welch on CNBC this morning joining the recent parade of business leaders, CEOs, etc. to come on the show the tear apart the administration's anti-business policies.  Our Guy Moskowski is cutting numbers on the banks due to the summer doldrums - no surprise.  The front-end of the week proved very positive as the SPX rallied sharply through 1130, posting more than a 2% gain for the week.  Given the early-Globex weakness today, the SPX is about to retrace the gains from Monday and Tuesday.  All will be forgotten if the jobless claims data and existing homes sales beat expectations.  The recent breakout to 1148 needs to be defended.  The SPX need to hold today and recover back through the 1148 area over the next few sessions, otherwise confidence will again be lost and a dip back below 1050 is likely.  Buy the dip, the mid-term elections are little more than a month away.”