Friday, October 1, 2010

Morning Note...


Happy Friday… Futures are ~60bps higher this morning on overnight economic data in China (Purchasing Managers Index 53.8 vs prior 51.7) and U.S. Personal Income (+0.5% vs. +0.3%/e) & Personal Spending (+0.4% vs. +0.3%/e) comes in higher than anticipated and thus spurs investor optimism.  In China, pundits reacted positively to their most recent ISM print, which seems to indicate China’s economy is in the Goldilocks mode of “not too hot, not too cold…just right.”  As a result, global commodities (the “global growth” story) are bid higher.  Here in the U.S., the personal income and spending data shines a positive light on the state of the consumer, which represents the oft-quoted 70% of the U.S. economy.  Note that U.S. auto sales are due throughout the day today, and will provide more consumer insight, and the 10am release of the ISM Manufacturing survey will surely be closely watched.  In other macro-news, the USD continues to be weak ahead of the QE2 expectation, thus the ol’ reflation trade (weak dollar, strong equities) is in play, at least in part.  The US is down ~55bps against a basket of currencies, and the EUR is noticeably strong against the USD, at 1.3733, up 70bps.  Oil +1.6%.  Gold +60bps.  Europe is roughly 25bps higher at the moment (better-than-expected German retail data but cautious chatter from EU finance ministers regarding “fragile and uncertain” recovery), and Asian markets were muted, as China closes from today to October 7th for “Golden Week.”  In U.S. corporate news, Accenture (ACN; +4%) beats earnings estimates, guides higher, and raises the dividend.  Gymboree (GYMB; +20%) has reportedly put itself up for sale to private equity firms.  Hewlett-Packard (HPQ; -3%) names Leo Apotheker CEO and President. 

Worth noting that the Financial Stability Oversight Council holds its inaugural meeting today.  There will be a closed session at 1:30pm and the open session webcast (www.treasury.gov) starts at 2:30pm.  We may see some headlines out of this meeting, as regulation of nonbank financial firms (like GE) and implementation of the Volcker rule (limiting prop trading) is discussed. 

Given the September action (+8.8%!!), there’s plenty of “we’re due for a pullback” chatter out there.  Here’s on example from the BofAMLCO desk:

The market looking to start Oct where September left off.   I would have a guarded view after the best September in 70 years.   I am going to do some digging on the market performance after the Sept of 39, but I heard that the market was off 40% from that point.    Fund flows continue to stink.    The only inflows into equities was EFTs.   With the number of Bond ETFs out there now, you can’t trust those inflows.   Managed cash still struggles.  China PMI better than Cons but slightly below whisper 54, remember China closed until 8th.    USD continues to struggle.  Crude ripping.    I have no conviction.   Had to pick a way to go,  I’d say lower.

Here’s another interesting point on the USD and reflation from Keith McCullough at Hedgeye:

What we've learned in the last few years is that DOLLAR DOWN = REFLATION until these inverse correlations get too high and REFLATION becomes INFLATION. Sure, there's deflation in US Housing - but there's been longstanding deflation in the price of tulips and Japanese real estate too.

The US Dollar is getting annihilated (down 15 of the last 18 weeks and down -11% since June). Those getting paid by this may not care, but the other 95% of people who live in this country do. How else could the US stock market have its best September since 1939 and US consumer confidence drop?

My view from the cheapseats is this…while all the news lately seems to be bullish, and given the recent +9% month, it’s amazing how things like unemployment, upcoming Q3 earnings, and upcoming Q3 GDP are all pushed out of people’s minds.  Yes, the political landscape is spinning everything economic to the positive…and yes, the FOMC stands ready to helicopter drop another trillion or so dollars on all our problems.  But will it be enough?  And is that in any way “real growth?”  Market feels ripe for something…maybe it’s the performance-chase into year-end as hedge funds and mutual funds alike “hold their noses and buy ‘em,” or maybe it’s a massive correction.  Or maybe both.  But either way, something tells me that Oct-Nov 2010 will prove historic in one sense or another.  And we’ll all look back and remember this time – and these volumes – as the calm before the storm.  It may be an up-storm, or it may be a down-storm…but either way, bet on some action.  The winds will be swirling. 

CCE/KO deal expected to close Monday.  PIPR cuts CBK.  GSCO cuts LTD.  JPHQ initiates LXRX at OW.  REP and SHI from private energy alliance in Brazil worth $18 billion.  TNK announces 8M share offering. 

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

Today’s Trivia:  According to research from Gawker.com, which entertainment tabloid is most accurate, and what is the winning accuracy rate?

Yesterday’s Question:  According to an NPR story yesterday, who is the largest employer of musicians in America?

Yesterday's Answer:  The U.S. Army employs between 4,000-5,000 musicians, making it their largest employer.   

Best Quotes:  September has historically been the worst month of the year, but the top headline today was that it was the best September since 1939.  The S&P 500 added 8.8% although that was following an August that lost 4.7%.  Likewise, the S&P 500’s Q3 performance was a gain of 10.7%, but that followed a Q2 performance of a loss of 11.9%.  Essentially, the past two quarters have been lots of bouncing around with no real progress made in either direction.  Considering the first and last trading days of the quarter were the two heaviest volume sessions of Q3 and neither would have cracked the top 10 sessions in Q2, many investors sat out the summer.  To drill down even further, equity volume in Q3 was down 25% from Q2.  In the S&P 500 E-Mini’s, volume was down 21%.  For anyone keeping score, volume in 10 Year Treasury futures were down 5% in Q3 versus Q2, but Q2 was up 26% versus Q1. 

A big question on most investors’ minds is whether performance anxiety will force managers to chase if this market stages a breakout in Q4.  At this point, the S&P 500 is only up 2.3% year to date.  Anyone who did not participate in the Q3 rally likely did not get hurt in Q2 either so they probably still look good from a year to date vantage point.  Should the market break lower, players can remain on the sidelines without exposure which will lead to outperformance.  Aggressive shorting will be challenging if earnings hold up at current multiples and the looming risk of the Fed printing is always out there.  If a decisive breakout above 1150 materializes, chasing Equities may be one of the toughest decisions managers have to make in 2010.  After 9 months of going sideways, Q4 is set up to be the make or break quarter for 2010.  

--Mike O’Rourke, BTIG