Tuesday, October 19, 2010

Morning Note...

Futures are ~90bps lower this morning as China’s macro news dampens U.S. earnings.  Overnight, China moved to raise one-year interest rates by 25bps in an effort to moderate the pace of growth of its economy, resulting in a USD spike and a global commodity sell-off.  This news has – for the moment – overshadowed better-than-expected earnings results from Bank of America (BAC; +25bps), Coca-Cola (KO; flat), Capital One (COF; +4%), and Goldman Sachs (GS; flat).  On the other hand, however, headline earnings beats are being met with “take profits” or “sell the news” trading action, as Apple (AAPL; -4%), IBM (-3.4%), and Citigroup (C; -75bps) look lower in the pre-market this morning.  See below for an earnings summary.  Massey Energy (MEE; +10%) is also trading higher on news it may be seeking strategic alternatives, i.e. the company is for sale.  Elsewhere, Treasury Secretary Tim Geithner also made bullish USD comments, as he observed that the U.S. government aims to preserve investors’ confidence in a strong currency.  BAC also announced it was resuming the foreclosure process in 23 states.  Bank of Canada maintains interest rates at unchanged.  Asia was higher overnight.  Europe is roughly 25bps lower as of writing as the German ZEW confidence survey was weaker than expected.  Oil -240bps.  Gold -2%.  USD +1.3%. 

Here’s a solid earnings summary from MSCO:

+ BAC - Bottom line for the stock: Numbers look decent on their own and should be positive for the stock in my view but key will be management commentary on operating outlook, esp no reps and warranties issue as well as capital.  EPS of $0.27 ex goodwill charge beat Street est of $0.14 and MS est of $0.24.  Simple takeaway is revs were a little light but provisions came in well below expectations, driving most of the beat.  Total provisions down $2.7bn qoq and were $2.2bn below Betsy's estimate.  NCOs much better as well, $1.8bn below MS est.  Reps and warranties expense basically in line with Betsy's model at $872mn. Slide deck contains some details on the issue, nothing shocking, but management commentary will be key.  Total revenue about $1.4bn light of Betsy's est, on non-interest shortfall. Net interest income did better than we expected.  "BAC does not expect to issue common stock to meet new standards of Basel III" -- from the slide deck

+ KO - beat by $.03, .92 on Volumes of +5% - Street was at 3.8%.  The breakdown:  NA+2 - Street 1.8%, Eurasia and Africa +12 - Street 8.8%, Pacific +11 - Street 6.3%, LA +4 - Street +5.9%, Europe flat - Street up small. Overall this should be fine and stock is trading up small. (expectations were very high)

+ DPZ - beat by $.02 on very strong comps (we are still breaking this down but assuming expenses were high, they should have beat by more)

+ UNH - results look very strong, supporting the bullish thesis on the group.  Healthcare margins (commercial MLR) came in 270bp ahead of expectations, at 80.1% vs MSe 82.8%, this is a significant beat on the most important metric which healthcare investors scrutinize.  Revenues were modestly ahead (by 2%).  EPS had a bigger beat, 1.14 vs MSe 82c and street 83c (nearly 40% beat).  Other metrics were also strong – FCF of $2.7bn was well ahead of MSe 1.56bn, enrollment for both fully insured and self insured was somewhat ahead of expectations.  2010 guidance is being raised, from 3.40-3.50 up to 3.80-3.90 (company beat this qtr by ~30c and is raising full year guidance by ~40c).

+ HOG - posted a beat this am driven by Gross Margins - They narrowed shipment guidance for the year to 207-212k (was 201-212) and decreased capex to 190-210m.

+ AOS - reported operating EPS of $1.04 vs. cons of $0.92.  Revs of $559.4 mil came in well ahead of cons of $544.2 mil.  Op margins of 8.5% impacted by higher steel costs.   The co raised its full yr guidance to a new range of $3.93-4.03 from a prior of $3.73-3.93; Mid point of the guide comes in modestly below cons of $4.02, but the street has been consistently at the high-end of the range.   Net net a good qtr from AOS; Guidance commentary was somewhat cautious, so unclear how much headway the stock will be able to make ahead of the 10 AM call;

+ AEP - 3Q’10: $1.15 vs Consensus: $1.03 vs MS: $1.03 & 3Q’09: $0.93.  Healthy 3Q beat fueled by favorable weather (+$0.18 contribution), but should be largely expected with volumes up +13% in the Central Industrial region this quarter.  Also provided a ’12-’14 EPS growth rate of 4-6%, and a post-’14 growth rate of 5-7%.  Think this will be fairly well received, given mgmt previously said 2-4% growth, ex-transmission development, but…

+ SLTD – 3Q Modestly Ahead of Street, Guides to Some QoQ Improvement.  Company reported headline EPS of $0.09 ($0.11 net of increased tax) vs MSe of $0.06 and street $0.09.  Company saw increased shipments of long-products in the qtr (positive read across for NUE).  Company guiding to slightly stronger 4Q (cons at $0.19).  Conf call at 10am.  NET NET 3Q came in at the high end of mgmt guidance. That said, I still get the sense most investors are waiting for 4Q10 and 2011 ests to broadly be revised lower across the steel group before venturing back in (ie perhaps sometime around month end once all the names have reported).

+ PH -  headline EPS of $1.51 vs street $1.07.  Sales of $2.8b compares to street $2.64b est (Total sales up 27% organically & Sales improved across all segments).  Company guiding f2011 to between $5.20-$5.80 vs street $4.53.  Op margin of 15.5% led by Industrial N.American segment of 17.8%.   N. American industrial sales up 36%.  Intl industrial sales up 28.5%.  Aerospace segment sale up 4.8%.  Climate & Control segment sales up 23.5%.  Net net the street had been anticipating a very strong qtr – that said early feedback from investors would suggest today’s results came in better than even those inflated expectations and could/should continue to drive the stock higher

= OMC - first blush – revenues bit better than consensus, EBIT in-line (margins steady at 10.5%) but EPS penny shy at $0,57 vs. cons $0.58.   Note – company didn’t buyback stock this quarter which probably accounts for the EPS mss…MS estimates were broadly higher on rev and EBIT.  Organic revenues 6.7% vs, cons 6ish and MS 7%

= PKG – Roughly In-Line.  Company reports headline EPS of $0.91 ($0.60 ex-items) vs street $0.59 est.  Sales of $643mm compares to street $654.47mm est.  Company guiding to seasonally lower volumes in 4Q along with higher wood/energy costs.  Guiding 4Q $0.53 vs street $0.52 est.  Conf call at 10am – 866.219.5268

= SVU - $.28 on a comp -6.4% - that is roughly inline for Q2.  The guidance for the year is the key takeawya here. now $1.40-1.60 from 1.75-1.95 - Street was at 1.66. They also took IDs down from 5 to 5.5%.  Stocks indicated down roughly $1 from $12.40 close.  The guidance update is obvioulsy worse than anticipated but most investors were annoyed they didnt lower the year last qtr when they lowered ID sales the first time.

- AAPL- For the first time in a while, AAPL fell short of higher expectations (go figure, the stock was up over $40 in the last two weeks) but it doesn't appear worse than that, which leaves you with a $290B+ company growing sales and earnings at almost 70% and trading at less than a market multiple.  Combine that with the set up into December -- a gross margin reset, a lower earnings bar, continued share gains, a Mac product launch, the Xmas selling season almost exclusive to the iPad, the VZ iPhone on the come, as well as an iPad refresh -- and the stock should be fine (likely in a $295-305 range in the very near term as people digest the quarter). 

- CWTR - cut numbers for Q3 and now expects to lose money - comps down 18-20% on a loss of .14-.19 - just a massive miss. (CHS is the direct comp while you could see some spill in URBN JCG and ANN could be under pressure)

- VMW - Imperfect results, which has been tough for high multiple stocks to absorb in this tape, likely means this stock will need to take a breather in the medium term.  Overall, 3Q internals were good, though the hair in the quarter was billings and cash flow.  Today, Adam Holt argues that the latter is a non issue, and the former is less meaningful given the 4Q and CY11 revenue raise.  Net, he sees the more constructive out year commentary (20% growth as a base case), a big estimate raise, and profile of 'fastest growth in large cap software' as reasons to BUY weakness this morning.

- IBM - Another low quality beat (EPS likely missed most people's assumptions ex benefits from lower tax and share count) and a 6% y/y decline in Services bookings (vs. -12% last quarter), which will clearly disappoint vs. the 15%+ run the stock has had since Labor Day (thanks in part to HPQ).  Katy Huberty sees IBM benefitting from the rotation into later cycle software and services next year, consistent with her CIO survey and management's guidance for consistent to improving growth across its revenue segments in C4Q.  She models 4Q revenue and EPS of $28.3B and $4.07 (implies $11.42 for CY10) and looks for operating leverage similar to historical levels (4Q operating margins of 24.3%, up 5pts q/q).

- OXY - Clean $1.46 vs consensus of $1.36 - However the beat was all in chemicals and midstream - E&P missed, which is what matters - Disappointing US production, although the overall production number at bottom of guidance range inline with expectations

- WFT - 18 cents, above CE of 17 cents for share, guiding up 10% above consensus towards $1.30 share for 2011 - stock is down on small volume thus far.  What to watch for:  They booked expenses for Mexico/Chicontopec as one-time (non-recurring) which helped to boost Int'l margins for this quarter, as well as for Int'l margins going forward. Investors will most likely see through this, as it is an operational expense.....  stock's EPS were a slight beat, but this margin story will pressure the stock today.  As the conference call highlights the issue, the stocks reaction will most likely become more bearish.

- LMT - 3Q operating EPS of $1.55 vs. cons of $1.53.  Revs of $11.4 bil came in below cons of $11.6 bil – EIG divestiture accounts for most of the top-line miss.  Segment op margins of 11.2% came in in-line w/ expectations.  Implied 4Q guide range of $1.86-2.06 vs. cons of $2.15 (cons includes PAE & R&D Tax Credit– modest impact).  Pension contribution of $2.2 bil comes in $800 mil ahead of expectations – Likely funded w/ EIG proceeds.  ’11 guidance color for segment op profit flat y-o-y is a substantial concern (implies EPS considerably below current ’11 expectations).  Net net an in-line qtr with little to get excited about; Beat vs. cons was driven by lower sharecount and higher other income; Weak guidance for 4Q and initial ’11 outlook are both disappointing

Something else interesting from this morning’s news wires:

Gallup Finds U.S. Unemployment at 10.0% in Mid-October http://www.gallup.com/poll/143714/Gallup-Finds-Unemployment-Mid-October.aspx

Unemployment, as measured by Gallup without seasonal adjustment, is at 10.0% in mid-October -- essentially the same as the 10.1% at the end of September but up sharply from 9.4% in mid-September and 9.3% at the end of August. Gallup's unemployment measure showed a sharp increase to double digits at the end of September, before seasonal adjustment. The mid-October measurement suggests the resulting double-digit unemployment rate has been maintained during the first half of the current month. In turn, this suggests that the government will report an increase in the U.S. unemployment rate for October. In this regard, Gallup modeling suggests the government's unemployment rate report for October will be in the 9.7% to 9.9% range. Gallup's employment data continue to reveal little good news for consumer spending, retailers, or the unemployed as the holidays approach.

BofAMLCO ups BST.  JPHQ ups DLTR.  BofAMLCO cyst AUO.  BCAP cuts TSP, TSU.  CITI cuts MLM, VMC.  FBRC cuts RNOW, PXP.  GSCO cuts FLR.  BARD cuts AGAM.  UBSS cuts HL, NGD.  WEFA cuts NU. 

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

Today’s Trivia:  According to Nielsen Research as quoted in the WSJ last week, how many text messages does the average teen (13-17 years old) send per month?

Yesterday’s Question: What is widely considered the largest gathering of human beings on the planet?

Yesterday's Answer:  The Hajj, or the annual pilgrimage of ~two million Muslims to the holy city of Mecca, is considered the largest gathering of humans on the planet.

Best Quotes:  This is yesterday’s Hedgeye note, but it’s worth a read…

EARLY LOOK: BLIND BELIEF
"Blind belief in authority is the greatest enemy of truth."
- Albert Einstein

If you need a solid dose of anti-academic dogma, read "Einstein: His Life and Universe" by Walter Isaacson. Never again will you accept the Blind Beliefs of modern day academics who purport to know exactly what is going on in your life and the global economy.

In addition to an ominously timed story titled "The Return of the LBO", Barron's ran an interview with Vincent Reinhart this weekend titled "The Case for Quantitative Easing." If you haven't read it yet, you should. It will cost you 5 debauched bucks to get a consensus opinion that's worth about that much.

Vincent Reinhart shouldn't be confused with his wife, Carmen Reinhart, who co-authored one of the most important empirical works in modern economic times ("This Time Is Different" with Ken Rogoff). Carmen is a self-taught Cuban-American who came to America with her family and 3 suitcases in 1966, whereas Vincent spent almost his entire career as a yes-man at the Federal Reserve.

If you don't want to waste 5 Burning Bucks (the US Dollar closed down again on a week-over-week basis last week for the 17th out of the last 20 weeks), here's a recap of some fairly shocking one-liners in the Reinhart interview (*reminder - Reinhart was a Greenspan "consigliore"):

1.       Barron's: "You must feel some vindication that the very policy you have been pushing for several years is now being embraced"
Reinhart: "It's too early to take credit until they actually do something meaningful."

2.       Barron's: "Quantitative easing has very little history in economics."
Reinhart: "There was one other important case study, the 1930s, when short term rates were about zero from 1932 onward."

3.       Barron's: "Is that a good or a bad thing?"
Reinhart: "That depends on your outlook. Certainly you can't expect the Chairman of the Fed to go around making speeches saying 'hooray, we are depreciating the currency. Yet dollar weakness is a good thing as long as it is limited, controlled and gradual."

Maybe a better acronym for QE is government sponsored BS.

While we do applaud the Barron's interviewer for giving Hedgeye some knucks calling QE "financial kryptonite" (in our Q4 Macro Themes presentation from 3 weeks ago we coined QE "Krugman's Kryptonite"), we're hardly going to support another professional politician with no market practitioner background for pandering to the academic dogma of a Fed Chairman who is still lost in his historical studies of the Great Depression.

I think the groupthink embedded in these quotes is pretty obvious, so I won't dissect it in detail, but I will summarize the risk in what both Reinhart and Ben Bernanke aren't telling you.

1.       With 43 MILLION Americans in line for the Food Stamp program and a 9.6% unemployment rate there should be no credit given to the charlatans of the broken promises associated with ZERO percent rates and Big US Government Market Intervention.

2.       Quantitative Easing has plenty of history - it's just not the history that fits the storytelling of those who perpetuated Jobless Stagflation in both the mid-1930s (Germany and USA) and Japan since 1997.

3.       Debauching a country's currency and attempting to fear-monger its citizenry into believing that the rate-of-return on their hard earned savings accounts should be ZERO as the government implodes itself with debt is something the Fed Chairman should be protecting Americans from rather than perpetuating via its politicized policy making.

As Washington fat cats take pictures petting their pooches in front of some inflated art like Vincent Reinhart did for his interview, remember this ... and remember it well... Americans aren't paid off to have Blind Belief in short-term dollar depreciation oriented stock market rallies. They know who is getting paid by the Piggy Banker Spread in 2010 - and it's not them.

Americans want someone in government to tell them the truth. The enemy of truth is the posturing of truth itself.

My immediate term support and resistance lines for the SP500 are now 1167 and 1181, respectively. As the bulls were Snorting QE on Wednesday, I finally re-shorted the SP500 (SPY) near its intra-week high. I titled an EL note last Monday "Defend Yourself" and I am currently living that strategy out loud.

Best of luck out there today,
KM