Wednesday, October 20, 2010

Morning Note...


Futures are ~15bps higher this morning as markets rebound slightly off yesterday’s weakness.  Global commodities are generally higher as some investors interpreted yesterday’s China rate hike as indicative that things there are so good there that some moderation is called for.  U.S. earnings continue to dominate the news, and headline reports include Yahoo (YHOO; +1%), which beat on the bottom line but offered weak guidance; United Technologies (UTX; -2%) & Boeing (BA; +2.5%), which beat and raised guidance; US Bancorp (USB; flat) & Wells Fargo (WFC; -1%), which beat estimates; and Morgan Stanley (MS; -1%), which missed earnings estimates.  Comerica (CMA; -7%) is also lower on disappointing earnings.  Asia was mostly lower overnight.  Europe mixed but relatively flat as of writing.  USD -60bps.  Oil +75bps.  Gold +15bps.  Looking ahead, note the Fed Beige Book release at 2pm today. 

Following yesterday’s trend, I will borrow from Morgan Stanley’s earnings summary again:

Industrials/Materials:
+++ ETN: EPS of $1.60 vs. cons of $1.38; strong quarter with good guidance; Expectations were high but appear to have been met and exceeded
++ DAL: EPS of $1.10 vs. cons of $0.93; Operating Revs comes in at $8,950M vs cons of $8,806M; Good result with strength in intl mkts a key driver
++ SWK: EPS of $0.97 vs. cons of $0.88; big quarter for SWK; Expect the shares to trade well
+ ST: EPS of $0.45 vs street at $0.42 and guidance of $0.40-$0.43; Solid Qtr & Guidance; balance sheet metrics continue to improve and tgt growth appears on track;
+ BA: EPS of $1.12 vs cons of $1.05; solid qtr driven by BCA margins offset in part by weaker than expected performance at BMA. Guidance brought in-line with street expectations
+ WSO: EPS of $0.97 vs. cons of $0.98 and MSe of $0.93; In-line quarter with good cash management
+ UTX: EPS of $1.30 vs cons of $1.28 and MS $1.31; in-line qtr but importantly starting to show signs of aero aftermkt recovery; no color on 2011 outlook may be issue
+/= TXT: EPS of $0.13 vs. cons of $0.11; in-line qtr thanks to TFC and Bell, strong 4Q guidance; However impact of TFC on next Q and the extremely low levels of Cessna deliveries are a real concern

Consumer/Retail:
+ MO: EPS beat of $0.03 was driven by better pricing; Cigarette Pricing was +6.4% vs MS +4.5%; Market share was generally stable; reaffirmed full year guidance
= SONC: As Expected, Quarter In-Line; Comps were in-line with the pre-release and EPS was also in-line with cons
= TUP: Org Sales Light coming in at +3% vs MS +3.5% and mgmt guidance for +4-6%. Street was probably 4-5% - but report was Offset by Better Margins and Lower Tax Rate

TMT:
+ CHKP: Nice beat on network security demand posting strongest beat above high end in 19 quarters. Deferred revs down sequentially will be hair, but should be normal seasonality
+ WDC: Quarter looks okay despite all the concern around weak PC demand this quarter and price pressure in HDDs. Revs & EPS were slightly ahead of the street while mgins & units were a bit light vs some expecting a huge miss.
+ ALTR: Another screamer with a slight beat to the quarter but huge 4Q guide +3-6%q/q or $543-559M vs St $513M. That’s “too good” which is why stock only up 2% on this.
+ MANH: Posted a 5C beat, inline revs & license revs
- YHOO: Revs slightly lower with search -7% (vs. cons -5%) and display +17%  (vs. cons +18% and slowed 200bps) - Rev guidance also came in light
- JNPR: Revs/EPS were “just inline” which isn’t good enough when people were expecting upside.
- CREE: Guided light on revs and EPS with mgmt talking about a “decline in LED chips” leading to lower revs; inventory +12% q/q, though gross margin was stable at 48.6%

Healthcare:
+ SYK: Results overall look pretty good; leverage continues to impress and guidance raised
- ISRG: Results fell short of expectation; revenues of $344m were < MSe $356m

Regarding yesterday’s action and today’s set-up, here’s the take from Hedgeye:

As the day progressed and the US stock market selloff picked up momentum, breaking a critical immediate term TRADE line of support (1170 on the SP500), it was hard to discern which factor was the driving force...

1.       Was it Apple?
2.       Was it Gold?
3.       Was it Bank of America?

Or was it fear that China's Team was providing some leadership to this global economic system by doing something that US-centric stock market investors didn't want them to do? China doesn't want to hold the bag of inflation risk associated with Bernanke's Quantitative Guessing.

Notwithstanding that the fear of raising interest rates is a narrative fallacy unique to CNBC watchers (Chinese stocks closed up overnight on news of their rate hike, fyi), this morning's manic media in America will be right back at it beating the drum of losers.

In yesterday's missive I wrote that America's markets are turning into the sort of soft and qualitative excuse making zones where losers find comfort and coddling.

Read these two headlines this morning and you tell me - are we winners or losers?

1.       "Bank of America says it is not responsible for the poor performance of loans due to the bad economy" -CNBC
2.       "Dollar weakens on prospects of Fed officials to signal easing" -Bloomberg

Sadly, I think we have completely lost touch with what America's Team should stand for. Whether it's total abdication of responsibility from an Investment Banking Inc. CEO or a Blind Belief that Big Government Intervention is the only way out - it's driving the winners in this country to trust China's Team more than they trust their own.

Do you blame them? At the same time that Chinese, Brazilian, and Australian central bankers were proactively addressing inflation risk, the President of the Chicago Fed (Evans), who has never seen a commodity price go up that he'd call inflationary, was "reiterating his belief that the Fed should reassess how it measures inflation." America, this is embarrassing. Flat out embarrassing.

CITI ups CFN.  GSCO ups NIHD.  OPCO ups JNPR.  BofAMLCO cuts ALKS, AMLN.  CITI cuts AMLN, LLY, VAR.  FBRC cuts WFT.  OPCO cuts BAC. 

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

Today’s Trivia: What modern vehicle was invented to circumvent trench warfare?

Yesterday’s Question: 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 Answer:  The average teen sends 3399 texts per month, or over 100 per day.

Best Quotes:  From BofAMLCO trading… “Good Morning - SPZ futures close rich and get more rich in globex trade on global bounce helped by commodities and dollar. Yesterday’s drop was the biggest down move since August 11th.  Asian stocks dropped for a fourth day, the longest losing streak for the region's benchmark index in two months, still responding to China’s unexpected rate increase on Monday night. We wait for beige book to provide and any more clarity on QE2 while U.S. markets still digest this mortgage debacle. In credit markets.  Financial earnings so far this morning: WFC slight beat (waiting on conf. call), NITE miss, CMA miss, USB- looks good. Technicals: cash volumes getting healthier on a more consistent basis. Futures volumes yesterday were outright heavy but very little change in open interest, reflecting the confusion in this market as longs liquidated and new longs and shorts came into market. Key level in SPZ is 1151.75 (last week’s low). I think buying of dips is still the play. Earnings mostly coming in better and money chasing yields should help stocks. Have a good one.”