Thursday, October 21, 2010

Morning Note...

Futures are ~35bps higher this morning as markets digest recent earnings reports and Initial Jobless Claims for the week ending October 16th are slightly better-than-expected.  Initial Claims came in at 452k vs. the 455k expectation, and Continuing Claims were 4.441M vs. 4.420M/e.  However, note that last week’s Initial Claims were revised lower to 475k from 462k.  In earnings news, Internet retailer EBAY (+8%), global industrial giant Caterpillar (CAT; +50bps), and copper-producer and global economic strength bellwether Freeport-McMoran (FCX; +2.5%) are leading the market higher.  Overnight, China’s GDP came in at +9.6% vs. the +9.5% expectation, Industrial Production was lighter than expected, Retail Sales were better than forecasted, and the Consumer Price Index was in-line.  Asia was mixed as a result, as Hong Kong was up while Shanghai was down.  Europe up roughly 50bps across the board.  USD flat.  Oil -1%.  Gold -30bps.  Leading Economic Indicators data due at 10am today along with the Philly Fed.  Looking ahead, AMZN reports this afternoon, along with CMG, NCR, CB, PMCS, SNDK, AXP, CAKE, and QLGC. 

Maintaining this week’s cut-and-paste theme, here’s some commentary from Morgan Stanley’s FX desk followed by an earnings summary from the cash desk:

The lead stories this morning are Geithner’s comments on the rebalancing of the world economy and the USD, the foreclosure crisis (everything is a crisis these days I guess), the UK’s $128b in spending cuts and the China data out overnight.  From Geithner’s interview with the WSJ the FX market focused on "the major currencies... are roughly in alignment now” and the world needs guidelines on setting exchange-rate policy.  More USD headlines in the papers, the NY Times’ lead business section story was ‘As dollar value falls, currency conflicts rise’ and ‘Weaker dollar is no elixir for economy (WSJ).’  China’s overnight data dump was stronger than the market expected although the WSJ focused on the quarter over quarter slow down in GDP growth (10.3% to 9.6%) with the headline ‘China’s economy slows.’  The news from Europe’s peripheral has gone very, very quiet over the past week.  Europe’s main focus continues to be on the strikes in France and worse, the unthinkable happened, Lady Gaga cancelled two Paris concerts!  Finally, internet sensation and NYS gubernatorial candidate Jimmy McMillan from the "rent is too damn high" political party admitted yesterday to lying about how much he pays for rent - this may hurt his chances in the election on November 2nd. 

3 Top News Stories

China growth moderates from Q2, but beats expectations. Real GDP grew at a healthy clip at 9.6% (9.5%E, 10.3%P). CPI came in at expectations at 3.6%  (3.6%E, 3.5%P) which was far lower than some of the worst-case inflation scenarios projected. Retail Sales grew to 18.8%Y (18.5%E, 18.4%P). This sheds light on the rationale of the PBoC to hike rates 25bps on Tuesday to control overheating growth and inflation.

Geithner comments in WSJ: while there was no need for the USD to sink much farther against the majors - EUR and JPY, he hoped other countries (EM and China) would allow their exchange rates to appreciate against the USD. He looked to G20 for accord on currencies, trade protectionism, and norms regarding current account imbalances.

European data strong; UK data underwhelming. The French INSEE business confidence indicator posted its first 100+ number since June 2008, coming in at 102 (98 E, P). German initial PMI beat expectations at 56.1 (54.6P, 55.1P). Meanwhile, UK retail sales disappointed, with the ex auto fuel number at 0.0%M (0.2%M E, -0.6%M P) and its Trends in Lending report showed that net lending to businesses dropped.

+ BBT: EPS beat by 6c as stronger than expected revs offset higher than expected provisions. Somewhat noisy quarter but the process of loan sales and NPL cleanup continues and underlying results look pretty solid.
+ STI: EPS of 17c vs consensus basically at breakeven and MS at -2c so much better than forecast on better revs driven by mortgage (esp hedge gains) and slightly lower operating costs and provisions. Stock should do well vs peers as expectations seem to have been much lower than actual delivery in the quarter

+++ Fiat: Stellar Q3 numbers, with trading profit 50% AHEAD OF THE STREET; very positive read for the US suppliers and F (co derives 25% of its revs from Eur)
++ CNH: Headline EPS of $0.43 ex-items vs street $0.34 est; very strong qtr with FY guidance to match. Will have to wait for conf call for more segment/geography specific outlook
+ SCHN: Solid Qtr, Guidance Modestly Below Street; EPS of $0.58 was a beat vs MSe $0.27 estimate and the $0.38 Street estimate
+ APD: A Solid quarter, guidance in line with consensus expectations; EPS of $1.35 came in 2% better than consensus, in line with MSe
+ GR: Good Qtr In Spite of Muted Commercial Aftermkt Recovery
+ DHR: Adjusted 3Q EPS of $0.60 vs. cons of $0.55; good beat from DHR driven mostly by strength on the margin line; guide on the call will be important
= UAL: Looks generally in-line; Tough to make a definitive call though; legacy CAL coming in a bit better and UAL coming in in-line = JBLU: In-line qtr and a wash on 4Q guidance given higher PRASM offset by higher costs. Revenue color supportive of POSITIVE view towards group.
= WCC: Reports EPS of $0.74 vs. cons of $0.65 and MSe of $0.63; nice beat driven by better margins
- TEX: Reported a 3Q operating loss of $0.34/share vs. cons of -$0.14; noisy quarter with the loss driven by weaker results out of the cranes biz; However AWP's appear to be troughing
- PCX: Weak as Expected, Met Settlements Support Recent Reports; Focus likely to be on domestic met coal settlements, but higher costs in 4Q may be a concern
- TNB: EPS of $0.81 (excluding $0.04 tax benefit) vs. cons of $0.77 and MSe of $0.74; small beat vs cons driven by slightly better margins; Weak 4Q guide will likely be the issue here

+ PENN: Solid Results Driven by West Virginia; EBITDA and EPS both surpassed expectations, driven by new table games in West Virginia coupled with solid expense control
+ VFC: EPS of $2.22, vs. Consensus $2.11;Sales come in at $2,232 m vs consensus $2,214m; better than plce's negative pre-release this morning
= HSY: Slight Operating Profit Beat on Strong Gross Margins, but Small Sales Miss; organic sales growth slightly below forecasts but stronger operating profits driven by better gross margins
- PM: EPS Up, due to FX, but Q4 Represents the Weakest Underlying Operating Profit in Quite a While
-- ESI: Enrollment Numbers Very Disappointing; EPS beat likely to be significantly overshadowed by a small revenue miss and a very big new enrollment miss

++ NFLX: Very clean, very strong quarter -- sub adds grew 52% y/y, churn was an all-time low, SAC was an all-time low, revenue growth accelerated to 31% y/y (on a tougher comp)
+ EBAY: A clean beat to 3Q, materially above even the pre-announced upside from 9/21, and a raise to 4Q. 12% y/y organic growth is pretty good vs. last quarter's +13%. PayPal continues to outgrow expectations (+42% y/y), and show real operating leverage
=/- T: Estimates in-line but wireless a bit light on margins and net adds
- XLNX: 3Q missed and 4Q was guided down

- ETR: 3Q results beat what was pre-announced on 10/15 by +$0.01, and again reaffirmed '10 guidance, but long-term financial outlook section is absent in the release - may raise a few eyebrows

EBAY beats by 3c.  FCX beats by 24c.  HBAN beats by 4c  HNI misses by 13c.  JBLU misses by 1c.  LYTS beats by 14c.  ADS beats by 3c but guides lower.  ALXN beats by 5c.  BofAMLCO ups AMZN.  BT higher on positive court ruling.  COHU beats by 8c.  CRUS misses by 2c and guides lower.  CYS lower on earnings.  NFLX misses by 1c.  NOK higher on earnings.  PLCE lowers guidance.  RBCN added to JPHQ focus list.  SCSS beats by 3c.  STI beats by 18c.  XLNX reports in-line but guides lower. 

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

Today’s Trivia: From last nights NLCS Phillies-Giants game…What does Alcatraz mean in Spanish?

Yesterday’s Question: What modern vehicle was invented to circumvent trench warfare?

Yesterday's Answer:  The tank was invented to circumvent trench warfare.

Best Quotes:  Op-Ed from BBERG…

Japan’s Toxic Cocktail Fails U.S. Taste Test: Caroline Baum
2010-10-21 01:00:00.1 GMT

Commentary by Caroline Baum
    Oct. 21 (Bloomberg) -- Japan is an old country, and I’m not talking about the place.
    Twenty percent of the population is 65 or older, putting Japan in first place, in a tie with Italy, in the geriatric country competition, according to the Stanford Center on Longevity.
     The average number of births per woman has been below the replacement rate of 2.1 births per woman for 40 years. At the same time, Japan boasts the highest life expectancy of any
country: 82 years.
     Put it all together, along with a reluctance to address financial-sector insolvency and industry inefficiency, and you get a toxic mix. A shrinking workforce must support a growing number of retirees, auguring slower economic growth and reduced living standards.
     Deflation, in other words, isn’t the worst of Japan’s problems. It’s a symptom, not a cause, of two decades of post- bubble economic malaise.
     In the 20 years since the Nikkei 225 Stock Index peaked just shy of 39,000, Japan’s consumer price index has averaged
0.5 percent. That’s 0.5 percent with a plus sign in front of it.
In the last 10 years, the CPI has declined at an average 0.3 percent rate. Even the most discerning shopper can’t differentiate between the two.

                        Avoidance Model

     And yet, Japan is the model, albeit an avoidance model, for the U.S. Federal Reserve. In contemplating another round of quantitative easing, U.S. policy makers are determined to ensure that Japan’s deflation doesn’t happen here.
     Is the U.S. deflation prone? Almost five years after the housing bubble burst and almost three years after the U.S.
economy slipped into recession, there is no deflation in the data. All that economic slack Fed officials point to -- an unemployment rate of 9.6 percent and industry utilization rates at recession-like levels -- and a contraction in credit, and still there’s no sign of falling economy-wide prices. (The Fed claims that the CPI has an upward bias, which is why it targets an inflation rate of 1.5 percent to 2 percent instead of zero and calls it price stability.)
     Deflation, if confined to gently falling prices and not a Great-Depression-like downward spiral, isn’t the scourge Fed officials make it out to be. Just ask Japanese consumers.
     In an Oct. 15 column, the Financial Times’ Gillian Tett cites the results of a Bank of Japan survey of the public’s attitude toward deflation. Forty-four percent said deflation was favorable; 35 percent were neutral on falling prices; and 21 percent gave it the thumbs down.

                       Deflation’s Upside

     In a country for old men (and women), consumers want their yen to go a long way, especially with wages declining for the better part of the last decade.
     Of course, deflation is bad for debtors, who have to repay their loans in yen or dollars that have appreciated in value.
Historically Japan has been a nation of savers, even as the Japanese government racked up debt equal to 200 percent of gross domestic product from umpteen (who can keep track?) fiscal stimulus initiatives.
     “It’s as if the Obama administration had done a lot of fiscal stimulus programs and no TARP,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, referring to the U.S. Treasury’s Troubled Asset Relief Program to recapitalize the banks.
     Unlike Japan, the U.S. realized it had to fix Wall Street (the banks) in order to fix Main Street (get credit flowing).
Both streets are still in need of road repair.

                      Compare and Contrast

     There are a lot of other ways in which the U.S. isn’t Japan. As a young nation, our culture is oriented toward individuality, not conformity. Our economy and job growth rely on entrepreneurship, not industrial policy.
     As a nation, we aren’t content to sit still, to endure years of sub-par growth. We can’t relax with persistently high unemployment, the kind from which Europe suffers. We demand that our government “do something” even though we’re not sure exactly what we want the government to do. (Provide benefits and cut taxes?)
     To be sure, the U.S. has its share of problems, including an aging population (12 percent is 65 and older, according to the Stanford Longevity Center), trillion-dollar deficits, unsustainable entitlement programs for the sick and elderly and a political class that only thinks as far as the next election.
     Japan’s deflation is the outgrowth of two decades of economic malaise, which in turn is the result of burst property and equity bubbles, the devastating effect it had on bank balance sheets and the government’s tendency to prop up zombie banks and zombie companies.
     If the Fed wants to draw parallels between Japan and the U.S., which prefers its bubbles one at a time, I’d suggest an alternative to the deflation route. Both countries offer prima facie evidence of the need for bubble avoidance. Central bankers’ protestations to the contrary, the damage from leaning into them is a lot less than cleaning up afterward.

     (Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)