Wednesday, October 27, 2010

Morning Note...

Futures are ~70bps lower this morning as earnings season continues.  BRCM beat estimates.  P&G, ODP, and CMCSA all reported in line.  Sprint, Heineken and SAP earnings fell short of expectations.  In M&A news, it’s official:  CTV to be acquired by the Carlyle Group for $31.50/share.  Europe ~30bps lower.  Asia mostly lower overnight.  USD +15bps.  Oil -90bps.  Gold -60bps.  September Durable Goods Orders were mixed and basically a non-event.  New Home Sales due at 10am.  Some chatter this morning about a Wall Street Journal article that speculates on lighter-than-expected QE2 from the Fed, but there’s nothing really new there:

Looking ahead, next week will be huge (and Friday’s Q3 GDP will also be critical).  Here’s a quick cut and paste from JPHQ:

Super-week of catalysts coming up to start off Nov nxt wk; more than overwhelming the Q3 earnings season. 

To watch next week (week of Nov 1): 1) elections on Tues Nov 2; 2) FOMC on Wed Nov 3; 3) ECB/BOE on Thurs Nov 4; 4) US BLS on Fri Nov 5; 5) the PMIs for the month of Oct (China will be out Sun night and the US is out on Mon). 

The last important piece of information from this week will prob. wind up being Fri’s (10/29) Q3 GDP number in the US.  This will be the last big piece of data the Fed will have prior to their decision on Nov 3.

What’s the view from the cheap seats these days?  [Soap Box Alert]  This week, outside of earnings, there continues to be little “new news” or commentary that already hasn’t been released.  Volumes – and trading action – remains surprisingly light thus far into Q3 earnings, and one could argue that we’re floundering in the “calm before the storm” that will arrive with QE2 and midterm elections.  The critical question, of course, is which way that storm will break…  Will we see a break to the downside on a massive “sell the news” trade, as GOP victory and QE2 has been already priced in?  Or will we rip to the upside?

I have no crystal ball, but what is worth noting this time around is investor psychology and media coverage.  As recent as the widely anticipated FNM/FRE bailout in September 2008 (S&P 1236 the morning of…), the concept of “sell the news” was well known among the “professionals” but underreported and perhaps even misunderstood by the media, and thus that message was not delivered to the masses.  And as it turned out, the perceived “good news” of the bailout was met by massive selling from the pros – it was an amazing shorting opportunity.  (One could argue that going against the masses is always a good trading strategy.)  However, this time around, everyone and their brother are wondering about “sell the news” and investor psychology appears to be leaning that way.  So, is the contrarian call – amidst the general public and media’s expectation of a sell-off – to load the boat on the long side? 

It’s anybody’s guess…but I have always thought that success in this business requires first a fundamental understanding of business, second an understanding of the basic forces of supply and demand, and third a healthy understanding of “what other people think or perceive,” i.e. investor psychology.  As a result, the next few weeks will prove very, very interesting.  I think most people are comfortable with parts one and two above, but guessing as to number three will probably separate the winners from the losers. 

ABD beats by 2c.  AMLN upgraded at Leerink.  BRCM beats by 5c.  BWLD beat by 3c.  CENX misses by 23c.  CHRW beats by 1c.  CML beats by 11c.  CMP misses by 20c.  FFIV beats by 7c.  ILMN beats by 6c.  IP beats by 12c.  JDAS beats by 2c.  JNY misses by 8c.  MCK higher on earnings and buyback.  OII beats by 15c. PNRA reports in-line.  RFMD beats by 3c.  SLAB beats by 1c.  STM beats by 1c. 

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

Today’s Trivia: What popular casino game was invented by mathematician Blaise Pascal?
Yesterday’s Question: What waterway, opened on this date in 1825, was critical to the economic development of the Midwestern - and ultimately, Western - U.S.?

Yesterday's Answer:  The Erie Canal opened on October 26th, 1825.   

Best Quotes:  BofAMLCO note…

Good Morning - focus is on WSJ article on Fed starting their program next week, buying several hundred billion dollars of bonds, falls short of expectations and the buy the rumor sell fact trade could ensue. I think it’s a bit of a double edged sword in that maybe the Fed knows something and doesn’t feel like it had to be a monster program like some of the recent competitor research that pointed towards a $2-4 trillion bond buying program. Overnight: The MSCI Asia Pacific Index fell by the most in almost two months on the WSJ article and we should expect to test weekly low at 1174.00 in SPZ. Next level of support comes in at 10/21’s low at 1167.25. I think we test that. What will be most interesting is to see if the recent better volumes that we’ve seen, dry up as we head towards elections next week. We do get Durable goods today, jobless claims tomorrow and first look at Q3 GDP on Friday, so there could be some catalysts but I would expect risk off as we head into election. Have a good one.