Monday, November 8, 2010

Morning Note...

Futures ~40bps lower this morning on the renewal of European sovereign debt concerns (Ireland’s CDS have blown out 620bps).  An additional side-effect of European concerns is a flight-to-quality bid to the USD (+60bps), which subsequently weighs on equities.  Markets are also certainly due for a pause after recent strength, and to simply digest last week’s elections, jobs data, and FOMC QE2 announcement.  In fact, we may see economic and macro news take a relative backseat this week after last week’s onslaught.  The global reaction to QE2 over the weekend was generally negative, but Goldman Sachs Chief Economist is out this morning defending the Fed’s actions.  In corporate news, McDonald’s October same-store-sales came in slightly weaker than expected (+5.6% vs. +6.1%).  Bank of America may have to pay bonuses in stock this year.  In M&A news, is close to an agreement to acquire Quidsi, the owner of and, for $540M.  Europe -50bps.  Asia mostly higher overnight.  Oil -40bps.  Gold -60bps.  Note that Nat Gas is up 3% this morning. 

Today’s commentary comes from, which predicts that we’re at something of a tipping point in global markets:

Market at a Tipping Point?  Last Update: 08-Nov-10 08:49 ET

The S&P 500 jumped 3.6% last week.  It has risen nine out of the last ten weeks; and it is up 17% since the end of August.  It isn't ridiculous to think then that the market might be due for a consolidation period.

The initial signal this morning is that stocks will start the week on a modestly lower note.  Naturally, the headlines have a mostly negative tilt to help account for that disposition, so it will be interesting to us to see if the tone of the headlines shifts in the event the market bounces back from the early selling pressure.

For the time being, the negative bias is being attributed to a strengthening dollar, concerns about Ireland's debt issues, and uncertainty over the November 11-12 G20 meeting in Seoul where currency swings (or lack thereof) are expected to be a hot topic of conversation.

We're not expecting the G20 meeting to produce a kumbaya moment for the capital markets.  There is just too much jawboning ahead of the meeting to think there will be any convincing accord that comes from the Seoul and not just the mouth.  It is one thing to say the right things.  It is quite another to actually follow through on what is said, particularly when domestic interests are so varied at this time.

There won't be any economic data today to shift sentiment.  The calendar is empty for Monday in what will be a very light week for economic releases.  The initial claims and trade balance data are the featured reports.  Both will be released before the open on Wednesday.  The claims report has been moved up from Thursday since the bond market will be closed in observance of Veterans Day.

The third quarter earnings reporting will die down this week, too.   There are still some heavyweights, like Cisco (CSCO) and Disney (DIS), that will report, but the peak reporting period is now behind the market with over 80% of the S&P 500 having already reported their results.

According to Thomson Reuters, the blended earnings growth rate for the third quarter is a robust 31%.  That compares to the 24% growth that was expected ahead of the reporting period.

The strong earnings growth has been the most important fundamental underpinning for the market in the latest rally effort.  That underpinning is expected to remain intact, too, as earnings growth is projected to be 32%, 12%, 10% and 13%, respectively, for the next four quarters based on analysts' estimates compiled by Thomson Reuters.

Armed with that knowledge, market participants will simply consider the quantitative easing plan by the Fed as an added element that supports buying on weakness.

The equity market is certainly not risk free.  The threat of competitive devaluations and protectionist trade policies looms; commodity price inflation is heating up; sovereign debt issues in Europe are simmering again; and tax policy in the U.S. still needs to be addressed.

These are all near-term risks that could drive equity prices lower if they break the wrong way.  Nonetheless, the wide gap that remains between the forward four quarter earnings yield (7.5%) and the yield on the 10-year note (2.53%) points to a value proposition in owning stocks versus bonds for the long term. 

--Patrick J. O'Hare,

MA raised at WEFA.  UBSS cuts SWY.  ALU downgrade at BERN.  BCAP ups EL.  CITI ups BBEP.  UBSS ups INTC, MXIM.  BofMLCO cuts PLAB, SLG.  BCAP cuts AVP, PVA, SD.  DISH cut at UBSS.  ASH to sell distribution biz to TPG for $930M.  ATPG misses by 57c.  CADX to offer $85M secondary.  DLM initiated Neutral at SunTrust.  IDT announces strategic initiatives, including spin-offs and dividends.  LEE higher on earnings.  NOG higher on earnings.  NOK cut at West LB.  OEH announces secondary.  RDN announces offering.  RJET reports in-line.  ROSE tgt raised at STFL. 

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

Today’s Trivia:  What insect has supposedly caused more human deaths than all the wars in history combined?
Yesterday’s Question:  I love this one…everyone knows that a group of geese is a gaggle, and I have long made use of senseless collective nouns like a “smuck of jellyfish” and an “aurora of polar bears,” but here’s a twist…what is a group of geese called when in the air?

Yesterday's Answer:  Apparently, a group of geese – when in the air – is called a skein.   

Best Quotes:  MSCO FX desk…The “buyer strike” in Ireland, Obama facing a battle on taxes and spending and QE2 op-eds are the leads this morning.  German Finance Minister Wolfgang Schäuble said QE2 would be ineffective for both the US and global growth and would undermine “the credibility of U.S. financial policy."  Kevin Warsh published an op-ed in the WSJ arguing for better pro-growth policies versus long-term UST purchases by the Fed.  Ireland is the focus from the peripheral as 5-year CDS rose to +620bp this morning with significant coverage in all the papers.  We saw another article on Asia’s fight against inflation in the face of QE2.  The article argues that output gaps are now closed everywhere in Asia, ex-Japan, but central banks will wait for food price inflation to materialize versus preventative hikes that will put upward pressure on their currencies.