Tuesday, November 16, 2010

Seriously? That's just pathetic, Miami...

In case you didn't see my review of last Thursday's Heat-Celtics game, I took the Heat to task for being terrible (deservedly) and took the Heat fans to task for being clueless (maybe a bit harshly).  Well, apparently the Heat organization also has some issues with their fans, and maybe my assessment was more accurate and less jaded than I originally thought.  Apparently the Heat fans need to be taught how to actually...be fans.  Has this ever been done before?  Has an organization ever printed a "how to" primer and also posted an accompanying video?  I mean, that's embarrassing!  And don't take my word for it...check it out yourself.  Below, see the aforementioned "Fan Up, Miami" (aka, How to be a fan at an NBA game, you clueless bozos) print out:

Maybe next year's version will include definitions of boxing out, weak side defense, taking a charge, the "pass that leads to an assist," and working the shot clock...not to mention important discussion topics like "when to boo when your superstars take terrible shots," why millionaire ballplayers - even the bench guys - should hit open 15-footers, "when to boo when your other superstar dribbles 100 times at halfcourt while no one else moves," "when to boo when your big money power forward gets dunked on by a point guard," and of course "when to boo when your superstar whines about getting fouled, does not run back on D, and his man hits another wide-open spot-up three."  Oh, and they might also want to offer a fan seminar on "how not to be fooled by fancy dunks and trick passes - especially those that continually lead to unforced turnovers - because there are no style points in basketball."  Miami's NBA action...er...um...amazing kinda happens here...(!!)...pssst, what time is our dinner reservation on South Beach?  We gotta leave early...

Morning Note...

Futures ~50bps lower this morning as yesterday’s afternoon fade continues on concerns that – broken record alert – China will tighten and Ireland will default.  Overseas, Asia was mostly lower – led by Shanghai down 4% - and Europe is tracking down 1% on aggregate.  In Europe, Ireland is supposedly in talks with European and IMF officials about a bailout.  Note that eurozone finance ministers are due to meet in Brussels today for a two-day summit.  In Asia, China Securities Journal – a state newspaper – reported that the country will introduce measures to control rising food prices.  Commodities are trading off on the potential for slower growth in China, the world’s fastest growing economy.  Further, the Bank of Korea raised rates overnight to 2.5%.  In economic news, October month-over-month Producer Prices were lower than expected, at +0.4% vs. +0.8%/e.  October year-over-year PPI was +4.3% vs. +4.6% expected.  The deflationary reading causes some concern that the demand portion of the U.S. economic supply-demand dynamic is simply not there.  Capacity Utilization for October was in-line with expectations.  Industrial Production came in at 0% vs. the +0.3% expectation.  In earnings news, plenty from the retail sector last night and today:  Wal-Mart (WMT; +1.1%) reported in-line and raised its full-year outlook.  Dick’s Sporting Goods (DKS; +3.5%) beat by 5c and guided higher.  Urban Outfitters (URBN; +6%) beat by 1c but trades higher.  Abercrombie & Fitch (ANF; +2.2%) reported in-line.  Home Depot (HD; +1%) reported better-than-expected.  Nordstrom (JWN; -4.3%) disappointed.  Elsewhere, GM raised its IPO’s price target to the $32-$33 range, but the deal was not upsized in share terms.  Also, the Financial Times reports that U.S. companies sold a record $41 billion in bonds the first two weeks of November in a rush to lock in low rates.  Congress is back in session; quack, quack.  Oil -1.65%.  Gold -1.15%.  USD +25bps. 

Relative to commentary, here’s an opinion piece from John Mauldin, who wrote about yesterday’s op-ed that pressures the Fed to step back from QE2:

I want to comment on QE2 and the efforts by some Republican economists to urge legislators to get involved to stop it (see the front page of Monday’s Wall Street Journal). That pushes my comfort zone a little too much.

First, I am not a fan of QE2. Never have been. If it had been my call, I would have punted and told the guys in the Capital that the ball was in their court to get their fiscal house in order, because that is the main source of the problem. But Bernanke and the Fed felt they had to “do something,” to demonstrate they got the seriousness of the situation. If the only policy tool you have left is the hammer of printing money, then the world looks like a nail.

Second, I doubt it works. It might be interesting to see what would happen (theoretically) if they decided to print $3-4 trillion. Now that would have a (probably very negative) impact. But it would show up on the radar screen. I think $600 billion just gets soaked up in bank balance sheets, sloughed off to world emerging markets (that don’t want it) and other hot spots, with some drifting into the stock market. But does it increase real final demand, which is what the Keynesians are so seemingly desperate for? I doubt it. And I just don’t see the transmission mechanism for QE2 to produce new employment of any statistical significance.

Third, targeting the middle of the yield curve is about as benign a way as you can do it, as far as QE goes. It certainly is not bringing down mortgage rates (so far). This is not exactly shock and awe QE.

Now, if the real plan, which no one can mention in polite circles at G-20 meetings, is to weaken the dollar, then QE2 just might work at doing that. But do we want it to? Do we want our input prices to go higher? A weaker dollar cuts both ways. And Germany seems to be able to work with either a strong or a weak euro. Are they that much better than us? Really? I sincerely hope we can take Bernanke at his word that this policy is not meant to weaken the dollar. Currency manipulation is not what we need from the world’s reserve currency, nor will we hold that status much longer if we embark down that path.

Back to the Republican sortie against QE2. As long as it stays on a debate level, or even as a resolution, then fine. There is considerable room for debate, and some very serious economists on both sides of the issue. This is new territory and deserves to be debated vigorously. This is, after all, affecting the public. Fed policy is too important to be talked about only inside a conference room with a few appointed governors and economists.

But I do not want to see anything that would reduce the independence of the Fed from the political process (any more than it already has been reduced). I don’t want Republicans dictating Fed policy. Or Democrats. Or the President, beyond his power to appoint. That is the path to becoming a banana republic.

If We the People want to change Fed policy, then we need to realize it is important who we elect as president, because he appoints the chairman and the governors. Ideas matter and have consequences. How many times do presidential candidates get asked about their views on monetary policy in national debates? Are you a proponent of Keynes? Or Friedman? Fisher? von Mises? Which of these four dead white guys have you read and studied? These elections of ours are more than taxes and health care. The Senators who sit on the committees have the right to review appointees, though few understand the real issues regarding the Fed, I am afraid. (Wouldn’t it be fun to have Rand Paul on that committee? He could tag team with his dad in the House. Just a thought.)

Final thought. Maybe the reason for a less than shock and awe QE is that the Fed can get to the end of it and say, “Look, we tried. But the money just went back onto our balance sheet. Printing more doesn’t seem to be advisable.” (Especially if the public pushback gives them some cover.) Then they can back off and let Congress know that they have no intention of monetizing their fiscal profligacy and that Congress must get its house in order before the bond markets react negatively.

And then again I may be wrong. Maybe QE2 does do something. No one really knows because this is truly uncharted territory. We’ll find out in the coming months. 

BRCD upgrade at JMP.  RAJA ups DKS.  BCAP ups ITC.  CSFB ups TCO.  JEFF ups SNH.  MOKE ups CREE.  UBSS ups HOV.  CITI downgrades PWRD.  JEFF cuts BUCY.  MSCO cuts JOYG.  BARD cuts BUCY. 

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

Today’s Trivia:  What will yield the most BTUs of energy – a gallon of oil, a pound of coal, or a gallon of gasoline?
Yesterday’s Question: What was Malcolm X’s birth name?

Yesterday's Answer:  Malcolm X was born Malcolm Little in Omaha, Nebraska

Best Quotes:  BTIG commentary…

Bond Bombshell.

"From our vantage point, no matter what size QE program is announced in two weeks, we expect 10 year yields to be north of 3% by year end."           Bedtime with BTIG 10-17-2010

We have been critical of the rally in Treasuries throughout the QE debate.  Paying expensive prices on the greater fool theory is almost never a successful strategy, even when that greater fool has the largest balance sheet in the world.  In the month since we have published that October 17th note, both 10 year and 30 year Treasury yields have risen by approximately 40 basis points.  The question investors are asking is whether the 36 basis point rise in both 10 year and 30 year yields is going to continue and will it be a headwind for equities.  This is a healthy re-pricing and shakeout of fast money that bids Treasury prices to levels where they should not be.  Market participants may recall that, at the equity market low in the first week of March last year, the yield on the 10 year was in approximately the same place it closed today, after the post-FOMC rout.  Last year was an environment where the primary fear was nationalization of the banking system, thus if any environment would have a flight to quality bid built into, it would be that one.  Since then, the only other episode where 10 year Treasuries rallied enough to push yields below 2.5% was the March 2009 FOMC meeting, at which the Fed reloaded QE1 with the announcement of $1.15 Trillion of "Shock & Awe" purchases over 6 months (later the timeframe was stretched out to a year).  That rally in bonds lasted only 2 days.  In August 2010, the 10 year made its latest push to 2.50% yields, again this was on the jawboning of impending QE2.  The 2 months of limbo waiting for the official announcement managed to keep rates down until the official announcement came.

The other key question is whether this seemingly endless selling of bonds is indicative of inflation expectations picking up in the market.  We say no.  If one looks at the spread between 10 year Treasuries and 10 year TIPS, the big move in inflation expectations occurred between late August and mid-October, when the spread rose from 151 basis points to 214 basis points.  Today it is 212 basis points (Chart 1).  In other words, the TIPS market has been equally victimized by this bond market selloff.  TIPS would have held up better if the selling was inflation related.  As additional evidence that the rise in inflation expectations through October is not worrisome, consider that the current 212 basis point spread is below the 220-240 range in which it traded from January through May of this year.  The range from 2004 until June 2008 was approximately 225-265 basis points.  We would even go one step further to note that the pullback in commodity prices is an indication that some of the "dangerous" inflation expectations are being tempered.  In short, the Fed's persistent jawboning created demand destruction in the Treasury market at a 2.5% 10 year yield, so now the re-pricing occurs.  The move still has some room to run but just as last year's rise stabilized at historically low levels  (3.25%-3.75%), we expect this rise to do the same.