Thursday, December 9, 2010

Morning Note...

Futures ~50bps higher as Initial Jobless Claims for the week ending December 4th fell by 17,000 to 421k from the prior 438k, beating the 425k estimate.  Additionally, Continuing Claims fell to 4.086M from the prior 4.277M, beating the 4.237M estimate.  Overseas, the BofE kept its emergency stimulus package unchanged, as the central bank believes the economy should be strong enough to weather budget cuts.  Europe is up ~1% despite a Fitch downgrade of Ireland’s debt, and the EUR/USD is holding steady at ~1.3250.  Asia was mixed overnight. No word yet from China on potential tightening, but Shanghai was down 1.3% last night.  In earnings news, CIEN is up 7% premarket on better-than-expected Q4 results.  Oil +65bps.  Gold +60bps.  USD flat.  Bonds higher, yields lower. 

Politics & the extension of Bush-era tax cuts are still front and center as a Congressional vote approaches.  Speaking of politics, a Bloomberg National Poll showed that “more than 50% of Americans say they are worse off now than they were two years ago when President Barack Obama took office, and 2/3rds believe the country is headed in the wrong direction.”  Additionally – and file this one in the “Ron-Paul-is-high-fiving-himself” category – another Bloomberg National Poll showed that “a majority of Americans are dissatisfied with Fed, and say it should either be brought under tighter political control by Congress or abolished outright.” 

Great summary of the world from Hedgeye this morning:

This morning's global macro game is confusing. The US stock and bond markets are sending completely different messages as Asian stocks and bonds continue to break down.  All the while European sovereign risk premiums continue to fluctuate like twitter.

Let's look at US markets first:

1.       The SP500 had its 1st up day in the last 3, making a bullish comeback from an outside reversal on the day prior, hitting a new YTD high at 1228.
2.       The SP500 is now up +81.7% from its March 2009 lows and down -21.5% versus its October 2007 highs.
3.       The immediate-term TRADE range for the SP500 moves to 1209-1245, with the daily downside risk being about equal with upside reward.
4.       Volatility (VIX) at 17.74 is testing a breakdown towards its April lows; while this is a bearish contrarian signal, the VIX could easily test 16.
5.       US stock market Volume and Breadth studies continue to flash bearish, despite higher prices, there is a very negative skew.
6.       In our SP500 Sector Studies, 2/9 sectors are bearish (XLV, and XLU) and 7/9 bullish from an immediate-term TRADE perspective.
7.       The US Dollar Index continues to flash bullish on both our TRADE and TREND durations, with intermediate term TREND support at $79.49.
8.       US Treasury Yields continue to boom to the upside with 2s, 10s, and 30s all busting out into what we call Bullish Formations.
9.       The Yield Spread (10s minus 2s) continues to widen at +10bps for the week-to-date, supporting the rally in Financials (XLF).

Overseas, the immediate-term game is much less confusing:

1.       Chinese equities were down another -1.3% overnight and remain bearish from an immediate-term TRADE perspective at -14.3% YTD.
2.       Indian equities got tagged for another -2.3% drop overnight as the BSE Sensex broke its intermediate term TREND line of 19,655.
3.       Japanese equities are the only bullish immediate-term TRADE market in Asia as the POSITIVE correlation to the USD reigns supreme.
4.       Australia's central banking guru, Glenn Stevens, continues to prove that raising rates and seeing unemployment drop can work together.
5.       Germany, Russia, and the Netherlands continue to flash bullish TRADE and TREND signals in both stocks and bonds.
6.       Spain, Italy, and Greece continue to flash bearish TRADE and TREND in both stocks and bonds.
7.       Brazil looks like India, as stocks on the Bovespa are down every day this week and now bearish on both TRADE and TREND durations.
8.       The Euro continues to flash bearish on both our TRADE and TREND durations with intermediate-term TREND resistance = $1.34.

Global Commodities markets continue to confirm what almost every country's central banker who has real-time quotes sees - inflation:

1.       The CRB Commodities Index closed at 316 yesterday = +21% higher than Bernanke's decision in Jackson Hole to Quantitatively Guess.
2.       Oil is in a Bullish Formation with immediate-term TRADE lines of support and resistance of $87.17 and $91.47, respectively.
3.       Copper prices are testing ALL-TIME highs again this morning = +29% since The Ber-nank opted to sponsor inflation.

Gold, meanwhile, looks a little bit less-like most commodities all of a sudden. To a degree, if real-interest rates continue to push higher, the gold bulls will have to compete with that yield. That's new. Tops are processes, not points, but Gold will need to get back above its immediate-term TRADE line of $1390/oz to get me interested in getting long it again (I sold our GLD position on Monday).

Altogether, if you take the beginning and end of 2010, you can draw plenty of conclusions that are now crystal clear. From my global macro model's vantage point, the deep simplicity of all of these global macro factors and what they mean prospectively to the global markets remains as follows: Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding.

Trader talk from BofAMLCO:

Santa rally is in full force.  Financials finally starting to lead the tape higher.   Earlier this morning we traded to a new year high in the futures North of Tuesdays 1235 level.    There is no supply out there to defend the Bears, and shorts are not playing ball.   Jobless Claims could be a game changer, but even if there is a sell off the dips have been bought in full force.   Later today we get wholesale inventories.  Crude flat.   The market gained yesterday despite the Euro weakness.  You know my stance.   Keep being bullish, I don’t see what takes the market lower.  

On that note, if you have not seen this yet, it’s worth a chuckle.  Click the video.  Rated R, by the way: 

Cramer positive WHR.  BofAMLCO ups CTB, GT.  BCAP ups JNS, LM, WDR.  GSCO ups FMCN.  JPHQ ups ARB as ARB reaffirms guidance.  BLK makes positive comments at GS Financial Services Conference.  Relational urges CRL to seek strategic alternatives.  DMND beats by 4c.  FCX announces split and dividend.  GSCO ups GT.  HITK beats by 20c.  LINE announces 10M share offering.  OXM beats by 3c.  SAI beats by 6c.  SIRI announces Howard Stern will renew for 5 more years.  SWHC beats by 5c.  LULU raises guidance.  MSCO ups CM.  UBSS ups TGI, WAG.  MSCO cuts RY.  WEFA cuts JNJ, PAYX. 

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

Today’s Trivia:  On this date in 1979, what virus was eradicated, marking the first and only human disease thus far to be driven to extinction?
Yesterday’s Question:  According to The Economist, what percentage of New York City residents are foreign born?

Yesterday's Answer:  35.7% (!!) of New York City residents are foreign born. 

Best Quotes:  2011 outlook (yes, it’s that time) from Barclay’s…

“Fresh of the presses, Larry Kantor , Global Head of Research, is out with his '11 Cross Asset Strategy. Bottom line, our primary recommendation is to be long equities in both developed and developing markets, which we believe are still reasonably valued. The environment is also favorable for commodities and credit, although absolute credit returns will likely be compromised by generally higher interest rates. Digging in, Larry highlights that he economic recovery is on track and growth is surprising on the upside, backed by a new round of policy stimulus. To wit, better growth, combined with easy and easier monetary policy, provides a very favorable backdrop for risky assets. That said, Larry warns that the reflation trade, however, may not last very long, and investors should position for continued volatility and the possibility of sharp reversals. With Equities, in the U.S. our base case for the S&P 500 at year-end '11 is 1,420 (the product of $91 operating EPS and a 15.6x multiple). We recommend U.S. industrials, technology, and energy, which benefit from an improving domestic growth outlook. In Europe, we prefer the emerging markets-leveraged basic resources, industrials and personal & household goods, the high-beta financial services, and the inflation  exposed  food retail. Across the aisle in Bonds, n-t we are neutral on U.S. rates, but we expect a sell-off to pick up pace in H2 11. We look for wider swap spreads medium term (on the still deteriorating fiscal situation). We recommend closing short duration positions in the euro area and being long 10y versus 2y and 30y in euro rates. Regarding credit, in the U.S., BBs are still attractive relative to BBBs. We prefer selective investing in CCCs. As it relates to commodities, we continue to advocate investors stay long crude oil, copper gold and corn owning to strong  demand, inventories that are still contracting and  macroeconomic uncertainties. Finally, on the FX front, peripheral euro area issues will likely pull the EUR lower in the next quarter, but monetary policy will weigh on the USD. Sell NOK/SEK. Short AUD/CAD. Long GBP/JPY.”