Monday, January 31, 2011

Morning Note...

Futures slightly higher (+40bps) this morning as global markets stabilize after Friday’s well-publicized Egyptian unrest (see below for more on that).  Earnings season rolls on, as Exxon Mobile (XOM; +1.4%) beat estimates by 22c as net income rose 53% and Illinois Tool Works (ITW; -1%) reported both revenues and earnings that beat estimates.  In M&A news, ANR (-6%) reached a deal to acquire MEE (+13%) for $69.33/share.  In economic news, Personal Income for December was in-line with expectations (+0.4% vs. +0.4%) and Personal Spending for December was higher than expected, at +0.7% vs. +0.5%/e.  Also, Canada’s GDP rose +0.4%, which beat the +0.3% consensus estimate.  Later this morning (9:45am) we’ll get the Chicago Purchasing Manager survey results.  Overseas, Europe is mixed this morning and Asia was mostly lower overnight despite a +1.4% surge by Shanghai ahead of their New Year’s holiday, which starts Thursday.  Note that today marks month-end, and thus far it appears that the bellwether indices (Dow Jones +2.13%, S&P500 +1.49%) will hold their year-to-date gains.  Oil +40bps.  Gold -90bps.  USD -50bps.  EURUSD 1.3715.

Looking ahead, Bernanke speaks Thursday, Auto Sales data will be released Tuesday, Retail Sales data is due Thursday, the ECB will meet Thursday (which will be interesting given recent higher-than-expected inflationary data in Europe), and the January Official Nonfarm Payroll data will be released Friday.  Also note that the Chinese New Year begins Thursday and will extend to February 9th

Regarding earnings, here’s a blurb from this morning’s WSJ:

The Upshot
U.S. Corporate Profits Surge

With about 50% of companies already reporting, fourth-quarter profits for the biggest U.S. corporations have been exceptionally strong and 2010 is poised to deliver the third-best full-year gain since 1998—with sharp advances in the telecommunications and energy sectors and a rebound in financial services.

Excluding financial companies, whose losses in 2009 skewed results, weighted earnings for the companies in the Standard & Poor's 500 Index are up 17% on an as-reported basis for companies representing 54% of the group's market value.

Unlike the initial period of the recovery, when cost cutting strongly boosted profits, the results suggest a solid pickup in spending by businesses and consumers. Sales for the group rose about 9% from a year ago, according to S&P. Job cuts continue to be critical under tight expense controls.

Bolstered by exports and consumer spending, overall U.S. fourth-quarter sales excluding inventories jumped by 7.1%, according to a report Friday by the U.S. Commerce Department. The gain far outpaced the 0.9% increase in the third quarter.

Combined with a decline in imports, "we have a healthier mix" ahead in 2011 for economic performance, said Brian Jones, an economist at investment bank Société Générale.

S&P now forecasts fourth-quarter earnings will rise about 32% over a year ago when all 500 companies report, more than three times as fast as its forecast at the outset of this reporting season. Profits then were seen rising 9.8%, with sales expected to be up 6%, according to S&P.

At roughly this point a year ago, about half-way through earnings season, corporate profits excluding the banks were running about 47% higher than the year-earlier period. Sales growth a year ago was about 5.9%. But at that point, the recovery was just beginning and comparisons were off much lower earnings.

For 2010, S&P estimates profit growth will be about 51%, a percentage gain surpassed only by the previous year's record 243% jump and a 77% gain in 2003, according to S&P.

Financial companies are enjoying the biggest jump in profit gains, albeit over a quarter in 2009 where they as a group lost money, according to S&P. Telecommunications companies that have reported so far saw profits rise 58%; materials companies including steel, mining and chemicals are up 45% and energy concerns are up 40%. For instance, Chevron Corp.'s fourth-quarter profit rose 72% on higher oil prices and better refining margins.

Banks benefited this quarter from greatly diminished write-downs, and less cash set aside for loan losses, and in some cases cash actually released from money previously set aside to cover losses. For instance, U.S. Bancorp reported fourth-quarter profit of $974 million, up from $602 million a year ago, as cash it had set aside for loan losses declined by 34%.

The biggest laggards include utilities, down 18%, and health-care companies, down 17%. Columbus, Ohio, utility American Electric Power Co. posted a 26% decline in profit due to a required refund to customers and employee-severance costs. Pharmaceutical companies are facing patent expirations, slowdown in health-care spending, price cuts in Europe and tougher regulatory hurdles for new products.

One trend that marked 2010 results and continues to crop up this year: job cuts. Drug maker Abbott Laboratories last week said it would cut 2% of its work force, or 1,900 jobs, while home-improvement retailer Lowe's Cos. said it is eliminating roughly 1,700 store-management positions and hiring 8,000 to 10,000 part-time hourly employees to man the sales floor during weekends. Boeing Co., struggling to get a new jet into production, said it will lay off 1,100 workers.

Already this year, 11 banks have closed their doors, on top of 157 banks last year, adding to industry unemployment rolls as new owners consolidate. Meanwhile, several big banks, including State Street Corp. and American Express Co., also have recently announced layoffs or intentions to cut jobs.

The sharp rise in energy and raw-materials costs in recent months has only begun to impact results. Companies from Ford Motor Co. to Colgate-Palmolive Co. say rising commodities prices hit their final-quarter performance and are expected to play a bigger role in results this year. Delta Air Lines Inc., stung by higher jet-fuel prices last quarter, said fuel will be its "biggest issue" this year. Industrial equipment maker Parker Hannifin Corp. also cited rising costs "across the board" in its fourth-quarter results.

Procter & Gamble Co. expects rising costs will cut about $1 billion from earnings in its current fiscal year ending June 30, double the impact it expected at the start of the fiscal year. Commodity costs were up 6% from the previous quarter and 20% higher than a year ago, Chief Executive Bob McDonald said Thursday.

Grocery-store operator Supervalu Inc. has been struggling with rising food costs, and finally said it plans to pass price increases along to its customers. At the same time, it's cutting overhead by closing underperforming stores and cutting corporate staff.

Colgate-Palmolive now expects commodities costs will rise between 8% and 10% in 2011; in October, it projected an increase between 4% and 6% this year. To compensate, the company will continue with its "overhead reduction initiatives," and forecasts prices rising between 1% and 2%. Pricing, Chief Executive Ian Cook said on a conference call, will be "consistent with what we see happening in the marketplace."

While Moody’s cut the country’s debt ratings, the situation in Egypt is generating concern on mainly three fronts:  oil, regional stability, and world peace.  For now, the main political and social concern is that the Muslim Brotherhood (which basically spawned Al Qaeda) has a legitimate chance at a power grab.  Bear in mind that we’ve seen this before when Hezbollah stepped into power after the Lebanese revolution, and Islamic fundamentalists took over after the Iranian revolution.  In terms of oil, concerns over shipments through the Suez Canal may be unfounded, but the potential disruption of regional stability (vis-à-vis Israel, against which Egypt under Mubarak has been a buffer of sorts against more radical states) and the threat against overall world peace is very real and very concerning.  For those interested in the political arena, the U.K.’s Telegraph had an article speculating that the U.S. is secretly behind the North Africa uprisings – see quote section below. 

Regarding last week’s GDP release, interesting rant in this morning’s King Report:

The Q4 GDP estimate is a total fraud. The BEA made the estimate with only two months of data. Though the usual suspects emphasized that the decline in inventory growth subtracted 3.70 percentage points from GDP, they ignored that fooling with the deflator added 1.77% percentage points and goofy trade accounting added 3.44 percentage points to GDP. The fraud in the GDP report is evinced by the fact that despite roaring inflation in Q4 government toadies reduced its inflation measure, the GDP Implicit Deflator, to 0.26% in Q4 from 2.03% in Q3! Even the bogus CPI shows 2.6% inflation in Q4!!! And PPI shows 4% inflation!!!! The most infuriating and disgusting scam in the GDP report is that the BEA states inflation at 0.26% to overstate GDP and then it puts import inflation at 21.8% annualized. The toadies at the US Ministry of Truth report negligible inflation to overstate GDP and also report huge inflation in imports, which allows the deceivers to reduce imports, which increases GDP. The sharp decline in imports grossly conflicts with the biggest surge in consumption in years – unless the trade deficit has suddenly disappeared!!!!

Ask your favorite economist or guru about the BEA fraud. Without the BEA fraud there is little or no GDP, AKA economic, growth.The next most-questionable aspect of the GDP report is consumer spending of 4.4%. This is the highest rate of consumption since 2006 (5 years)!!!! That was the peak of people using their homes as ATMs!!! There is nothing in income growth or credit growth that supports the consumption data in Q4 GDP. The BEA made the consumption estimate without December data; and there was an enormous amount of holiday buying in November due to the hype, hoopla and retailer discounts. And we all know now that
December sales were not nearly as good as the November hype indicated.


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

Today’s Trivia:  How many films were released in America in 2009, and how did this compare to ~10 years ago in 2000?

Yesterday’s Answer:  According to a 2010 University of Bristol study, 42% of responders said they lie awake at night trying to resolve problems, and 47% actually said life was ore confusing than 10 years ago.

Best Quotes:

Egypt protests: America's secret backing for rebel leaders behind uprising

The American government secretly backed leading figures behind the Egyptian uprising who have been planning “regime change” for the past three years, The Daily Telegraph has learned.

The American Embassy in Cairo helped a young dissident attend a US-sponsored summit for activists in New York, while working to keep his identity secret from Egyptian state police.

On his return to Cairo in December 2008, the activist told US diplomats that an alliance of opposition groups had drawn up a plan to overthrow President Hosni Mubarak and install a democratic government in 2011.

The secret document in full

He has already been arrested by Egyptian security in connection with the demonstrations and his identity is being protected by The Daily Telegraph.

The crisis in Egypt follows the toppling of Tunisian president Zine al-Abedine Ben Ali, who fled the country after widespread protests forced him from office.

The disclosures, contained in previously secret US diplomatic dispatches released by the WikiLeaks website, show American officials pressed the Egyptian government to release other dissidents who had been detained by the police.

Mr Mubarak, facing the biggest challenge to his authority in his 31 years in power, ordered the army on to the streets of Cairo yesterday as rioting erupted across Egypt.

Tens of thousands of anti-government protesters took to the streets in open defiance of a curfew. An explosion rocked the centre of Cairo as thousands defied orders to return to their homes. As the violence escalated, flames could be seen near the headquarters of the governing National Democratic Party.

Police fired rubber bullets and used tear gas and water cannon in an attempt to disperse the crowds.

At least five people were killed in Cairo alone yesterday and 870 injured, several with bullet wounds. Mohamed ElBaradei, the pro-reform leader and Nobel Peace Prize winner, was placed under house arrest after returning to Egypt to join the dissidents. Riots also took place in Suez, Alexandria and other major cities across the country.

William Hague, the Foreign Secretary, urged the Egyptian government to heed the “legitimate demands of protesters”. Hillary Clinton, the US Secretary of State, said she was “deeply concerned about the use of force” to quell the protests.

In an interview for the American news channel CNN, to be broadcast tomorrow, David Cameron said: “I think what we need is reform in Egypt. I mean, we support reform and progress in the greater strengthening of the democracy and civil rights and the rule of law.”

The US government has previously been a supporter of Mr Mubarak’s regime. But the leaked documents show the extent to which America was offering support to pro-democracy activists in Egypt while publicly praising Mr Mubarak as an important ally in the Middle East.

In a secret diplomatic dispatch, sent on December 30 2008, Margaret Scobey, the US Ambassador to Cairo, recorded that opposition groups had allegedly drawn up secret plans for “regime change” to take place before elections, scheduled for September this year.

The memo, which Ambassador Scobey sent to the US Secretary of State in Washington DC, was marked “confidential” and headed: “April 6 activist on his US visit and regime change in Egypt.”

It said the activist claimed “several opposition forces” had “agreed to support an unwritten plan for a transition to a parliamentary democracy, involving a weakened presidency and an empowered prime minister and parliament, before the scheduled 2011 presidential elections”. The embassy’s source said the plan was “so sensitive it cannot be written down”.

Ambassador Scobey questioned whether such an “unrealistic” plot could work, or ever even existed. However, the documents showed that the activist had been approached by US diplomats and received extensive support for his pro-democracy campaign from officials in Washington. The embassy helped the campaigner attend a “summit” for youth activists in New York, which was organised by the US State Department.

Cairo embassy officials warned Washington that the activist’s identity must be kept secret because he could face “retribution” when he returned to Egypt. He had already allegedly been tortured for three days by Egyptian state security after he was arrested for taking part in a protest some years earlier.

The protests in Egypt are being driven by the April 6 youth movement, a group on Facebook that has attracted mainly young and educated members opposed to Mr Mubarak. The group has about 70,000 members and uses social networking sites to orchestrate protests and report on their activities.

The documents released by WikiLeaks reveal US Embassy officials were in regular contact with the activist throughout 2008 and 2009, considering him one of their most reliable sources for information about human rights abuses.

Friday, January 28, 2011

Morning Note...

Happy Friday…. Futures ~20bps higher as markets shrug off a U.S. Q4 GDP release that came in lower than expectations, at 3.2% vs. the 3.5% expectation and the 2.6% prior reading.  However, Personal Consumption was higher than expected, at 4.4% vs. the 4.0% expectation and the 2.4% prior reading.   In earnings news, bellwether internet stock AMZN (-7.5%) is lower pre-market on an earnings.  Software giant MSFT (-25bps) beat earnings expectations but deferred revenues were lighter than expected.  Ford Motors (F; -7%) earnings also disappointed, missing estimates by 18c.   In M&A news, SLE will reportedly spin off its businesses into two distinct segments.  VZ will buy TMRK for $19/share or $1.4B. Note that the U.S. broad market continues to struggle around the psychological 1300 level.  Across the pond, U.K. consumer confidence made headlines with its biggest drop in twenty years.  Europe is trading ~30bps higher although U.K. is down 1%.  Asia was mixed to slightly weaker overnight, led by Japan.  USD flat.  Oil +45bps.  Gold -35bps.  EURUSD 1.3710.

U.S. consumer confidence data is due at 10am.  Looking to next week, recall that Bernanke speaks on the 3rd, China is closed the 2nd to the 8th, and January’s Official Nonfarm Payrolls will be released on Friday the 4th.
Interesting Bloomberg piece on the back of Japan’s debt downgrade from AA to AA- (also see quote section below for Financial Times article on the same topic): 

Moody’s Says Time Shortens for U.S. Debt Outlook 2011-01-28 07:08:17.758 GMT By Christine Richard
Jan. 28 (Bloomberg) -- Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens. The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday. “Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report. The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington. U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.

BSX faces a U.S. lawsuit over defective cardiac devices.  DRIV misses by 2c.  ARNA -10% on announced job cuts.  BGP receives $550M refinancing from GE Capital.  JPHQ cuts DEO.  GSCO ups FLWS.  INFN cut at CITI and beats by 3c.  LSCC beats by 3c.  MWW -7% on earnings miss.  PMCS misses by 1c.  SNY lower on Phase III trial results. 


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


Today’s Trivia:  Are people happier?  According to a 2010 University of Bristol (U.K.) study, what percentage of respondents lie awake at night trying to resolve problems?

Yesterday’s Answer:  The average American supermarket carries 48,750 items, which – according to The Economist – is 5x more than in 1975.

Best Quotes:  Interesting piece from the Financial Times this morning…

Warning shot for America and Europe as S&P downgrades Japan
Standard & Poor's has downgraded Japan for the first time in nine years, citing lack of a "coherent strategy" to control its monster deficits or grasp the nettle to reform.
By Ambrose Evans-Pritchard 8:44PM GMT 27 Jan 2011
The move is a chilly reminder that sovereign debt woes continue to fester across much of the industrial world, and still pose a threat to the fragile global recovery.
The US rating agency cut Japan's $10.6 trillion (£6.6 trillion) debt one notch to AA-, warning that the mix of government paralysis, a shrinking workforce and a fast-rising interest burden have left the country's debt dynamics on an unsustainable footing.
Julian Jessop, from Capital Economics, said the unfolding drama in Tokyo has global implications since Japan is the world's top external creditor with $3 trillion of net assets abroad. "This is potentially a much bigger story than any default in Greece," he said.
The concern is that Japanese banks, pension funds and life insurers may forced to repatriate large sums to cover losses at home if the fiscal crisis triggers a jump in bond yields. This could set off a worldwide fall in asset prices.
Takahora Ogawa, S&P's Asian analyst, said Japan's economy is the same size today in nominal terms as it was in 1992 yet public debt has tripled. The combined central and regional government debt will reach 233pc of GDP this year, or 259pc including bonds under the Fiscal Investment and Loan Programme.
In contrast to Europe, Japan has barely started to tighten its belt, drifting on with a budget deficit that will be 8pc of GDP as far out as 2013. "This is not affordable. Japan is running out of the domestic financial assets to absorb the debt," said Mr Ogawa.
Japan's population has been contracting since 2005, pioneering a fate that awaits much of Europe and Asia. Its median age is a world record at 44.4 years, and rising fast. The population will fall from 127.5m to 89.9m by 2055, according to Japan's Social Security Resarch Institute. "Despite this bleak demographic outlook, Japan has no specific measures or plans to deal with its diminishing and aging population," said S&P.
Japan was downgraded repeatedly between 1998 and 2002 without suffering much harm but that was in a different world, before the global credit crisis shattered illusions about the sanctity of sovereign debt.
The Bank for International Settlements has warned that simmering fiscal problems in the rich countries are nearing "boiling point", with a risk of an "abrupt rise" in bond yields as investors choke on excess debt.
Kaoru Yosano, Japan's economy minister, called S&P's decision "regrettable" given that the government is working on a plan to overhaul the tax and social security system. "I hope the world will understand our sincere efforts to carry out fiscal consolidation. I believe confidence in Japan will not be shaken."
Mr Yosano himself said last week that Japan has reached a "critical point" where investor patience might suddenly snap. "We face a dreadful dream that one day the long-term interest rate might rise."
Mr Jessop said the S&P downgrade is no shock since the country was already on negative watch. However, the Democratic Party of Japan – hampered since June by a hung parliament – has not yet shown that it is "up to the job" of restoring discipline.
"If the government gets this wrong, Japan could be the first Asian casualty of the global financial crisis. Markets have tolerated Japan's awful fiscal position because it was the fastest growing economy in the G7 last year, thanks to a rebound in exports and fiscal stimulus. But it all started to go horribly wrong in the fourth quarter when the economy almost certainly contracted again," he said.
Adarsh Sinha from Bank of America said Tokyo is on borrowed time but does not expect a bond crisis this year. "Inexorable structural forces mean that each year brings us closer to when the domestic pool of saving will be insufficient to finance Japan's public debt. However, 2011 is unlikely to be the tipping point for this disorderly adjustment."
Tax revenues covered just 52pc of spending in 2010. Almost half the budget was borrowed. Even in the boom year of fiscal 2007 revenues covered only 70pc of outlays, so the problem is clearly chronic and not caused by the recent recession.
The IMF's latest Article IV report on Japan warns that without a shift in policy the "public debt-to-revenue ratio" will rise from 263pc three years ago to 482pc by 2015. No country in peacetime has ever pushed the fiscal boundaries so far and emerged unscathed.
Peter Tasker from Arcus Research, a venerated Tokyo expert, said horror stories about Japan's debt have been the stuff of folklore for years, yet borrowing costs have fallen ever lower anyway because the country is "entirely self-financing". If need be, the Japanese can squeeze a lot more tax from their under-taxed economy.
"Rather than a 'dreadful dream', Japan's leaders face an enticing reality. They have the opportunity to issue more and more bonds at the lowest interest rates seen since the Babylonians invented accounting. Japan needs to forget about the views of credit agencies, which have not had a terribly good track record recently," he wrote recently.
Japan has certainly been shielded from global vigilantes so far because 95pc of its debt is held by local investors, allowing Tokyo to issue 10-year bonds at just 1.21pc. It is far from clear that this can continue. The Government Pension Investment Fund (GPIF) – the biggest holder of Japanese debt – has switched from net buyer to net seller as it meets payout costs for retiring baby-boomers.
Dylan Grice, a noted Japan bear at Societe Generale, said the country's ageing crisis would bite in earnest in two to three years, causing pensioners to run down their assets. The savings rate has already dropped from 15pc of GDP in 1990 to under 3pc. It may soon turn negative, depleting reserves needed to soak up state debt.
"They will have to turn to foreign investors, who will demand higher yields of 4pc to 5pc. The government will not be able pay this because interest payments are already 28pc of tax revenues," he said.
"If they try to correct it by a fiscal contraction [raising taxes] they will cause a depression that dwarfs anything in Greece. The Japanese are facing a problem that no country has ever faced before. I think Japan is already is beyond the pale," he said.
Mr Grice predicts the get-out-of-jail-free card will prove to be some sort of stealth default through inflation, perhaps spiralling into hyperinflation very fast once the genie is out of the bottle.
James Bullard, the head of the St Louis Federal Reserve, said recently that the US is "closer to a Japanese-style outcome today than at any time in recent history". That bears thinking about.

Thursday, January 27, 2011

Morning Note...

Futures slightly lower (-20bps) this morning as markets digest heavy earnings, disappointing economic data, and yesterday’s FOMC “non-decision” decision.  Note that markets are expected to open on-time despite heavy snows in NYC.  In earnings news, CAT (+2.5%) beat estimates, LLY beat, T (-3%) beats by 1c but guidance was light, PG (-2.4%) beat by 3c but missed on revs, CL missed on revenues and trades lower, and POT (+4%) beat estimates.  NFLX, QCOM, and UA also beat and raised forward guidance.  Notable misses include BMY and MUR (-7%).  In economic news, Initial Jobless Claims for the week ending January 22nd disappointed, coming in at 454k vs. the 405k expectation and the prior 403k.  Continuing Claims were 3.991M vs. the 3.873M expectation.  Further, December Durable Goods Orders also disappointed, at -2.5% vs. the +1.5% expectation and the prior -0.1% reading.  In macro news, S&P downgraded Japan’s debt rating to AA- from AA and the Japanese Yen (JPY) has fallen in response.  Additionally, the situation in Egypt (especially on the back of recent events in Tunisia) is worth keeping an eye on as it relates to Middle Eastern stability.  Looking ahead, key dates/events include Bernanke speaking Feb 3rd and China’s New Year holiday from February 2nd to 8th.  Investor George Sorus defended the euro currency, and Europe is up ~40bps on aggregate this morning.  Asia was mixed overnight but Shanghai was the outlier, up 1.5%.  Gold +10bps.  Oil -50bps.  USD -20bps.  EUR 1.3742.  Interesting Bloomberg poll release in quote section below.  Respondents expect China to crash within 5 years and half think a U.S. city or state default this year is unlikely.  

Regarding the Fed, ISI posted a solid summary yesterday afternoon:

            1. Summary - No changes in policy, only a minor upgrade to the FOMC reading of current economic           conditions, and no changes to the outlook.  No dissents.
2. Growth outlook - The statement largely repeated the same language as the December statement.  The FOMC recognized that growth in household spending picked up late last year, but also continued to say that it's likely to remain constrained by a number of factors.  The language on unemployment suggests that the Committee doesn't take much signal from the drop in the unemployment rate last month.
3. Inflation outlook - There was an acknowledgement that commodity prices have risen, but that did not change the FOMC's assessment of the inflation situation.  The main message is that measures of underlying inflation have been trending downward, same as in December.
4. Policy stance - Language largely unchanged from last time, but with the omission of the explicit pace at which Treasury purchases are going to take place.  However, the statement still said that the FOMC intends to purchase $600 billion of Treasuries by June, which implies the same pace of $75 billion per month that was in previous statements.  We wouldn't make too much of this omission.  It is possible that the FOMC was seeking more flexibility in the pace of monthly purchases to allow for changes in market conditions.  The omission also could prepare the groundwork for a tapering off of QE2 (maintain the same $600 billion but postpone the end date, thus decreasing the monthly pace), but a decision in that sense will probably be made at the March or April meeting.
5. Dissent - There were no dissents.  Even the two members who were considered most likely to vote no (Fisher and Plosser) stayed with the consensus.  They may dissent later, when more important decisions will have to be made.
6. Looking ahead - The Fed will continue to review economic conditions at coming meetings, but today's statement does not signal any intention of scaling down QE2.  The next two meetings, in March and April, will probably be more interesting, with decisions to be made about the tapering off of QE2 or its potential extension, and the stance of policy over the medium term.  Given the FOMC's outlook, we expect that QE2 will be tapered off and that the Fed will be on hold for about a year after that.

Interesting rant from TGL this morning on the recent CBO release on the U.S. gov’t budget:

Moving on then, the Congressional Budget Office yesterday shows the world how truly ignorant of economic realities it is when it reported that the Federal deficit shall widen to $1.5 trillion this year from the already “sporty” $1.3 trillion of the last fiscal year. The CBO said that much of the increase in the deficit was the direct result of the extension of the “Bush Tax Cuts.” The CBO put a very precise cost to those tax cuts: $858 billion. What we find comical with the CBO’s figures is that these are perfectly static numbers; that is, the CBO has simply taken the most recent GDP figures, taken the most recent tax receipts as a percentage of GDP and cast them forward then done the same with the tax rates ex-the “tax cuts” and projected a sum of receipts and compared the two numbers as if businessmen and women shall make no adjustment whatsoever to their businesses to account for the change in these margin tax rates.
This is of course utter and complete nonsense, for if this were so then all we musts needs do to balance the budget is project a much higher marginal tax rate that would be sufficient to yield the receipts necessary to affect budgetary balance and be done with it. If that would require a marginal tax rate of 95% then the CBO would raise the rate to that level, project the appropriate tax receipts, achieve budget balance and move on. But of course people change their actions according to marginal tax rates, and history shows that lower marginal tax rates always and everywhere yield greater, not lesser, tax revenues.

SBUX lower on higher coffee input costs.  QCOM higher on earnings.  NFLX higher on earnings.  MO higher on earnings.  CAT higher on earnings.  CTXS higher on earnings.  CL beats by 1c.  COV to be added to S&P500.  ETFC missed by 7c.  GM higher on India demand.  BWA cut at GSCO.  GT cut at GSCO.  LMT beats by 20c.  OI misses by 2c.  SYMC beats by 2c and raised at JEFF.  TER higher on earnings.  TWC beat estimates and raised dividend 20%.  VAR beats by 7c.  

FT News:  COV added to S&P 500, TYC earnings beat, T lower on earnings, SYMC beat and raised at JEFF,

FT PreMarket 8:30am (% change vs prior close/volume): 

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

Today’s Trivia:  How many items does the average American supermarket carry?

Yesterday’s Answer:  n/a

Best Quotes: China Will Face Crisis Within 5 Years, Investors Say 

Jan. 27 (Bloomberg) -- Global investors are bracing for the end of China’s relentless economic growth, with 45 percent saying they expect a financial crisis there within five years. An additional 40 percent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 percent are confident China will indefinitely escape turmoil. “There is no doubt that China is in the midst of a speculative credit-driven bubble that cannot be sustained,” says Stanislav Panis, a currency strategist at TRIM Broker in Bratislava, Slovakia, and a participant in the Bloomberg Global Poll, which was conducted Jan. 21-24. Panis likens the expected fallout to the aftermath of the U.S. subprime-mortgage meltdown. On Jan. 20, China’s National Bureau of Statistics reported that the economy grew 10.3 percent in 2010, the fastest pace in three years and up from 9.2 percent a year earlier. Gross domestic product rose to 39.8 trillion yuan ($6 trillion). Any Chinese financial emergency would reverberate around the world. The total value of the country’s exports and imports last year was $3 trillion, with about 13 percent of that trade between China and the U.S. As of November, China also held $896 billion in U.S. Treasuries. The trade and investment links between the two nations were underlined with Chinese President Hu Jintao’s visit last week to the White House for meetings with President Barack Obama.
Investors’ concern contrasts with Chinese government statements on the outlook for the economy, which is poised to overtake Japan as the world’s second biggest. The Politburo said last month that the nation had a “sound base” for stable and fast growth in 2011 after consolidating its recovery. In an interview in Davos yesterday, Li Daokui, an academic adviser to the central bank, said he doesn’t expect any “hard landing” and the economy may expand about 9.5 percent this year. Fifty-three percent of poll respondents say they believe China is a bubble, while 42 percent disagree. China’s neighbors are the most concerned: 60 percent of Asia-based respondents identified a bubble in the world’s second-largest economy. Worries center on the danger that investment, which surged almost 24 percent in 2010, may be producing empty apartment blocks and unneeded factories.
Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management in San Francisco, says he is “exceptionally worried” that the Chinese would eventually face “major dislocations within their banking system.” Chinese authorities also raised interest rates twice in the fourth quarter in a bid to choke off inflation, a sensitive political issue since the 1989 Tiananmen Square protests, which followed uncontrolled price increases. Food prices last year rose 7.2 percent, according to the National Bureau of statistics. Haroon Shaikh, an investment manager with GAM London Ltd., cited “rapid wage inflation” and soaring property prices as the financial markets’ chief concern. Li said rising real estate prices are the “biggest danger” to the Chinese economy, in an interview with Bloomberg News in Davos, Switzerland. The People’s Bank of China should “gradually increase rates in the first and second quarter,” Li said. Since peaking on Nov. 8 at 3159.51, the Shanghai Composite Index has slid about 14 percent. “The market is right to be nervous,” Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, wrote in his Jan. 26 financial newsletter.
Some investors remain unbowed. “China can continue to grow over 10 percent for the better part of the next five years,” said Ardavan Mobasheri, head of AIG Global Economics in New York. Still, the poll found other signs of mounting investor caution toward China, where three decades of market-oriented reform has obliterated a legacy of Maoist impoverishment. Asked to identify the worst market for investment over the next year, 20 percent of poll respondents say China versus 11 percent in the last poll in November. Almost half of those polled -- 48 percent -- say a significant slowing of growth was very or fairly likely within the next two years. Michael Martin, senior vice president of MDAvantage Insurance Company of New Jersey, says the Chinese government “has executed brilliantly” in managing the economy. The government’s capacity will be tested as the economy grows and becomes more complex, he says.
Chinese officials have said they intend to wean the economy off its reliance upon exports, the source of trade tensions with the U.S., in favor of greater domestic consumption. Peter Hurst, a broker with Sterling International Brokers in London, says he’s concerned China will struggle to complete the transition. “Yes, there are 1.3 billion people in China,” he says. “But are they rich enough to become consumers?” If China stumbles, the global economy will feel the impact, says Suresh Raghavan, chief investment officer for Raghavan Financial Inc. in Houston. “If the PBOC is successful at lowering growth rates to 7 percent, it will still feel like a recession for a lot of people around the world,” he says.
Most poll respondents remained confident of the Chinese government’s ability to fend off demands for greater political liberalization. Just 1 percent expect a political crisis within the next year and 27 percent expect one within the next two to five years. And by a 60 percent to 30 percent margin, those surveyed say President Hu’s policies were favorable to investors. Hu tied with German Chancellor Angela Merkel for the poll’s top spot. “The Chinese politicians are able to act on all necessary issues. That gives them a huge advantage compared to the Western economies,” says Henry Littig, who heads his own global investment firm in Cologne, Germany. The poll was conducted by Des Moines, Iowa-based Selzer & Co. for Bloomberg and has a margin of error of plus or minus 3.1 percentage points.

Friday, January 7, 2011

Morning Note...

Better late than never…

Futures open slightly higher this morning (+15bps) after earlier weakness on the back of yesterday’s relatively disappointing December Retail Sales data and this morning’s weaker-than-expected December jobs data.  The official Change in Nonfarm Payrolls came in at +103k vs. the +150k expectation, although the Unemployment Rate dipped to 9.4% from the prior 9.8% reading.  Overseas, European markets are slightly lower (-10bps) and the EUR/USD (1.2974) remains under the 200-day moving average (1.3080) and the psychological 1.30 level.  Asia was mixed but mostly flat overnight.  Oil +60bps.  Gold -30bps.  USD +7bps. 

Interesting Bernanke commentary hit the tape on the open this morning:

Bernanke Sees Slow Drop in Joblessness Even With Growth Pickup 2011-01-07 14:30:00.12 GMT

Jan. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the decline in the unemployment rate is likely to be slow even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus. At the pace of improvement projected by Fed officials, “it could take four to five more years for the job market to normalize fully,” Bernanke said today in prepared testimony to the Senate Budget Committee. Bernanke also stepped up the urgency of his call for a plan to reduce the federal budget deficit, saying “prompt adoption” of one could have economic benefits in the long and short run. The Fed chief is defending his unorthodox program of buying $600 billion of Treasuries through June to meet the Fed’s mandates for full employment and stable prices. He spoke an hour after the government reported U.S. employers added 103,000 workers to payrolls last month, less than forecast by economists. The jobless rate fell to 9.4 percent from 9.8 percent, reflecting gains in jobs and fewer people in the labor force. “In a situation in which unemployment is high and expected to remain so and inflation is unusually low,” the Federal Open Market Committee “would normally respond by reducing its target for the federal funds rate,” Bernanke said in his first public remarks on Capitol Hill since September. Instead, with the rate close to zero since December 2008, the Fed is buying securities in an effort to keep market borrowing costs low, he said, building on the first round of $1.7 trillion in debt purchases that “appeared to be successful in influencing longer-term interest rates, raising the prices of equities and other assets, and improving credit conditions more broadly, thereby helping stabilize the economy and support the recovery.”

BGP in restructuring talks with JEFF.  GSCO ups DO.  CITI ups GT.  KBH higher on earnings.  OPCO ups KLIC.  JPHQ ups PHG.  SCHN lower on earnings.  VLTR lowers guidance.  WEFA & DBAB upgrade SYNT.  XRTX earnings miss.  
 
S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Best Quotes:  Adios…

Thursday, January 6, 2011

Morning Note...

Futures ~10bps higher this morning as jobless claims are in-line and same-store-sales for December are “mixed,” for lack of a better word, but slightly “weaker than expected” is also viable.  Initial Jobless Claims for the week ending January 1st were 409k vs. the 408k expectation and the prior 391k revision.  Continuing Claims for the week ending December 25th were 4.103M vs. the 4.080M expectation and the 4.150M prior reading.  Europe ~75bps higher on the aggregate.  USD flat.  EUR/USD 1.3115.  Oil -65bps.  Gold -10bps.  Asia mixed overnight.  Regarding same-store-sales, here’s a summary from the Barclay’s desk:

(1) WHY DID SO MANY RETAILERS MISS?  It's actually been very company-specific, as opposed to some single, prevailing theme.  There are a bunch of inconsistencies across the space, but point is that middle-income disappointed, high-end delivered, and a lot of these holiday channel checks were off.  Net net, we think Retail underperforms today.
                              
(2) STRENGTH came from Luxury (JWN, SKS) and the Off-Price channel (ROST, TJX), while the middle-man got hit (GPS, JCP, KSS, M).

(3) Very contrary to this time last year, ANF outperformed AEO/ARO, and consensus was positioned that way for the most part.  AEO and ARO came in with some of the lowest expectations, and both still disappointed.  While +15% for ANF is better than street, it's mostly in-line with buy-side expectations and AUR not great.  Nonetheless, not complaining about +15% on a morn like this.

(4) Similar amount of pre-announcements as this time last year (14 now vs. 15 then).  This time around, more balanced between those that raised (4), reaffirmed (5), and lowered (5).  For what it's worth, on Dec comp day in Jan 2010, the MVRX closed flat vs. SPX.

(5) Weather impact wasn't addressed as much as we thought it would be.  Only 1 or 2 small-caps actually quantified the effect.  I gotta imagine more color to come on these conf calls.

(6) One last thing worth mentioning is that HGG cut comp and EPS guidance pretty meaningfully (namely, the video comp).  This should make BBY extra interesting tomorrow.  TGT also called out electronics as weak.

- COMPS BETTER:   DDS, JWN, ROST, SKS, TJX, URBN
- COMPS IN-LINE:  ANF, COST, KSS, LTD
- COMPS WORSE:    AEO, ARO, BJ, GPS, JCP (below whisper), HGG, M, TGT

- GUIDANCE BETTER:   KSS, NWY, ROST, TJX
- GUIDANCE IN-LINE:  ARO, FRED, GPS, M, TGT
- GUIDANCE WORSE:    AEO, BEBE, CATO, WTSLA

* PRE-MKT MOVERS:  AEO (7.4%), ANF +1%, ARO +0.7%, DDS +1.5%, GPS (7.1%), JCP (1.5%), JWN +1.3%, KSS (1.5%), LTD (0.2%), M (3%), ROST +1.8%, SKS +4.3%, TGT (4.6%), TJX +2.8%, URBN (2.9%)

BMOC ups ADM.  CITI initiates DEO with Buy.  CITI ups COV.  FBP reverse stock split.  BCAP cuts LAMR.  PCS Q4 net adds weaker.  PCX upgrade at BB&T. 

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

Best Quotes:  The race is on for 2011, and if you have been a non believer that the rally in equities has legs, let’s face it you are stuck in the gate.   With no meaningful upside resistance levels, and dips aggressively bought you have to be worried that 1300 will be the first level for a pullback.   Volumes have been great 3 straight days over 4.4 billion shares, the 75 day moving average is about 4.2.    M&A is still robust.  Early New issue has been easily absorbed.   It’s been long said that the market could not have a meaningful rally without the financials.  Well they are involved and still under owned.   Support levels 1265 yesterdays low, 1256.25 is the weeks low.   Continue to buy the dips,  the money is coming back to equities, you can feel it. 

Wednesday, January 5, 2011

Morning Note...

Futures ~20bps lower this morning despite much better than expected unemployment data from ADP.  The December ADP Employment Change release indicated 297,000 jobs were added to the economy for the month, which is nearly three times the +100k estimate.  U.S. futures, however, remain slightly underwater as European markets are down ~1%, Asian markets were mixed to slightly lower overnight, and commodities are generally lower across the board on “slowing global growth” concerns.  Additionally, the USD is ~1% higher and the EUR/USD stands at 1.3146 (down 1.22%).  Drilling down a bit in Europe, it’s worth noting that Portugal sold EU500 billion of six-month bills with a 3.7% yield, which is much higher than the 2.05% rate in September 2010.  In M&A news, QCOM will acquire ATHR for $45/share, or roughly $3.1 billion.  In earnings news, agriculture company MOS is ~3% higher on a 10c beat to earnings estimates.  Yesterday’s Fed minutes also revealed a lack of faith in the recovery signals observed during the last two months, with the Fed noting its reticence to adjust the QE2 program at this juncture.  The Fed further expressed concern on the European debt issues that have been gaining attention in the market over the past few months.  With all of the variables in place, several Committee members stated that they had a “fairly high threshold” for making adjustments to QE2.  Note that December’s ISM Non-Manufacturing release is due at 10am today, and stands to confirm this morning’s positive jobs data.  Here’s a quick summary from Knight’s Fixed Income desk:

ADP, the best (and really only) predictor of Friday’s monthly jobs data, printed at a very high 297K gain for December versus expectations of a 100K gain.  We have noted before that “best” here is a pretty low bar and the ADP report should be considered in its own right, and not just a forward look at the official numbers.  ADP overestimated November’s jobs data (by 43K), but underestimated the prior 6 months (average difference of 55K).
 
That being said, the 297K print is hard to argue with.  270K of the jobs were in the services sector, so this raises expectations for the ISM Non-Manufacturing number due out at 10AM.  We will closely watch this number for confirmation of the ADP data, but there is historically not a huge basis to argue with the number.  Even adjusting for holidays and noting the service bias, it is not out of line.  Service jobs accounted for about 97% of ADP December job gains and 84% of all ADP prints over the past five years.  A confirming ISM number at 10AM will significantly raise expectations and estimates for Friday. 

Regarding market “feel,” here’s one trader’s take (BofAMLCO):

Look no farther than the commodities for the selloff.  The dollar up for a third straight day vs. the euro, and the possibility of position limits on CRB loom.    Reuters: CFTC commissioner Bart Chilton “While I will now support publishing a position limit proposal for public comment, I will continue to make the case that we need to address excessive speculation in these markets immediately,”  These comments will focus on ETF participation in the Commodity markets.   12555 is Monday low, the first level of support, 1245 was last weeks’ low.  1270 was yesterdays high.   I am still a buyer of this dip.   Going into earnings I feel you need to be long the market.   Have a good day.

FDO lowers guidance.  EBAY initiated Hold at Canaccord.  PIPR cautious on LEAP.  JEFF cuts ASBC.  BCAP ups BYD, NVDA.  EDR announces 9.5M share offering.  HTS announces 9M share offering.  TRID lowers guidance. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Best Quotes:  Good BBERG piece on rising food costs…

World Food Prices Rise to Record on Sugar, Meat Costs
2011-01-05 09:57:50.319 GMT

By Rudy Ruitenberg
     Jan. 5 (Bloomberg) -- World food prices rose to a record in December on higher sugar and meat costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.
     An index of 55 food commodities maintained by the Food and Agriculture Organization climbed for a sixth month to 214.7 points, above the previous all-time high of 213.5 set in June 2008, according to a monthly report posted on the Rome-based UN agency’s website today. The gauges for sugar and meat prices advanced to records.
     Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years in Chicago. Food prices may gain further unless global grain production rises “significantly”
in 2011, the FAO said Nov. 17. At least 13 people died last year in Mozambique in protests against planned increases in bread and water prices.
     “There is still, unfortunately, the potential for grain prices to strengthen on the back of a lot of uncertainty,”
Abdolreza Abbassian, senior economist at the FAO, said by phone today. “If anything goes wrong with the South American crop, there is plenty of room for them to increase further.”

                      Cereals, Cooking Oils

     The FAO’s food-price indicator climbed from 206 points in November. Its gauge for sugar prices reached 398.4 points last month, increasing from 373.4 in November. The meat-price index rose to 142.2 points from 141.5.
     The agency’s cereal-price index jumped to 237.6 points in December, the highest level since August 2008, from 223.3 the previous month. The indicator for cooking oils advanced to 263 points, the highest since July 2008, from 243.3. The index for dairy prices rose to 208.4 points from 207.8.
     Global grain output will have to rise at least 2 percent this year to meet demand in 2011-2012 and avoid further depletion of stocks, the UN agency has said. Concern about dry weather in Argentina helped corn prices to jump 52 percent in Chicago last year.
     The basis for the FAO index is 2002-04. The gauge includes commodity quotations that the agency considers representative for international food prices.

Tuesday, January 4, 2011

Morning Note...

Futures ~30bps higher this morning as positive economic data coupled with the new year’s global deployment of cash continues to rally equities.  Yesterday’s ISM was generally met with investor cheer, and all eyes will be on this morning’s 10am Factory Orders and this afternoon’s 2pm Fed Minutes release for more evidence to the upside.  Also note that December Auto Sales will be released later today, the December ADP Employment Change is due at 8:15am tomorrow, Initial Jobless Claims are due Thursday, and the December Official Nonfarm Payroll release is set for Friday morning.  Europe ~80bps higher on aggregate despite higher that expected German unemployment.  Asia higher overnight across the board.  Oil -45bps.  Gold -180bps.  USD -20bps.  In political news, Obama is back in Washington today and will sign a $1.4 billion food safety bill into law.  This morning’s Gartman Letter speculates on rising Wheat prices due to Australian floods.  Reuters reports that bank borrowing continues to tick higher. 

In his evening note last night, BTIG’s Mike O”Rourke focused on the ISM release:

No Hesitation.

Whether it was the cash being redeployed for the New Year (likely) or investors playing catch up on positions, stocks opened up and staged a broad-based rally. The gains moderated slightly as the Dollar strengthened throughout the afternoon. Regardless, the S&P 500 posted its best performance since December 1st. The key economic data point today was the December ISM Manufacturing Report. The report posted its highest reading since May, and was an impressive report considering that 7 of the 18 industries reported contraction in December. There were a couple underlying data points of note. The much-watched New Orders – Inventories spread widened out in a positive manner to 9.1, after bouncing around above and below zero for 5 months. On the negative side was the Employment component, which, although still well within growth territory, downticked to its lowest reading since March. Norbert Ore, who chairs the survey for ISM, discussed watching for the handoff of the recovery from the Manufacturing sector to the Services sector over the next 6 months. The other notable aspect of the report was the focus upon rising commodity prices. According to ISM, in December 28 commodities were up in price, and Natural Gas was the only one down. Ironically, the only commodity in short supply was Cocoa Powder, which was not up in price according to ISM's metrics. Ore noted that this is the point in time to watch commodity prices to see if they will fuel additional pricing pressures. He noted the rise in commodity prices in 2006-2007 was strong but did not carry through to the consumer level as it was offset by productivity gains. Our observation is that the last thing investors will be expecting in this economy is additional productivity gains after companies cut to the bone during the recession. That being said, we do not think commodities will build upon 2010's gains, but we will be watching.

WAG added to Conviction Buy list at GSCO.  MOS earnings due after the bell.  EBAY initiated Neutral at WEDB.  Barron’s positive BAC.  BP higher on news that the compensation payouts for the Gulf oil spill may be much lower than expected.  ARG buys Conley Gas.  NLY plans 75m share offering.  CEG completes acquisition of Boston Generating power plants for $1.1 billion.  Janney rates DKS a new buy.  UBSS cuts MLM.  DBAB ups CCL.  MACQ ups ESS.  WEFA cuts IR.  ROTH ups QCOM.  CSFB ups ROK.  SWX cut at UBSS.  WEFA cuts TROW.  KBWI ups STI.  BofAMLCO ups UHS.  JPHQ ups VRNT.  GLW COO retires.  Cramer positive AA.  JPHQ cuts AFFX.  RL upgrade at CITI.  SUSQ positive on Oil Sector.  BARD ups HE.  BLAIR ups SYNT.  GSCO cuts CALX.  JEFF cuts EMS.  OPCO cuts RPM. 

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

Best Quotes:  Knight trader note…

Futures higher again in the early morning as a slew of positive data is anticipated for the upcoming releases.  Today sees Factory Orders, FOMC Minutes, Consumer Confidence and Vehicle Sales.  Market sentiment seems to be trending towards fundamental doubt, however the anticipation of positive prints for December unemployment and 4Q10 GDP have market participants not wanting to be on the sidelines for a January rally.  Yesterday’s ISM was positive news as the market rallied on the strongest numbers since April 2010.  Treasuries continue to sell off.  We still maintain that the front end is oversold, but along with most market participants, we would not want to attempt to catch a falling knife.  The selloff is more driven by fiscal issues within the US than expectations of a broad recovery, which should serve to anchor Fed Funds expectations for the year.