Monday, January 3, 2011

Morning Note...

Futures ~50bps on the first trading day of the new year, as global investors return from the holidays both refreshed and optimistic.  Europe is ~1.5% higher and Asia was similarly higher overnight.  Note, however, that the U.K., Japan, Shanghai, and Australia remain closed for the holiday.  “Looking ahead” seems to be the general theme of the first day of the year, and – on that note – there is a fair amount of economic due in the near term.  Later today (10am), December ISM data is due for release.  And later this week we’ll get November Factory Orders, minutes of the most recent Fed meeting, December Vehicle Sales, ADP Employment, and December Official Change in Nonfarm Payrolls.  Positive article in the Wall Street Journal this morning that optimistically speculates that U.S. companies are set to begin spending their hordes of cash on new factories, new stores, and hiring.  Oil +80bps.  Gold -15bps.  USD +30bps.  EUR/USD 1.3344. 

Good read from BTIG’s Mike O’Rourke last night as a lead-in to 2011:

Nose, Reintroduce Yourself to the Grindstone.

It is time to get back to business.  The S&P 500 closed out 2010 with a very respectable total return of 15.07% and settled at 1257.64.  Although the S&P 500 has managed to reclaim its pre-Lehman territory, more than two years after the firm's collapse, it still does not appear as though many investors have participated in the latest move.  Volume in December continued to slow.  Equity volumes in December were down 8.7% year over year, and down 22% versus a volatile 2008.  A better illustration of how this rally was missed might be to measure from September 1st.  In the final 4 months of 2010, the S&P 500 rallied 20%, accounting for the year's gains and then some.  The volume for the final 4 months of 2010 was 13% slower than 2009, and 31% slower than a panicked 2008.  The ICI Fund Flow data provides additional confirmation.  Despite nearly $10 Billion of inflows to mutual funds seeking foreign exposure, there has already been $6.7 Billion in outflows from domestic equity mutual funds through December 21st.  During that 20% rally in the S&P 500 domestic equity mutual funds experienced nearly $35 Billion in outflows.  As it stands, December is on pace to be the 8th consecutive outflow month and the 14th of the past 17 months for domestic equity mutual funds.

Now that the holiday season is past, it makes sense to check on our preferred indicators to see where they stand as of late.  Our prediction that Initial Jobless Claims would break below 400,000 before the end of 2010 came down to the wire but was achieved.  Last week's reading of 388,000 was the lowest since July 2008.  We expect a big bounce in this week's reading up to the 420,000 level before settling back in around the 400,000 range.  Two other important metrics, which are closely related to one another, are showing signs of life.  The first is Commercial and Industrial Loans on bank balance sheets, which have risen to its highest level since April.  This is still well below the peak level of $1.6 Trillion reached in 2008 during the credit bubble.  As such, it is not paramount to return to that level quickly but the resumption of credit expansion is.  The resumption of credit expansion is one of those levers that will reinforce the self-sustaining nature of the recovery.  The expansion of credit is a critical ingredient to M2 Money Supply growth.  M2 year over year growth is once again hitting its best levels in a year.  This is a step in the right direction, and still well below a pace that would create an inflation concern.  Year over year M2 growth is still only testing the bottom end of the range for the past decade.  If these indicators continue to remain on track, 2011 should be the year in which the economic recovery on Main Street takes precedence over the financial markets recovery on Wall Street.

Barron’s positive PEP, WMT.  BCAP cuts ARO, COH, RUE, TIF, TLB, URBN.  DBAB ups AA.  CITI names AMD Top Pick.  ANAC initiated Buy at CITI.  GS reportedly invests $450M in Facebook.  BAC announces $2 billion write-off on Countrywide bad debts.  DRYS cut at MSCO.  MCP tgt raised at Dahlman Rose.  MELI upgrade at JPHQ.  Janney ups ODP.  CITI ups ONNN.  KEYB ups POL.   

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

Best Quotes:  BofAMLCO trader note…

Good Morning -  I hope everyone had a healthy and happy holiday.   January effect will be in full throttle this year, off the heels of the best 2 year market since 1998-1999.   It was the best December since 1991, and if you missed Friday good for you.   Friday was the lightest full day of trading of the year.   The economic data out last week was encouraging.   Today we get ISM and Construction spending.   Tomorrow FOMC.   Later in the week the NFP data to be release.  I fully expect the new issue calendar to heat back up.  Need to strike while the iron is hot.   Will we see rate hikes this year?  In theory equities should benefit from the asset allocation trade.   Technically speaking 12257 was Fridays high, 1280 was the high on 9/19/08.   Support is 1250, coincides with Fridays low.    I would buy the dips.   Can’t start the New Year with a negative attitude.  Have a great day.