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.