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.