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.