Clean, Clear, Calm

Morning Note...

2011-02-03T09:04:00.000-05:00

Unfortunately - and this is just one of the perils of joining a large organization with a series of checks and balances in place to protect its clients - the Compliance Dept at Franklin Templeton does not look favorably on my daily Morning Note post. It's completely understandable, but I apologize in advance - I am suspending stock market posts going forward. You'll just have to settle for rants against Miami drivers and the Miami Heat... All the Best, Ben

Morning Note...

2011-02-02T08:46:00.000-05:00

Futures ~15bps lower despite today’s better than expected ADP Employment Change for January. According to ADP, payrolls grew by 187,000 in January, which was lower than December’s +297,000 but beat the +140,000 expectation. However, going back to December, recall that the Official Nonfarm Payrolls number came in at only +103,000 despite the ADP’s +297,000 number. On the earnings front, Time Warner Cable (TWX) is 3.5% higher on better-than-expected profits. Video game maker Electronic Arts (ERTS) is also 11% higher on earnings. Note that China is closed for their New Year’s holiday until Feb 9^th. Looking ahead, Bernanke speaks tomorrow and we’ll get the ECB rate decision and – surely – some market moving headlines from Trichet. The Official Nonfarm Payrolls release will be Friday. In Europe, interesting to note that Greek bonds have recently outperformed German bonds (!!) and there are positive comments from Greek Finance Minister Papaconstantinou on the tape. Ireland’s debt was cut at S&P. Europe relatively flat. Asia higher across the board overnight. USD flat. Oil +30bps. Gold -10bps. EURUSD 1.3805

Going back to yesterday, there have been some concerns that personal spending was slightly higher than personal income yesterday. Does that indicate a return to elevated levels of personal credit? It’s worth noting that this data was released the same day that the DJIA closed over 12,000 since the pre- to early-crisis days of June 2008. Hedge fund manager Travis Anderson also made note of the return of the consumer in his Q4 letter:

Natural resource stocks continued to be leaders, building on their earlier gains, but more growth oriented technology and retail names came to life in the quarter, pushing several of them into our top ten for the year. This I think indicates a nascent belief in economic recovery – and not just stock market recovery – taking hold among investors.

Considering yesterday’s better-than-expected Auto Sales data – especially the light truck segment, which correlates somewhat favorably to positive-thinking and spending consumers – Travis is clearly onto something.

Interesting article this morning on hedge funds getting off to a slow start in 2011:

Many Hedge Funds Have Weak Start In January, Lagging Stocks (Wednesday, February 02, 2011 05:16 ET)

By Margot Patrick Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Many hedge funds lagged stock market indexes and took the wrong side of currency and interest-rate bets in January, in a lackluster start to the year for the industry.

The HFRX Global Hedge Fund Index, tracking about 250 funds that report on a daily basis, gained 0.56% in January, far less than the S&P 500's 2.4%. Treasury yields were little changed in the month as a mixed outlook for the U.S. economy led investors to reset their expectations on when interest rates might rise.

By strategy, HFRX constituent hedge funds investing in distressed debt had the best month, up 1.87%, while systematic hedge funds that use automated computer models to make trades across asset classes were down 2.58%.

One systematic trading fund that has already reported for the month, Man Group PLC's (EMG.LN) AHL Diversified, lost 3.5%. Last year it outperformed the broader hedge-fund industry with a 16% gain. The HFRX Global Hedge Fund Index was up 5.19% in 2011. A more widely watched index, the HFRI Fund Weighted Composite Index posted a 10.5% gain. Both indexes are compiled by Hedge Fund Research Inc. The HFRI index data for January will be released within about a week, after its roughly 2,200 constituent funds submit their data.

Another early reporter that makes public its performance, Third Point Offshore Fund, continued its 2010 winning streak with a 3.9% rise in January. The $2.77 billion fund makes investments linked to company mergers, debt restructurings and other corporate events and was up 34% last year.

Third Point in an investor update Wednesday said its top winners in the month included positions in fertilizer company Potash Corp. (POT) and paper-packager Smurfit-Stone Container Corp. (SSCC).

Potash Corp.'s stock rose 15% in the month, after record sales of potash in the fourth quarter. Smurfit-Stone shares soared nearly 50%, as the company announced an agreement to be acquired by Rock-Tenn Co. (RKT).

Losing positions included gold--one of Third Point's largest portfolio holdings--off about 6.3% in January, and German chemicals company Brenntag AG, whose stock slumped more than 9% in the month.

Meanwhile, Boussard & Gavaudan Holding Ltd. (BGHL.AE), a listed vehicle of Anglo-French hedge fund manager Boussard & Gavaudan Asset Management LP, Tuesday reported a 0.64% increase in January. The listed company invests in B&G's Sark fund, trading in stocks, credit instruments and volatility.

The hedge-fund industry for the most part has gotten back on its feet since the financial crisis wiped out hundreds of billions of dollars from its asset base. HFR last month said industry assets reached $1.92 trillion at the end of December, just short of their $1.93 trillion peak in mid-2008.

Regarding yesterday’s positive economic data, BTIG’s Mike O’Rourke posted a solid summary last night:

In the U.S., the ISM Manufacturing report was the big story. The reading of 60.8 was the highest since the 61.4 reading of May 2004. After that you need to go back to December 1987 to find the next higher print. Beyond being a strong number overall, it also had the same important characteristic of last week's GDP report - strong internals that should fuel the next couple of months. The New Orders component hit its highest level since early 2004, while inventories remained in check. The real impressive stat is that the Employment component registered its highest reading since April 1973. Yes, that's nearly 38 years (another one of those stats that takes you by surprise). There is no doubt that it is positive and impressive progress. The problem is the manufacturing sector has been in decline for essentially 38 years. In 1973, manufacturing jobs were 23% of Nonfarm Payroll Employment. In 2000, they were 13.2%, and today they are only 8.8% of jobs. We believe manufacturing is a notable portion of the structural Unemployment in the United States. Since China joined the WTO a decade ago, it has been a decade long downtrend in which the final washout was forced by the recession. Today's report represents great progress and U.S. Manufacturing jobs have likely registered a long term bottom during the recession, but a secular growth phase is not in the offing until trade balances begin to even out.

GNW lower on earnings. WHR misses by 19c. ENT lower on JMP downgrade. HSP lower on guidance. APKT better earnings and positive comments from Cramer. ERTS beat estimates and was raised at PIPR. HLX raised at MSCO. NAVI may be acquired by TWX. ANN raises guidance. BGP bankruptcy filing reportedly imminent. BRCM lower on earnings. CVI announces 15M share secondary. AFL misses by 2c. DLTR cut at PIPR. CSFB positive on RIO. JDAS lower on earnings. NUAN cut at GSCO. MWA misses by 1c. LVLT beats by 1c. WSJ cautious on DF. WWW cut at SUSQ. MSCO cuts ENR. MSCO cuts F numbers.

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

Today’s Trivia: What controversial sociological tenet holds that human beings can only successfully maintain 150 relationships of any kind at one time?

Yesterday’s Answer: n/a

Best Quotes: Interesting from ISI last yest afternoon…

Some rumors going around today about a potential repatriation holiday from the Obama Administration.

Companies with the largest absolute amount of unrepatriated earnings potentially benefiting from a tax policy change include: GE ($84b), PFE ($43b), JNJ ($32b), CSCO ($32b), MRK ($31b), PG ($30b), MSFT ($30b), C ($27b), IBM ($26b), PEP ($22b), ABT ($21b), KO ($19b), SLB ($18b), BAC ($17b), BMY ($17b) and HPQ ($17b).

Morning Note...

2011-02-01T08:58:00.000-05:00

Futures ~60bps higher this morning as earnings continue to impress and the Egyptian unrest appears to be settling somewhat. (Although the Jordanian PM resigned – it may only be coincidental but the main concern in Egypt is the unrest spreading to other oil producing nations, like Saudi Arabia, in particular.) Volumes remain slightly lower than historical averages (7.8B combined vs. 8.1B year-avg), which is understandable given Middle Eastern concerns and lofty market levels. The VIX has also dipped back below 20. On the earnings front, bellwether global shipper UPS reported $1.08 vs. the consensus $1.05 estimate and expects to increase their buyback in 2011. Elsewhere, much-maligned BP is trading slightly lower on earnings (weak volume outlook) and the announcement it would be selling two refineries, and despite the fact it will be re-instating their dividend. Agriculture giant ADM reported a 29% jump in net income and beat earnings and revenue estimates – despite higher food prices, demand is still strong. In global macro news, China’s PMI was worse than expected, at 52.9 vs. the 53.5 consensus, and Eurozone (10% vs. 10.1%/e) and German (-10k vs. -13k/e; 7.4% rate is lowest since November 1992) unemployment were both slightly better than expected. U.K. and German PMI results were also better than expected, and Europe is currently trading over 1% higher on aggregate. In Asia, markets were mixed to slightly higher overnight. In general, commodity stocks continue to show strength on the back of Asian and European growth in particular. Oil -60bps after recent surge. Gold +55bps. USD -45bps. EURUSD 1.3754. Note that construction spending and ISM Manufacturing data is due for a 10am release today. (Expectations are for the 18^th consecutive month of growth.) Auto Sales are also due later today.

ALB upgrade at JPHQ. IP upgrade at CITI. UBSS cuts PCL. JEFF cuts EXP. OPCO ups VLO. JEFF ups PLD. GSCO cuts DISCA. GSCO cuts SNI. EMN lower on earnings. MTW over 10% higher on earnings beat from strength in crane business. ARMH higher on earnings beat. BIDU +8% on earnings and Mizuho upgrade. LXK +7% on earnings. AMD +3% after recent INTC design flaw. NVLS +4% on earnings and guidance. EMR reports in line. BHP, HL, PAL, RIO all higher on global growth.

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: 558 films were released in America in 2009. 479 were released in 2000.

Best Quotes: from a trader’s desk…

This was an eye opener: in front of employment data friday, in order to see unemployment rate back at 6% we would need to create 9.5mm jobs immediately and then add 125k new jobs each month to keep pace with population growth (not going to happen). If we could created 425k jobs/month it wold take past 2020 to get back to 6%. Say we could add 325k/months wed be in 2030 before we saw it. (data from gartman report).

Morning Note...

2011-01-31T08:39:00.001-05:00

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 9^th.

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.

Morning Note...

2011-01-28T08:48:00.001-05:00

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 3^rd, China is closed the 2^nd to the 8^th, and January’s Official Nonfarm Payrolls will be released on Friday the 4^th.

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.

Morning Note...

2011-01-27T09:06:00.000-05:00

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 22^nd 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 3^rd and China’s New Year holiday from February 2^nd to 8^th. 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.

Morning Note...

2011-01-07T09:53:00.000-05:00

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…

Morning Note...

2011-01-06T09:24:00.000-05:00

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 1^st were 409k vs. the 408k expectation and the prior 391k revision. Continuing Claims for the week ending December 25^th 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.

Morning Note...

2011-01-05T09:28:00.000-05:00

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.

Morning Note...

2011-01-04T09:16:00.000-05:00

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.

Morning Note...

2011-01-03T09:22:00.000-05:00

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.

Morning Note...

2010-12-31T09:35:00.000-05:00

Really not much to say this morning, folks… Happy New Year to your and yours…

Futures ~10bps lower this morning on year-end profit taking, most likely. Europe was lower on a half-day of action; -25bps on the aggregate but the U.K. and France were both down ~1% and Germany is closed. Asian markets were mixed overnight, with Shanghai the lone standout at +1.75%. Oil -80bps, Gold +43bps, USD -45bps, EUR/USD 1.3370.

In terms of commentary, I thought this was the best piece of the morning thus far:

Perennially, there tends to be a lot of hype around the last day of the year (buzz words like window dressing, portfolio rebalancing, tax loss selling, etc). I remember I flew back from Hawaii a day early so as not to miss 12/31 a few years back. It wasn't worth it ... I should've stayed on the beach. We looked at broader market volumes over the past 10 years on the last day of the year, and today tends to be slower than people make it out to be. Broader market volumes on 12/31 have been 77% of the December average, and 84% of the prior 10-day average (which tends to be light to begin with). 12/31 is around in-line with the prior 5-day avg.

As for PERFORMANCE, SPX has closed RED on "year-end" 7 of the last 10 times, and RED on 5 of the last 6. The avg abs value move of SPX = 0.66%. MVRX has outperformed SPX on 7 of the last 10 year-end days, XLP has lagged on 4 of the last 10, Russell 2000 has underperformed on 8 of the last 10. Have a safe NYE! Being 6 blocks from Times Square right now is 50 blocks too close for me.

Regarding Hedge Funds and this year’s performance, here’s an interesting NY Post article:

Hedges clipped

By KAJA WHITEHOUSE

The normally boisterous and upbeat hedge fund crowd is limping into 2011 bearing the heavy weight of lackluster performance and an ominous insider-trading probe -- leading some industry watchers to wonder if the new year could be marred by another round of fund closures.

In 2010, the number of hedge funds to close their doors permanently declined 32 percent to just 585 firms through the end of the third quarter, according to fund tracking outfit Hedge Fund Research. But fund watchers say the recent downturn in closures may just represent a lull in the storm.

In terms of performance, the hedge fund industry -- which prides itself on being smarter than the Average Joe and charging clients 2 percent management fees and 20 percent on the profit -- struggled to eke out superior returns this year, leading the average hedge fund to close 2010 up a mere 7.5 percent, according to Hedge Fund Research. That's below returns for average stock market indexes like the S&P 500, which is up 13 percent this year.

"If the market is continually as tough as it has been, I think you are faced with guys who will say, 'I've had a good career. I've made my investors money,' " before throwing in the towel, said Sam Hocking, head of prime brokerage at BNP Paribas.

Leading that trend to the exit is noted moneyman Stanley Druckenmiller, who announced in August plans to call it quits after 30 years, citing the "stress of performing" amid a rare slump of just 5 percent.

Compounding the industry's pressure has been the Department of Justice's massive insider-trading probe, which has ensnared numerous hedge funds, including Raj Rajaratnam's $3.7 billion Galleon Group and a $1.5 billion health-care fund managed by Morgan Stanley's FrontPoint Partners.

What's more, the FBI in November conducted high-profile raids on three prominent hedge funds, including Diamondback and Level Global, which both manage money for prominent pension funds, including the New York State Common Retirement Fund.

Andrew Schneider, a founder of hedge fund services firm HedgeCo Networks, said investors have definitely grown skittish over who might be implicated next. Following the fed raids, some of his investor clients moved money out of funds that may be more likely targeted for insider trading, like event-driven funds, and reallocated to distressed funds, forex funds and computer-driven funds, Schneider said.

"Investors are holding back new investments in event-driven and merger M&A types of funds because of what's going on, even though some of them passed due diligence," he said. Investors are saying, "We don't know who's involved and we don't want to take the chance," he said.

Among the few fund managers on track to end 2010 with a bang appear to be those who took concentrated risks. Bill Ackman's Pershing Square Capital Management is up 35 percent, with big bets on distressed investments, while John Paulson's controversial gold fund is up 33.6 percent.

Grange Johnson, head of LaGrange Capital Management, said the only way to escape the current doldrums is to take risks on beaten-down plays. This year, Johnson's bets on Coinstar, the controversial operator of the DVD kiosk platform Redbox, returned his fund a good 200 percent after Coinstar settled several high-profile lawsuits with its distributors.

Of course, such plays come with their own stresses, said Johnson, whose fund is up roughly 60 percent this year.

"It's the type of investment that is prone to second-guessing," he said.

kwhitehouse@nypost.com

BGP lower on reports it is delaying payments to vendors as it tried to refinance. UAM sells medicare prescription drug business to CVS for ~$13/share. CLWR Chairman to step down. IMAX higher on reports that Sony may bid $40 for the company. S to buy $200M in CLWR debt. BARD raises SWK estimates. STFL positive on HOT. BARD raises TNB estimates.

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

Best Quotes: Interesting article from yesterday…

Dec. 30 (Bloomberg) -- Marc Faber, who advised investors to buy U.S. stocks in March 2009 as the Standard & Poor’s 500 Index began a rally of as much as 86 percent, said U.S. Treasuries are a “suicidal” investment.

Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October.

“This is a suicidal investment,” Faber said in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S.

long-term bonds.”

On Nov. 3, the Fed said it would buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. U.S. bond funds had withdrawals of $8.62 billion in the week ended Dec. 15, the most in more than two years, according to Washington-based Investment Company Institute.

Rising Yields

Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. U.S. debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.

Treasuries fell today as reports showed initial jobless claims dropped more than forecast, U.S. businesses expanded at the fastest pace in two decades and pending home resales beat expectations. The yield on the benchmark 10-year note advanced

0.02 percentage point to 3.37 percent at 4:28 p.m. in New York, according to BGCantor Market Data.

Bonds may rally in the next two or three weeks, Faber said.

Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to its record of 1,565.15 seven months later, and ended the year up 3.5 percent.

Faber said equities may continue to advance as the dollar weakens as a result of loose monetary policy.

“If you print money, the currency goes down and the S&P 500 goes up,” he said. “By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.”

Morning Note...

2010-12-30T09:23:00.000-05:00

Futures are slightly lower this morning (-5bps) despite better than expected Initial Jobless Claims for the week ending December 25^th. Claims came in at 388k, which beat the 415k expectation and the 422k prior reading. Continuing Claims were 4.128M vs. the 4.084M expectation. Again, relatively quiet outside of that economic data, although note that Pending Home Sales and Chicago PMI data is due at 10am. Overseas, Asian markets were mixed overnight as China’s manufacturing dropped for the first time in five months as recent government monetary tightening policies seem to have successfully taken hold. Across the pond, however, European markets are lower on the aggregate (down ~1%), probably on some year-end profit taking against light volume levels and continued sovereign debt concerns. Oil –60bps. Gold -30bps. USD -35bps. Euro slightly higher against the USD, at 1.3294.

Regarding China, here’s more detail off the Thomson Reuters newswire:

Chinese inflation showed signs of cresting in a manufacturing survey on Thursday, an early indication that the government will be able to stick to its course of gradual rather than aggressive monetary tightening. An easing of price pressures could also cap this week's jump in the yuan to a record high against the dollar, which the central bank said had played an important role in taming inflation. HSBC's China Purchasing Mangers' Index fell to a three month-low of 54.4 in December from 55.3 in November, suggesting that the pace of business expansion in the factories of the world's second-largest economy was moderating but still strong. The headline figure offers an early clue about the direction of overall economic growth, but all eyes now are on Chinese inflation, which is running at its fastest in more than two years, and Beijing's policy response to price pressures. (Thomson)

Regarding consumer spending and the outlook for 2011, I thought this was an interesting story:

Consumers Opening Wallets May Prompt More Corporate Takeovers 2010-12-30 00:01:00.3 GMT

Dec. 30 (Bloomberg) -- U.S. consumers put the brakes on dealmaking in 2010. They may be the accelerator next year. Chief executives maintained record levels of cash this year as the recession-weary consumer fueled doubts about an economic recovery. While mergers and acquisitions topped $2 trillion in 2010 -- the first increase in three years -- the amount failed to approach 2007’s $4 trillion peak in global takeovers. Shoppers may help bring 2011 closer to that total. Holiday sales jumped 5.5 percent in the U.S., the best performance in five years, on purchases of clothing and jewelry, according to MasterCard Advisors’ SpendingPulse. As spending rises, companies are more optimistic and willing to take on risk, according to Joseph Gromek, chief executive officer of New York-based Warnaco Group Inc., owner of the Calvin Klein and Speedo brands. “There will be a very aggressive approach,” Gromek said. “The companies that have strong balance sheets with lots of cash on hand will try to be as opportunistic as possible.” The 1,000 biggest companies worldwide, excluding financial- services industries, have amassed more than $3 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg. Most companies and their boards stayed conservative this year, waiting to see how the economy rebounded before pursuing deals, he said. Warnaco invested in its operations and foreign distribution in 2010, and may now look at acquisitions, Gromek said. “Interest rates are very favorable,” he said.

LMT wins $492M Navy contract. BHP may bid $90 for APC. EWBC announces repayment of TARP. CSFB cuts MS, GS estimates. PIPR lowers PCLN estimates.

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

Best Quotes: Interesting BBERG update in the insider trading investigation…

Three Hedge Funds Got Inside Data From Consultant, U.S. Says 2010-12-30 05:01:01.5 GMT

By Bob Van Voris, Pamela MacLean and David Voreacos

Dec. 30 (Bloomberg) -- A former Primary Global Research LLC expert-networking consultant was charged by U.S. prosecutors in Manhattan with selling inside information to portfolio managers at three unidentified hedge funds.

Winifred Jiau, arrested in Fremont, California, as part of a national probe of insider trading, was accused of selling data on Nvidia Corp. and Marvell Technology Group Ltd., makers of computer components, through Primary Global, according to a filing yesterday in Manhattan federal court. The hedge funds paid her $200,000 through the firm, prosecutors said. Jiau is the seventh person connected to Primary Global to be charged in a multiyear U.S. insider trading investigation that has ensnared company employees and consultants.

Jiau, 43, is charged with one count each of conspiracy to commit securities fraud and securities fraud. The first count carries a maximum sentence of 20 years in prison. She appeared yesterday in San Francisco federal court and was ordered held in custody by U.S. Magistrate Judge Nandor Vadas, who set a hearing for Jan. 12 on whether to transfer her to New York.

The evidence against Jiau is “strong,” Assistant U.S.

Attorney Wilson Leung told the judge, adding that there is a “cooperating witness and audio recordings.” When asked by Vadas if she understood the charges, Jiau said “I not have a chance to know until now.” Barry Portman, her assigned public defender, said the complaint is a “lengthy document.”

Jiau, who didn’t enter a plea to the charges, is scheduled to appear today to seek release on bail.

‘Expert Consultant’

Marilyn Gerber, a spokeswoman for Primary Global, said in an e-mailed statement that Jiau served as an “expert consultant” with the company from September 2006 to December 2008, declining further comment.

Jiau was the fifth Primary Global consultant arrested in an insider-trading crackdown that also has led to criminal charges against two other employees of the company. One of the consultants, former Dell Inc. supply chain manager Daniel DeVore, pleaded guilty Dec. 10.

On Dec. 16, Federal Bureau of Investigation agents arrested three technology company workers who allegedly sold secrets about Apple Inc., Dell and Advanced Micro Devices Inc. The men, who worked at AMD, Flextronics International Ltd. and Taiwan Semiconductor Manufacturing Co., were arrested on securities fraud and conspiracy charges for a scheme that Manhattan U.S.

Attorney Preet Bharara said operated from 2008 to early 2010.

James Fleishman, a sales manager at Primary Global, also was arrested the same day as the three men. If convicted, all four face as long as 20 years in prison.

Leaked Information

DeVore pleaded guilty to conspiracy to commit securities fraud and wire fraud. He said he worked as a paid consultant for Primary Global and, through the firm, accepted money from hedge funds for inside information. At his plea hearing, he said he leaked inside information to clients of Primary Global and New York-based consulting firm Guidepoint Global LLC, according to a transcript.

James Fingeroth, a spokesman for Guidepoint Global in New York, declined to comment yesterday.

The U.S. insider trading probe became public last year with the arrest of Galleon Group LLC hedge fund co-founder Raj Rajaratnam. The FBI recorded thousands of conversations during their investigation of the firm, lawyers said at an October hearing. Rajaratnam, who denies the charges, is scheduled to go on trial in Manhattan next year.

The expert-network arm of the Galleon probe was revealed last month with the execution of search warrants at hedge funds on Nov. 22, and the Nov. 24 arrest of Don Ching Trang Chu, another Primary Global employee.

Search Warrants

FBI agents from New York and Boston executed warrants at the offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumni of SAC Capital Advisors. Agents that day also executed a search warrant at the offices of Loch Capital Management. None of the firms or their employees has been accused of any wrongdoing.

Expert-networking companies such as Mountain View, California-based Primary Global match investors with specialists who provide insight into specific markets. Prosecutors in the case have described in criminal complaints the links among Primary Global, the technology experts it employed and unidentified hedge funds willing to pay for inside information.

Santa Clara, California-based Marvell, which makes chips for the BlackBerry phone, declined to comment on Jiau’s arrest.

Bob Sherbin, a spokesman for Nvidia, also based in Santa Clara, said Jiau was a contractor who left the company a year ago, declining further comment.

Lawsuit

A Winifred Jiau filed a sexual-harassment lawsuit against her former employer, San Francisco-based Adteractive Inc., in 2007. The complaint said she has an undergraduate degree from National Taiwan University and a Master’s degree in statistics from Stanford University. The plaintiff in the lawsuit matches the age and northern California residence of the Winifred Jiau charged by prosecutors.

Jiau founded a company that got funding from Intel Corp., according to the lawsuit. In the suit, filed in California Superior Court in San Francisco, the plaintiff claimed she worked as a senior statistician for Adteractive from April to July of 2006, when she was fired after refusing the alleged sexual advances of a supervisor.

According to the civil suit, the plaintiff had “over ten years of work experience building financial and economic models” and she “started her own company that was funded by Intel.”

Settlement

The case was dismissed on Dec. 29, 2008, after the filing of a notice of a confidential settlement, according to court records. An Adteractive attorney, Aryn Pedowitz, declined to immediately comment on the case.

Theo Emison III, a lawyer who filed the civil suit, said he was unable to say whether his former client is the woman charged yesterday.

Prosecutors in the criminal case in Manhattan claim the defendant began getting paid for insider information in September 2006.

In May 2008, Jiau separately gave two hedge fund portfolio managers, one of whom worked for two hedge funds, “on point and accurate” data about the quarterly financial results at Marvell before it was released to the public, prosecutors said. One of the funds netted more than $820,000 in profits based on that inside information, the FBI said.

Cooperating Witness

Jiau also gave quarterly financial data in August 2008 about Marvell to the same two managers, referred to as CC-1 and

CC-2 in the complaint.

CC-1 founded a New York entity referred to as Hedge Fund A and CC-2 worked at two separate hedge funds, according to the complaint. A cooperating witness who pleaded guilty, CW-1, began working as a research analyst at Hedge Fund A in March 2008, the FBI said in court papers.

CC-1 told the cooperating witness to get inside data from various co-conspirators, including Jiau, the FBI said. She gave inside information to CC-1 and CC-2, and the cooperating witness listened to their conversations about Marvell, the FBI said.

CC-1 also recorded conversations with Jiau, and the complaint quoted Jiau in conversations about Marvel’s second- quarter earnings that the company announced on Aug. 28, 2008.

When CC-2 asked if she had data yet on the next quarter, she

said: “As soon as I get it, I give you guys a buzz,” according to court papers.

CW-1 “understood that Jiau obtained the information about Marvell and Nvidia from a source who was not authorized to disseminate” it, according to the complaint.

Wiretap Recordings

Recorded and wiretapped conversations have been at the center of the Galleon probe and its various arms. Investigators made consensual and wiretap recordings of an unidentified expert-networking firm’s phones, the land lines of an unidentified hedge fund and the mobile phones of two of the men arrested Dec. 16 -- Mark Anthony Longoria, who worked at chipmaker AMD, and Walter Shimoon, formerly of Flextronics, a Singapore-based maker of electronic components -- the U.S. said.

At least two hedge funds are described in the complaint against the men. Neither is identified by name.

The U.S. also made consensual recordings using five cooperating witnesses, had a tap on mobile phones used by Shimoon and Longoria, and recorded conversations at Primary Global in November 2009, a month after Rajaratnam’s arrest, according to court papers.

One Witness

Court papers indicate at least five people have been working with the government in the insider-trading probe. Only one witness was identified by name: Richard Choo-Beng Lee, a former partner at San Jose, California-based hedge fund Spherix Capital LLC. He began cooperating with the U.S. in April 2009, according to court records, providing information to Bharara’s office in the government’s case against Galleon. He pleaded guilty in November 2009.

His partner at Spherix, Ali Far, who also worked as an analyst and portfolio manager at Galleon, pleaded guilty and is aiding the U.S. in the Galleon probe.

The U.S. said Chu established a relationship with Lee and that Spherix paid Chu’s firm, Primary Global, for tips concerning Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc., according to the government’s complaint.

At yesterday’s court hearing in San Francisco, Portman told the judge that Jiau is a U.S. citizen and has known about the insider-trading investigation since mid-December. She didn’t attempt to flee when FBI agents arrived at her home, the lawyer said in his argument that she be released.

Leung countered that Jiau is a “flight risk,” and that when agents went to her house, they heard her car running in an attempt to drive off. Leung said the agents found packed luggage inside her house.

Leung said that Jiau claimed she had just returned from a trip to Asia. The prosecutor said her Asia trip took place in October, and that she had traveled to Beijing and returned through Taiwan.

The case is U.S. v. Jiau, 10-Mag.-2900, U.S. District Court for the Southern District of New York (Manhattan).

Morning Note...

2010-12-29T09:14:00.000-05:00

Futures are up ~20bps this morning as Asia recovers from recent weakness overnight and Europe trends slightly higher. Asia was up ~1% on average and Europe is up 75bps on aggregate. On this side of the pond, news and volumes remain light, which is as to be expected given the holidays. For the moment, stocks continue their slow and steady “melt up” into year-end, probably for lack of bad news than anything else. There is some small M&A chatter this morning, however, as BJ’s Wholesale Club (BJ; +5%) is rumored to be a takeout target for Leonard Green & Partners. Oil -40bps. Gold +5bps. USD -20bps and EUR/USD 1.3133.

No economic data on tap for today, but Initial Jobless Claims and Continuing Claims are due tomorrow at 8:30am, and Pending Home Sales are due at 10am tomorrow.

Regarding recent stock action, here’s a pithy quote from Briefing.com:

There have been 19 trading sessions in December. The S&P 500 has logged a gain in all but three of the sessions; it has not had consecutive losing sessions; and its biggest loss has been a 0.5% decline on December 15. Since gaining 1.3% on December 2, the S&P 500 has not gained more than 0.6% in a single session.

Any guesses as to how today's session might go?

The odds-on bet is that there will be more "drifting" in the major averages during the day before things finally settle with a small gain for the S&P 500. That isn't a guarantee, but it certainly seems to have been the modus operandi for most of the month.

In other commentary, Knight also put out a cautious piece this morning that is worth a glance:

Drifting Into Year-End

Bottom Line – Yesterday’s US stock market action did nothing to change our current outlook. While our view is that the intermediate-term outlook is still positive for US stocks there are signs of some technical deterioration in the short-term indicators we follow suggesting the risk of a pullback is high. But seasonal influences are powerful witness yesterday’s recovery from early weakness so any pullback may be postponed until January.

Yesterday’s US market showed a softer tone than Monday with breadth mildly negative but volumes remained pre-holiday like and small-caps underperformed. Precious metal and energy related issues were aided by the recent strength in their underlying commodities.

Yesterday’s market action did nothing to change our view that the risks of a mild correction remain high. Upside participation has narrowed as has the new high list and volumes have been tepid as prices rise. Sentiment continues to be quite bullish.

The setup for a pullback would in our view be the following: SPX breaking 1251 sees 1233, DJIA breaking 11519 sees 11421, NASDAQ Composite breaking 2645 sees 2613, NDX breaking 2209 sees 2197 and Russell 2000 breaking 785 sees 768.

NBL announces new offshore discovery. RBCM ups CRNT. DARA announces $4M offering. CNBC’s Fast Money positive on IM. RNOW upgraded to OW at PIPR.

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

Best Quotes: Hedgeye…

HEDGEYE

EARLY LOOK: STUBBORN BELIEVERS

"This stubbornness in the face of clear data is right up there with the efficient market believers."

-Jeremy Grantham (Quarterly Letter, October 2010)

Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.

This isn't to say that there aren't plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.

I'm fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn't working, I shut down the noise, review my notes, and rethink my theses. Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.

Yesterday, I was re-reading Jeremy Grantham's Quarterly Letter for October titled "Night of the Living Fed" and that helped me re-think my global macro positioning heading into 2011.

Before you scroll down, don't worry - I'm not covering my short position in the SP500 (it's -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I've been bearish plenty enough times on US stocks in my career with performance that's worse than that.

Being bearish on US stocks here doesn't mean you have to be bearish on everything - that's a US-centric stock market investor's risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America's currency and hold rates of return on American savings accounts unsustainably low.

Grantham, Grant, and Hussman aren't fans of The Ber-nank either. So, while hope is not an investment process, I'm really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.

On the politicized US central bank, here are some valuable excerpts from Grantham in the "Night of the Living Fed":

1. On Evolution: "... displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment."

2. On Quantitative Guessing (QG): "Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy."

3. On US Economic Growth: "... on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world."

The "real world" is, of course, real-time... and... as Ludwig von Mises said, "for many people, the "long run" quickly becomes the short run." There's no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.

On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here's what the expectations of higher prices (inflation) have done:

1. Week-to-date = +0.61%

2. Month-to-date = +9.6%!

3. Quarter-to-date = +16.1%

For a man who preaches "price stability", that's nice Heli-Ben... really nice. The 45 MILLION Americans on food stamps salute you.

On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning's ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn't cool for the 90% of Americans who aren't levered-long the SPY.

Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07' and early 08') that stocks are "cheap" even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.

Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.

My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.

Best of luck out there today,

Morning Note...

2010-12-28T09:10:00.001-05:00

Futures are up ~20bps on another quiet holiday morning, and U.S. markets – and market volume – continue to be affected by snowstorms in the northeast. (Note that yesterday was the slowest volume day of the year to date.) S&P/CaseShiller October Home Prices were slightly weaker than expected, both month-over-month (-1% vs. -.6% expectation) and year-over-year (-.8% vs. the -.2% expectation). Asian stocks were lower overnight, led by China on the back of it’s recent “anti-inflation” tightening measures and fears that more will follow. Additionally, the Japanese Finance Minister promised “bold action” against a rising JPY. Europe is ticking slightly higher as of writing, but note that the U.K. market is closed. Also interesting to note Europe is up despite France’s downward 3Q10 GDP revision, which might also signal problems ahead in 2011 for the Euro region. The euro is stable, however, at 1.3204 vs. the USD. Oil +60bps. Gold +1.6%.

Initial Jobless Claims & Pending Home Sales data due Thursday morning the 30^th – there are no economic releases set for tomorrow.

The latest inflation-watch news from Hedgeye:

HEDGEYE

EARLY LOOK: ICY INFLATION

"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

-John Maynard Keynes

A Google search for quotes related to "inflation" produces quotes from Keynes in the first 10 spots. While his radical idea that government should spend money it doesn't have may have saved us from the brink of a financial collapse, he might not have agreed with QG (Quantitative Guessing) and the impact it is having on global inflation.

The week in between two holidays is challenging on many fronts - personally and professionally. Typically, there is little incremental macro data in the U.S. because politicians take time off for the holidays rather than trying to force issues when there is no audience. In addition, most "big money" institutions are not going to make any big bets when there is no liquidity.

We headed into the holiday lull with a bullish sentiment, an overbought market and MACRO factors that continue to keep us on the bearish side of a tightly-wound, high-risk environment. Yesterday, on a stealth day for MACRO news, the VIX shot up 7.29%, putting a two-day move at 13.89% (but still down 18.5% YTD).

The world is interconnected and this year's "tweener week" is filled with interesting global macro data points, especially after China used the holiday weekend to hike interest rates in an attempt to ward off mounting inflation.

The news/rumors this week do not stop with China! After the first of the year, Taiwan and South Korea will also be raising rates to battle domestic inflation. How ironic that the region of the world (Asia) that is the hot bed for "deflation" for the balance of the planet is fighting a battle against domestic inflation. If slowing growth in the emerging markets is not on your list of 10 surprises for 1Q11, it should be.

Don't take my word for it; the Chinese equity market is now down 9 of the last 10 days, declining 1.74% last night (down over 3% at one point). The Chinese don't mince words about where they think things are headed. Overnight China's Premier Wen Jiabao said measures to curb the country's property market "weren't well implemented" and reiterated his goal for home prices to return to a "reasonable level" during his term that ends in 2012.

This is the killer statement by Wen Jiabao: "We introduced about 15 measures this year but it appears that they were not well-implemented....I believe that after some time, the home market will return to a reasonable level with our efforts."

If China did not get it right in 2010 (even though the Shanghai Composite is down 16.6% YTD) and they implement measures to curb property prices more effectively in 2011 and demand begins to slow as a result of a heightening cycle, we could see Industrials (XLI) and Metals (XLB) quickly come under pressure. With the Chinese market as a leading indicator of growth and the market trading down 3.1% over the past month, those sectors and commodities with the biggest leverage to Chinese demand are likely headed lower, despite recent moves higher.

Over the past month:

(1) The S&P 500 is up 5.1%

(2) The XLB is up 9.6%

(3) The XLE is up 7.5%

(4) The XLI is up 6.7%

(5) The CRB is up 9.3%

(6) Copper is up 13.8%

In light of Wen Jiabao's statement, it is interesting to note that the best performing sectors year-to-date are also those with the most leverage to Chinese demand. The four best performing sectors are:

(1) Consumer Discretionary (XLY up 26.03% YTD)

(2) Industrials (XLI up 25.51% YTD)

(3) Energy (XLE up 17.82% YTD)

(4) Materials (XLB up 15.79% YTD)

While most Asian central bankers seem to see that there is an inflation problem, in the USA we still cannot see it, despite a number of "real life" examples of real inflation hitting the U.S. consumer hard. Yes, we are going to hammer home a key theme in 2011: Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

Of course, the components of any inflation index are up for debate. For instance, the government and most people that disagree with our view on inflation prefer to exclude staple, non-discretionary aspects of consumer spending such as food and energy from the calculation. One item I hope we can all agree to include is healthcare costs.

According to the Commonwealth Fund (a non-profit fund), U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay for it. They cited that private-insurance premiums for families rose three times faster than median household income over six years and deductibles rose almost five times faster. In 15 states, health-insurance premiums are the equivalent of at least 20% of median household income for people under 65.

While the market has rallied on the back of the Government pumping another $800 billion into the economy to prop up the ailing consumer, the average American remains liquidity-impaired and the U.S. housing market is headed lower, not higher. With these factors still in place, the now positive bias toward stronger-than-expected GDP growth in 2011 can certainly be questioned.

Inflation is a policy that, as Keynes said, confiscates part of the citizens' wealth. The government's most recent move, to implement payroll tax cuts while extending unemployment benefits, may go some way to stimulate the economy in the short term but runs a considerable risk of exacerbating the deficit. In this interconnected global economy, as the world's fastest-growing economies take strong measures to curb inflation, the net effect could be icy for world growth. In the U.S. certainly, from a global and domestic perspective, the evidence is clear that inflation is here to stay on a global basis and Jobless Stagflation is going to impact the economy in 2011.

Function in disaster; finish in style.

Howard Penney

Rare earth stocks (MCP, REE, SHZ) are ticking higher on reports that

China

will cut export quotas. GM initiated OW at JPHQ, OP at CSFB, Buy at CITI, and OP at RBCM. WSJ reports that AIG could raise $2-3 billion from Nan Shan sale. LOGI denies production halt on Google TV set-top boxes.

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

Best Quotes: Weather update…

New York Travelers Face Delays as Winds Slow Clear-Up (Update1)

2010-12-28 11:41:35.917 GMT

(Updates with wind forecast in second paragraph.)

By Aaron Clark and Stuart Biggs

Dec. 28 (Bloomberg) -- New York commuters and travelers face further disruptions today as winds hinder efforts to clear roads and runways following the heaviest December snows in six decades.

While the storm is moving slowly away, rising atmospheric pressure will continue to cause winds gusting to about 40 mph

(64 kph) in some open areas, commercial forecaster AccuWeather Inc. said on its website. Winds may “quickly” cover roads with snow, according to a winter weather advisory from the National Weather Service late yesterday.

Airports may struggle to keep runways clear, said Pennsylvania-based AccuWeather. New York’s LaGuardia, John F.

Kennedy International and Newark Liberty airports opened last night for outgoing traffic after snows forced shutdowns.

Airlines have canceled more than 6,000 flights nationwide since airports began to close on Dec. 26.

NJ Transit, which carries about 170,000 commuters to and from New York City daily, said passengers should expect delays because of local road conditions. The agency expected to restore bus services at 12:01 a.m. and planned to operate reduced train services today aside from on the Atlantic City Rail Line, it said in a statement on its website. Amtrak will pare rail services between Boston, New York and Washington, it said.

30-inch Snowfall

More than a foot of snow fell across the northeast yesterday, with some areas in New Jersey getting more than 30 inches (76 centimeters), according to AccuWeather. Central Park had 20 inches of snow by 8 a.m. yesterday, the most for the month since 1948, the National Weather Service said.

New York City will have winds between 16 mph and 20 mph with gusts as high as 31 mph, according to a Weather Service forecast. Its winter weather advisory, covering a wider region, said gusts may hit 55 mph overnight before slowing to 40 mph by morning.

The storm reached New York the day after Christmas, one of the five busiest shopping days of the year. It may take retailers two weeks to recover from lost sales, said Marshal Cohen, chief industry analyst at NPD Group Inc., a research firm based in Port Washington, New York.

New York, which faces a $2.5 billion deficit in the $65 billion budget projected for next year, will be more affected by lost economic activity than clean-up costs, Mayor Michael Bloomberg said at a City Hall news conference on Dec. 26. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

The snowfall was the fifth-largest on record for the city, Sanitation Commissioner John Doherty said on Dec. 26.

Flight Cancelations

U.S. carriers canceled at least 3,389 flights yesterday, after cutting more than 3,334 on Dec. 26, as they waited for airports to open in the Northeast, spokesmen said. Airlines in some cases grounded flights ahead of the storm to keep planes from getting stuck at closed facilities.

The storm brought snow as far south as parts of Jacksonville, Florida, AccuWeather said. The storm system began in the South over the Christmas holiday. Four inches of snow fell in Chattanooga, Tennessee, while 8 inches was reported in Gatlinburg, Tennessee.

Environment Canada issued a blizzard warning yesterday for northeastern New Brunswick and warned of heavy snow or rain in the rest of the Maritime provinces. The snowfall is expected to taper off into flurries today, the agency said.

Resignation...

2010-12-27T11:56:00.000-05:00

Friends & Colleagues,

As my third year at Brightpoint Capital in Miami nears an end, I have made the difficult decision to resign my trading position. In short, it is simply time for me to move on.

Details are to follow, as it remains to be seen whether I will serve out another two weeks or - more likely - depart immediately. Regardless, I will be back in touch soon with details of my transition, and I hope to resume the Morning Note within a couple of weeks.

Wishing you all the best for a happy, healthy conclusion to 2010...and for a great start to 2011!

All the Best,
Ben

Morning Note...

2010-12-20T09:23:00.005-05:00

**Please note I will out the rest of the week and the next Morning Note will be December 27th**

Futures are 40bps higher this morning after a relatively quiet – as expected – weekend. The biggest stories continue to fall into the “known known” category: instability in the Korean Peninsula and concerns over European sovereign debt. In fact, the closest thing I can find relative to this morning’s market strength is simply the lack of any negative news over the weekend. Europe up ~1%, Asia lower overnight, USD flat, EUR/USD 1.3161, Oil +40bps, Gold +45bps. Thus the path of least resistance continues to be higher, aka “The Santa Claus Rally.” Don’t take my word for it –I chuckled at this Barclay’s Trader Note titled “Not much to talk about, Go Back to Bed:”

European equities are up over 1% while S&P 500 futures are up 30 bps. The Euro is getting whacked again down 0.5% vs the USD. Meanwhile, commodities are having another big move with cotton up another 2.43%. The market is doing an admirable job of shaking off more noise coming out of N Korea, inflation from China, European sovereign cds widening, and the Euro back on the lows. Expect holiday volumes to start this week in earnest this week.

If you are looking for a sobering read amidst your holiday cheer, however, here’s something I stumbled across last week:

10 reasons to shun stocks till banks crash

Commentary: Stocks a sucker bet in a rigged game; meltdown ahead

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Do not buy stocks. Not for retirement. Not in the coming decade. Don’t. Huge risks.

Wall Street is a loser. Stocks are Wall Street’s ultimate sucker bet. And it’ll sucker you again. You’ll lose, worse than in the last decade. Wake up before Wall Street banks trigger the next meltdown, igniting mass bankruptcy.

Here are 10 more reasons not to bet at Wall Street’s casino … wait till after they implode:

1. American stocks are a high-risk sucker bet

That’s the view of Peter Morici, the former chief economist at the International Trade Commission: that U.S. stocks are a sucker bet. Is Main Street waking up to Wall Street’s con? Maybe. “With corporate profits breaking records, Wall Street anxiously anticipates the return of the individual investors to the stock market. It may be a long wait, because the little guy may have concluded investing in stocks is a sucker bet.”

America’s divided into two stock markets: one for Wall Street’s rich insiders, another for Main Street’s suckers: “Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.”

From 1998 to 2010, profits rose 203%. But the S&P 500 was up just 7%. And still, naive investors buy into Wall Street’s sucker bet.

Who’s pocketing the huge profits? Rich insiders. “Because most of the increased value created by higher profits,” says Morici, “has been captured by hedge funds, electronic traders, private equity funds, and aggressive M&A shops, free standing and at major investment banks, which have multiplied over the last two decades.”

Warning: With the resurrection of the GOP and Reaganomics, Wall Street will skim more from Main Street, get even richer. And yes, you’ll lose more.

2. New ‘big short’ dead ahead: Derivatives con game will crash again

In a Bloomberg story, “Big Short” author Michael Lewis asks: “Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary-trading groups, without so much as a whimper?”

The answer’s simple: Wall Street’s sneaky and will do anything to keep the derivatives casino running hot. Insiders “have no intention of ceasing their prop trading,” according to Lewis. “They are merely disguising the activity, by giving it some other name.”

3. Hedge funds shorting China: Warning — U.S. faces collateral damage

Get it? China may well crash first. Fortune’s Bill Powell interviewed hedge-fund kingpin Jim Chanos of Kynikos Associates, who’s “betting that China’s economy is about to implode in a spectacular real estate bust.” China is “an economy on steroids.” In a Charlie Rose interview, Chanos said “China’s on an economic treadmill to hell.” If so, then all of Wall Street’s highly promoted emerging markets are also sucker bets.

Another hedge-fund player warned: Chanos “is shorting the entire country,” including a company “Goldman Sachs recommended as a buy … the listing for the Hong Kong Stock Exchange … China’s Merchants Bank, one of Beijing’s largest.”

Back in the 1980s, Japan “grew largely on the back of capital investment” and then turned into “a capital-destruction machine, and that’s what China is now. You have an economy that’s 60% fixed-asset investment, and not even in the developing world is that sustainable.”

Chanos won’t pinpoint the timing or the trigger: “He just believes it’s coming,” and he is betting on it. Reminds us of Henry Paulson shorting Goldman Sachs’ crooked deals before the 2008 crash.

4. New insider-trading indictments killing Main Street confidence

Investor distrust of Wall Street’s casino will skyrocket in 2011. Before the elections in November, an AP-CNBC poll found 61% of investors had already lost confidence in the market, thanks to extreme volatility; 55% believe the market’s rigged to favor insiders.

It’ll get much worse as the FBI/DOJ investigations of insider trading add indictments and perp walks. As more facts surface, this could get bigger than Enron and the SEC mutual-fund fraud suits combined: more proof of Wall Street’s rigged game.

5. Banksters’ perfect gambling record proves stocks a rigged game

Last year we reported that Goldman Sachs made more than $100 million in profit a day for 23 days in one month. This year the con game has gotten bolder.

Morici says “J.P. Morgan and Bank of America went through the entire third quarter without a negative trading day, no losing days on proprietary trades. Unless you believe in perfection, something stinks about the information they are using. If someone is winning all the time, then someone else is losing. That’s the ordinary investor. Stocks have become a rigged game.”

Yes, America’s 95 million average investors are suckers in a rigged game.

6. Wall Street is socially worthless, existing only to make insiders rich

In the New Yorker, John Cassidy writes: “Much of what investment bankers do is socially worthless.” Wall Street exists solely “to make itself very, very rich.”

Yes “worthless,” but “for a long time, economists and policy makers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it.”

Worse, continues Cassidy, “even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street.” Why? Wall Street’s huge lobbying war chest. Soon all this will come to a disastrous climax, Wall Street will implode on blind greed.

7. The Fed is America’s worst nightmare, a $3.3 trillion moral hazard

Moral hazard simply means no consequences for Wall Street’s complicity in triggering the 2008 catastrophe. As a result, Wall Street insiders came away believing they can take bigger and riskier bets in the future because they will get away with it next time, too.

Why? Because America’s suckers will be dumb enough to bail them out the next time, too, with no consequences when they fail miserably again.

Last week the Fed made the moral-hazard risks more obvious by releasing 21,000 documents showing how an arrogant Ben Bernanke approved $3.3 trillion in cheap-money taxpayer bailouts to incompetent Wall Street banks, blue chips and even banks in Switzerland, France, etc. Bernanke’s making fiscal policy, and he’s a tragic disaster. When President Obama reappointed him last year, we echoed author Nassim Nicholas Taleb, calling it Obama’s worst domestic-policy blunder.

But it can get worse: Caving in to the GOP on Bush tax cuts to the rich will funnel billions more of our tax dollars into the rigged game. Final proof Obama is Wall Street’s co-conspirator in the class war against 300 million average Americans.

8. Wake up to a new normal: no growth, deflation

In his latest newsletter, economist Gary Shilling, a longtime Forbes columnist, warns: “Real economic growth rates of 2% or less are likely through 2011.” But we need 3.3% just to keep up with population growth.

So “high unemployment remains a political problem … with weak economic growth, looming deflation, and the dollar and Treasurys remaining the safe havens in a sea of global trouble.”

Warning: America’s new era, featuring no growth, deflation and a jobless recovery, will continue for years, resembling Japan over the past two decades. Worse, brutal deficit cuts will trigger riots, as in England, France.

9. Privatize Social Security: New GOP Congress loves dumb ideas

Here’s political Reaganomics at its numbest. Alan Sloan writes in Fortune: “Privatizing Social Security: Still a Dumb Idea.” The idea was “slaughtered when George W. Bush proposed it.” Yet many GOP millionaires in the new Congress campaigned on privatization.

“You’d think,” Sloan posits, “that the stock market’s stomach-churning gyrations — two 50%-plus drops in just over a decade — would have shown conclusively the folly of retirees having to bet their eating money on the market. But you’d be wrong.” They’re about to resurrect it. Why? Simple. Because the GOP is the party of the rich.

Yes, it’s that simple: Wall Street’s casino would love to get their hands on another $20 trillion of your retirement money, to gamble in their derivatives casino.

“Why is privatizing Social Security such a turkey?” asks Sloan. “Because retirees shouldn’t have to depend on the market’s vagaries for survival money. More than half of married couples over 65 and 72% of singles get more than half their income from Social Security.” And “for 20% of 65-and-up couples and 41% of singles, Social Security is 90% or more of their income.”

Imagine if our Social Security had been privatized in the 2008 meltdown: It would have done more damage than nuclear warheads, totally wiping out the American economy.

10. Warning: Wall Street will lose another 20% of your money by 2020

We have been making these same arguments for a long time: Wall Street has lost trillions in the stock market since 2000, a year in which the Dow Jones Industrial Average peaked at 11,722. It’s barely at 11,000 today. Adjusted for inflation, Wall Street has lost 20% of your money in the past decade.

CCL initiated OW at HSBC. RBCM ups HOLX to “Top Pick.” Cramer positive IDCC. APSG to be acquired by RTN for $38/share. BARD ups ITMN. Brean Murray cuts MPR. RBCM ups PCS. FBRC ups PCX. BofAMLCO ups CME, HBAN. BCAP ups PPS. FBRC ups CNX. BofAMLCO cuts MNKD. BCAP cuts BMO. BARD cuts SHO, FISV.

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

Today’s Trivia: Of the Oscar, the Heisman Trophy, and the Emmy, which is the taller award?

Yesterday’s Question: You may not know that certain landmark

U.S.

sites have their own zip codes. For example, the Empire State Building’s zip code is 10118. What might you find at 20500 or 90090?

Yesterday's Answer: The White House is found at zip code 20500, and 90090 is Dodger Stadium.

Best Quotes: BTIG forward look…

BTIG 2011 Compass.

"I can be reasonably certain of only one point: My economic forecast is highly likely to be wrong - but I don't know how." Federal Reserve Vice Chairman Don Kohn, April 8, 2010

This is the time of year for forecasts and predictions. We genuinely believe retired Fed Vice Chair Kohn's may be the wisest words ever spoken by a Central Banker. Accordingly, we don't think our own ability to make such prognostications is any better. The investment journey is often discussed in terms of a roadmap, but we have always found a compass to be a much more fitting description. A roadmap has far too much detail. It tells you what is around every corner and in the uncertain world of financial markets, that is unrealistic. On the other hand, a compass simply confirms that you are heading in the right direction. With just a compass, you don't know if a tree has fallen in your path a few miles out, or if it is a downhill walk on a smooth surface. For investors, dealing with this uncertainty is good because it requires that you be prepared no matter what the outlook. Like others, we don't view the passing of a date on the calendar as providing any revelation that one's outlook should dramatically change. Therefore, most of the themes on which we are focused are ones that we have been watching for some time, but this is an opportunity to string them together. Our current view has three key themes: Investor Positioning, Valuation and Global Growth.

Investor Positioning.

We view investor positioning almost equally as important to valuation as determining market direction. Most market participants have experienced either top down or bottom up equity market moves in which stocks or an index with awful valuation went up and continued to go, and go, and go. Likewise, value traps have been common, where the earnings are there now but will not be in the future. In the first case, those who need to own the stocks do not and in the second, just about everyone owns them because they are so cheap. We have been Bullish throughout the majority of the past two years. The exception was when we went to Neutral from the start of May to mid-July. Although the S&P 500 is on the cusp of re-claiming pre-Lehman levels, we believe there is a large numbers of assets that need to increase their levels of equity exposure and that transition will begin now.

From our vantage point, 2010 has been a speculator driven market. The vanilla investment community has been in a defensive, deleveraging and re-liquefying mindset for 3 ½ years. A historic shift has occurred from Equities to bonds, despite the low interest rate environment (Charts 1-4). As such, Hedge Funds have become the predominant incremental investor. In addition to the tremendous growth of Hedge Fund Assets relative to Mutual Fund Assets over the past decade (Chart 5), the turnover levels of the Hedge Fund community are multiples of that of the vanilla community. In turn, fast money has aggressively rotated in and out of trades and assets classes. The result has been rapid moves in succession, increased bouts of short term volatility but all in all, a much healthier market place. For decades, vanilla investors, both institutional and retail, dominated the flows. These investors generally fueled the rising tide that not only lifted all boats and easily blunted and absorbed the volatility of fast money making quick trades. When the 17% correction occurred in the spring, the fast money community exhibited its penchant for risk management cutting exposures quickly and moving on to the next trade. As the QE trade dominated over the past 6 months, Equities, although they received flows, were the third asset class in a 3 asset class race. It is our view that this has left a number of investors with Equity weightings below levels at which they want to be as the economy recovers.

Valuation.

Although we believe Investor Positioning to be almost as important as Valuation, Valuation is the key to sustainability of moves. We have all seen some stocks and indices trade with extremely lofty P/Es for extended periods. Some instances have even lasted in excess of a year(s), but usually, reality sets in. According to Standard & Poor's, 2011 estimates for S&P 500 earnings are $94.65 (Table 1). As of Friday's close, the S&P 500 is trading 13.1x estimates. Using a more conservative $90 estimate, the S&P 500 is trading 13.8x estimates. In either case, both provide ample room for multiple expansion to begin moving the P/E back to the historic average multiple of 15.9x earnings before investors get concerned about Equities moving into "expensive" territory. The S&P 500 has endured a decade of multiple contraction after a period of excess. Now that a cleansing has occurred and healing has begun, the process of multiple expansion will likely begin. What we believe to be the most important aspect of the earnings and valuation story is that it only takes 5% earnings growth in 2011 for the S&P 500 to post a record year of earnings. The current 2010 estimate is $83.61. Five percent growth next year will put earnings slightly above the record earnings of $87.72 in 2006. As the world slowly returns to a sense of investment normalcy, being able to purchase an index posting record earnings that is at the same levels it was 12 years earlier is a very attractive proposition. Even more importantly, the pressure will rise on the investment community to be there participating as that realization goes mainstream. Hindsight risk, will be placed upon those who are not participating. We expect that the prospect of record earnings, together with low bond yields, will prompt vanilla investors to return to Equities in 2011.

Global Growth.

Global Growth is the last key theme of our view. We believe the Global Growth story is alive and intact. The Great Recession created a reset for

U.S.

multinationals which were provided with the opportunity to downsize where growth was slowing and reinvest where it is picking up. Large corporations are now flush with cash and have the opportunity and resources to invest in markets offering the best potential. Below is a table of global growth forecast and S&P 500 Earnings. Next year, global growth is expected to increase 4.22% down from 4.8% in 2010 (Table 2). We also highlight that in the decade prior to 2008, the global growth average was just shy of 4%, suggesting that a 4+% growth world still provides ample opportunity for earnings to grow and that the 5% earnings growth necessary for record S&P 500 earnings is a likely scenario.

Risk Factors.

Finally, there are the risk factors. In the uncertain world in which we live and invest, they are always there. Their importance escalates with their probability and investor positioning. There are many well known risks of which investors are aware in the market: Sovereign Debt, U.S. Federal Debt, U.S. Municipal Debt, U.S. Pension Liabilities, China Economic Slowing, Trade War fears, Inflation, Geopolitical Risk (Korea, Terrorism, etc), and the list goes on. We believe each is a legitimate threat in its own right. The risk we fear the most is

China

's economic slowing. We don't expect it, but we would not rule it out either. As always, the key is timing. When investors are defensively positioned as they currently are, and the shocks are known, they are easier to digest. When that risk exposure ramps, those risk factors are harder to shake off, but we have been in a net selling environment for 3 ½ years, and we expect it will be a multiyear process of re-allocating to Equities. That does not mean there can't or won't be problems, it just means that at this point, we don't see them derailing our Bullish views.

Morning Note...

2010-12-17T09:10:00.002-05:00

sorry folks...no Note today...apologies, but this one's on my IT dept... PC probs... back Monday.

Morning Note...

2010-12-16T09:25:00.001-05:00

Futures are flat-to-slightly lower (-5bps) despite better-than-expected economic data, which has been offset by selected

U.S.

corporate earnings. November Housing Starts were the highest in recent months, at 555k vs. the 550k expectation. Also, Initial Jobless Claims for the week ending December 11^th were lower than expected (net positive) at 420k vs. the 425k expectation. Continuing Claims for the week ending December 4^th were 4.135M vs the 4.115M expectation. However, FedEx (FDX; -1%) missed earnings estimates and – considering its status as a global commerce litmus test – has kept a lid on U.S. futures thus far. Food giant General Mills (GIS; -50bps) also disappointed. Note that December Philly Fed and LEI data is due at 10am today. Overseas, European markets are slightly lower (-30bps) on average and Asian markets were mixed overnight. Note that Euro leaders have kicked off a two-day summit on their current sovereign debt issues – watch for headlines out of this meeting. Oil -55bps. Gold -65bps. USD -15bps. Also note recent volumes have generally been lighter than average, and

U.S.

equity markets seem to be inversely correlated – for the most part – to the USD.

Here’s BTIG’s O”Rourke on that same topic:

Dollar Dance Meets QE Unwind.

It was an interesting trading session today. The Dollar dance - in which U.S. assets move in the opposite direction of the U.S. Dollar - returned. The Euro had been mildly weaker overnight as Moody's placed Spain on negative watch for a Downgrade. Apparently, the new review was already priced into Spanish bonds and CDS, which displayed little reaction to the news. Likewise, the Euro recovered nearly all of its losses before U.S. trading commenced. The Euro then weakened versus the Dollar throughout the session. As the Dollar strengthened versus the Euro, U.S. assets began to falter. Equities, Treasuries and Commodities all began to move lower. The trading action had the appearance of part Dollar Dance (risk assets moving lower on a stronger Dollar) and part QE unwind (rotation out of Treasuries and Commodities). We have been bond bears for some time, but now we believe Treasuries are due for a healthy bounce in the near term. They have reached the point of being so oversold that the reasoning becomes circular. If the rise in rates continues at this pace, it will become a short term headwind for Equities, and if Equities exhibit weakness, Treasuries will start attracting a flight to quality bid.

In light of the Treasury market rout that has occurred over the past two months, now is a good time to revisit the Fed Model. The Fed Model is intended to track the relative valuation gap between the S&P 500 and Treasuries. From the 1960's through 2000, the S&P 500 Earnings Yield and the 10 Year Treasury Yield tended to trend together. When the relationship was out of line, it was an opportunity. In the past decade of low interest rates and multiple contraction, the relationship has broken down and Equities pervasively appeared cheap. Although the relationship has broken down over time, it does not mean there is not value in making comparisons to the recent history during the crisis as well as the past decade when Equities "appeared" inexpensive relative to bonds. The S&P 500's trailing earnings yield is 6.44%, making it still 83% higher than the 10 Year Treasury yield. The higher the premium, the more attractive Equities are than Treasuries. Today's level is still notably higher than the 20-30% premium the earnings yield had most of the decade when Equities appeared cheap. It is also well above the 20% premium with which the earnings yield started 2010. Simply stated, Treasury yields have been artificially low and S&P earnings had a historic recovery. We also use a BTIG Fed Model that uses a VIX adjustment to create a higher threshold that Equities must surpass to be attractive. By that measure as well, Equities remain very attractive relative to bonds. Although the S&P 500 is higher than it started the year, it remains notably more attractive than Treasuries. This is the reason we view a continued run-up in interest rates as only a short-term headwind for now.

Btw, here’s something from yesterday that I found interesting:

Bullishness Reaches 3 Yr. High in Investors Intelligence Survey 2010-12-15 11:23:00.624 GMT

Dec. 15 (Bloomberg) -- The percentage of newsletter writers classified as bullish reached 56.8%, the highest since Dec.

2007, according to Investors Intelligence…High bullish percentage signals “a strong likelihood that the rally is nearing a top"…Bulls 56.8% vs 56.2% last week…Bears 20.5% vs 21.3%...Newsletter writers classified as correction 22.7% vs. 22.5%...Bull/bear spread rises to 36.3% from 34.9%, highest since

April

JPHQ ups WYNN. BARD ups HOT. DBAB cuts HTS. FBRC cuts ASPG, ATK, AVAV, CMTL, LLL, RTN. GSCO cuts RAX3. MSCO cuts RIG. OPCO cuts VRSN. BARD cuts IRET. UBSS cuts CPIX.

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

Today’s Trivia: You may not know that certain landmark

U.S.

sites have their own zip codes. For example, the Empire State Building’s zip code is 10118. What might you find at 20500 or 90090?

Yesterday’s Question: According to Wired Magazine, what percentage of photos on the internet are of naked women?

Yesterday's Answer: Supposedly 80% (!!) of all internet photos are of naked women.

Best Quotes: Interesting BBERG piece on Basel II…

Basel Regulators Give Details of Bank Capital, Liquidity Rules

2010-12-16 10:00:00.24 GMT

By Jim Brunsden

Dec. 16 (Bloomberg) -- Bank regulators published details of an overhaul of liquidity and capital rules for lenders, to allow markets to make more thorough assessments of how well financial companies will cope with the new requirements.

Lenders would have needed 602 billion euros ($798 billion) to comply with the rules if they were in place at the end of last year, the Basel Committee on Banking Supervision said. The committee agreed in July to phase in the requirements up to Jan.

1, 2019, to mitigate their impact.

Regulators are overhauling bank capital and liquidity requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis.

The main elements of the overhaul were approved by leaders of the Group of 20 countries last month.

“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery,” Nout Wellink, the chairman of the Basel committee, said in a statement on the group’s website.

The Basel committee said that the 602 billion euros would have been needed for banks to cope with a requirement to hold core capital equivalent to 7 percent of their assets, with these assets weighted according to their riskiness. The figure has been calculated by regulators based on data collected from 263 banks.

Banks that do not meet the requirement will face restrictions on paying dividends, regulators said in September.

Banks would also have failed at the end of 2009 to meet new rules on bank liquidity that have been drawn up by the Basel committee, the group said.

Bank Business Models

Banks that fail the minimum liquidity requirements could meet them by “lengthening the term of their funding or restructuring business models,” the Basel committee said. The committee plans to introduce the liquidity rules between 2015 and 2018.

The Basel committee published a text clarifying the details of the regulatory overhaul. As well as revised rules on capital and liquidity, the overhaul also includes a limit on banks’

borrowings.

The new rules are a “landmark achievement that will help protect financial stability and promote sustainable economic growth,” Wellink said.

The Basel committee brings together regulators from 27 countries including Brazil, China, India, Germany the U.K. and the

U.S.

Morning Note...

2010-12-15T10:38:00.002-05:00

No Note today...morning meeting... apologies.

Morning Note...

2010-12-14T09:19:00.001-05:00

Futures are flat-to-slightly higher (+10bps) on what will probably be a light volume day ahead of this afternoon’s 2:15pm FOMC rate decision and statement. Not much is expected out the Fed today, but market participants will probably tread lightly today just in case. In corporate news, Best Buy (BBY) is 10% lower premarket on lighter than expected earnings and lowered forward guidance. In M&A news, HCP will pay $6.1 billion to HCR ManorCare for 338 nursing homes. In economic news, the NFIB Small Business Optimism survey for November was better than expected, at 93.2 vs. 92.3/e and the prior 91.7. Advance Retail Sales for November were also better than expected, at +0.8% vs. +0.6%/e, but were lower than the prior +1.7% revision. Month-over-month Producer Prices (PPI) were slightly higher than expected at +0.8% vs. +0.6%/e. Year-over-year PPI was also higher, at +3.5% vs. +3.3%/e. Business Inventory data is due at 10am. In political news, the WSJ reports that the “vote to pass the recently agreed upon tax compromises is expected in the Senate today or tomorrow, and while prospects for a smooth approval in the House ‘remain cloudy,’ party leaders appear more resigned to the measure passing.” Overseas, Europe is flat despite better than expected business optimism in

Germany

. Asia was slightly higher overnight. Oil -45bps. Gold -10bps. USD -20bps.

Regarding commentary, given that the S&P has extended to year-highs, I found this Bloomberg story fascinating. Maybe things are not always what they seem…

Pixie Dust Loses Magic as Foreclosures Slam Utopian Disney Town 2010-12-14 05:00:01.4 GMT

Dec. 14 (Bloomberg) -- Walt Disney Co. built Celebration, Florida, as an idealized version of a circa-World War II small town, where litter-free streets are lined with white picket fences and front porches entice neighbors to sit after dinner. Now, there’s trouble in the 16-year-old paradise set within earshot of the nightly fireworks at Walt Disney World Resort. Celebration’s foreclosure rate is about double the state’s pace as homeowners who paid a premium for a vision of utopia fall behind on their mortgages. Earlier this month, a resident on the verge of losing his house shot himself after a 14-hour standoff with police. Three days before that, the town had its first murder when a man was bludgeoned with an ax. “A lot of people bought homes in Celebration thinking Tinker Bell had sprinkled the town with pixie dust,” said Michael Olenick, chief executive officer of mortgage-data firm Legalprise Inc., referring to the character in Disney’s “Peter Pan” movie whose magical dust allows people to fly as long as they think happy thoughts. “Reality is hitting hard.” The foreclosure rate in Celebration since the beginning of 2009, based on notices of so-called lis pendens that initiate a case, is one for every 20 residents, compared with one per 48 people in Florida as a whole, according to Legalprise, in West Palm Beach. Celebration home values have dropped as much as 60 percent from the 2006 peak, while statewide values are down 51 percent, data from Seattle-based research firm Zillow Inc. show.

‘Fantasyland’ Premium

Celebration foreclosures are happening at a faster pace in part because property owners in financial trouble are walking away from vacation homes in the town, where real estate sells for about 30 percent more than surrounding communities, said Olenick. Before the recession, people were willing to pay more for living in a Disney “fantasyland,” he said. “The harsh reality is, bad things happen in Celebration too, both in real estate and in life,” Olenick said. Craig Foushee, 52, barricaded himself in his home on Dec. 2, shooting at sheriff’s deputies and members of a SWAT team before turning the gun on himself. No law enforcement officers were injured. Foushee’s home had been in foreclosure since October 2009, according to legal filings. The Osceola sheriff’s department said there was no connection between Foushee’s death and the murder of Matteo Giovanditto, 58, who was found in his home by a neighbor on Nov. 29. On Dec. 6, David-Israel Zenon Murillo, an acquaintance of Giovanditto, was arrested and confessed to killing him, according to a statement on the website of the sheriff’s office.

Different Movie Set

Residents are “in shock” after the deaths, said Angela Sessoms, who has lived in Celebration for 10 years. In the past, visitors have commented the town looks like the set of a Disney movie, she said. She heard a similar description with a dark twist last week, as word of the killings spread. “With the SWAT team, the roads barricaded, and the school in lockdown, it was like a different kind of movie set,” Sessoms said. Before the deaths, a stolen bicycle was considered Celebration’s biggest crime, said Sessoms, a real estate agent at Century 21 Premium Properties’ downtown office. The community has marked the events by tying yellow ribbons to the oak trees that edge its quiet streets, as a memorial. Disney started building Celebration in 1994, and the first residents arrived in 1996. Located on the southern border of Disney World, 25 miles south of Orlando, it was designed by Robert A.M. Stern, dean of the Yale University School of Architecture, and Jaquelin Robertson, a founding partner at Cooper, Robertson & Partners in New York. The style of the development is called New Urbanism, also known as neotraditionalism, emulating 1950s mixed-use neighborhoods where it was easier to walk than to drive.

Kilwin’s, Woof Gang

In the center of town, bordering a lake constructed by Disney, stores include Kilwin’s, a seller of ice cream and fudge, and the Woof Gang Bakery, where dog owners buy gourmet treats. At the Market Street Cafe, there’s an old-fashioned soda counter where diners can order the restaurant’s specials: meat loaf and chicken pot pie, followed by apple or pecan pie. Lexin Capital, a New York-based private real estate investment firm, bought the 18-acre Celebration downtown from Disney in 2004. Mike Nunez, a spokesman for the company, didn’t return calls seeking comment. Disney still owns some commercial property in the town, according to Marilyn Waters, a spokeswoman for the Burbank, California-based company.

Twice the Value

Living 12 minutes from Disney World’s Magic Kingdom, with a backdoor access road, comes at a price. Buying in the 10,000- person town requires paying what locals call the “Celebration Premium.” The median home value, including single-family properties and condominiums, was $250,800 in October, almost twice the $127,300 for the entire state, according to Zillow. Properties in Celebration are priced as high as $3.9 million for a six-bedroom, 8,000-square-foot (743 square-meter) mansion on a three-quarter-acre lot, according to Realtor.com. At $529,000, buyers could get a four-bedroom, 2,800-square-foot home with a wrap-around porch on about a sixth of an acre. For condominiums, $90,000 will buy a two-bedroom, 1,000- square-foot unit, according to Realtor.com. At the top of the market, a five-bedroom, 3,400-square-foot, townhouse-style condo is priced at $675,000. Four years ago, at the height of the real estate boom, the least expensive single-family house in the June to December period sold for $350,000, according to Kathleen Carlson, owner of Imagination Realty in the town’s center. In the same period this year, it was $210,000, she said. The lowest condominium sale in the boom was $193,000, compared with a sale at $70,000 for the 2010 period, she said.

Town Maintenance

All owners pay about $860 a year for private trash pickup and recreational facilities, including parks, community pools and baseball fields. Condo owners pay an additional maintenance fee that varies depending on location. The town’s Architectural Review Committee maintains strict control over the appearance of properties, dictating paint colors, regulating holiday decorations and overseeing the size of political signs that can only be posted in the 45 days leading up to an election. Most residents see the rules as “protection,” said Carlson, who lives in a Celebration home with a wide front porch where she drinks coffee with neighbors on Sunday mornings. “Most of us came here not because of Disney -- we came because we wanted that type of control over our neighborhood,”

Carlson said, “You don’t have to worry that your neighbor will suddenly start parking an old pickup on his front lawn.”

Six Acceptable Styles

Like Carlson’s house, most properties have front porches that encourage neighborliness. There are six accepted historical architectural styles for homes: Victorian, Classical, Colonial Revival, Mediterranean, French, and Coastal. While white picket fences outline most front yards, not everyone is allowed to have them. That would look too fake, said Laura Poe, a spokeswoman for the town. The architectural committee decides who can have the old-fashioned fences and who must have short, trimmed hedges. The town shows its Disney heritage in annual seasonal shows, each with special effects originally designed by the entertainment company. In October, leaf-shaped confetti shoots out of lamp posts in the village center to simulate colorful falling foliage. During the month of December, the posts emit what locals call snoap -- soap suds that look like snow. Unlike in real life, the snow falls four times a night, on schedule, and dissipates without shoveling. “Two of my grandchildren think we live inside Disney World, with Mickey Mouse,” said Celebration resident Sessoms, referring to a four-year-old and a five-year-old. “Except for the recent violence, I can understand why they would think that.”

UBSS ups TPC. WEFA ups GDP. BofAMLCO cuts NBG, TSO, UIL. CITI cuts VECO. GSCO cuts CFB. BARD cuts ACOR. UBSS cuts KALU. AHT announces 7.5M share offering. BP to sell assets in

Pakistan

. DX announces 5M share offering. GBX announces 3M share offering. ICO announces 34M share offering. LNDC lowers guidance. SAFM beats by 36c. WPZ announces 7.5M share offering.

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

Today’s Trivia: According to Wired Magazine, what percentage of photos on the internet are of naked women?

Yesterday’s Question: On this date in 1979, what virus was eradicated, marking the first and only human disease thus far to be driven to extinction?

Yesterday's Answer: Small pox, eradicated in December 1979, is the first and only human disease thus far to be driven to extinction.

Best Quotes: BTIG last night…

Euro Attention Please.

Despite a new round of intraday recovery highs for most major U.S. Equity indices, it was a quiet day for Equity markets. After trading in a tight range, most of those indices settled at the lows of the session. The more notable movements were in the Foreign Exchange and Commodity markets. The currency volatility had settled down last week. Today's Euro strength appears to be related to

Germany

's reiteration that it stands behind the Euro. That being said, the Germans do not appear willing to commit to offering Eurozone Bonds to fund the rescue programs to battle the crisis. Reports are circulating that the ECB is considering asking member nations to increase the Central Bank's capital. When will Central Bankers learn that this type of action should not be "considered" in the media - either do it or don't do it. Nowadays, markets do not have a level of confidence in Central Bankers that affords them the luxury of pondering their options in the news cycle.

Another development that may have fueled the Euro's strength was the weekly level of troubled Sovereign Bond purchases made by the ECB. The €2.67 Billion in purchases was the highest since early July, but is still a very low level relative to the commencement of the program during the Greek crisis. On the positive side, the small levels of purchases have been successful in keeping the bonds of Spain, Portugal and

Ireland

from deteriorating notably. On the negative side, Spanish 10 Year Yields have crept back up within 5 basis points of their closing peak in November. The risk is that the small purchases combined with requests for new capital can make the ECB appear to be a toothless tiger. Such a combination does not have the effect of "Shock & Awe." This is not a completely fair assessment because a global bond market selloff has been occurring. The spread between Spanish and German 10 years is 35 basis points below its November closing peak. For a little different perspective, one can look at the spread between Spanish 10 years and U.S. 10 year Treasuries, since both are being purchased by their respective Central Banks. That spread is 52 basis points below its November peak (maybe the ECB can give the Fed a helping hand). EU leaders will be meeting in Brussels on Thursday and Friday to discuss the crisis response, as well as the permanent solution to enact in mid-2013. No doubt, the political jawboning markets can expect over the next several days will likely create additional foreign exchange volatility, which in turn will influence markets here.

Morning Note...

2010-12-13T08:22:00.001-05:00

First day in the new office space...a few too many distractions for the Morning Note, apologies...

Morning Note...

2010-12-09T09:20:00.000-05:00

Futures ~50bps higher as Initial Jobless Claims for the week ending December 4^th fell by 17,000 to 421k from the prior 438k, beating the 425k estimate. Additionally, Continuing Claims fell to 4.086M from the prior 4.277M, beating the 4.237M estimate. Overseas, the BofE kept its emergency stimulus package unchanged, as the central bank believes the economy should be strong enough to weather budget cuts. Europe is up ~1% despite a Fitch downgrade of

Ireland

’s debt, and the EUR/USD is holding steady at ~1.3250. Asia was mixed overnight. No word yet from China on potential tightening, but Shanghai was down 1.3% last night. In earnings news, CIEN is up 7% premarket on better-than-expected Q4 results. Oil +65bps. Gold +60bps. USD flat. Bonds higher, yields lower.

Politics & the extension of Bush-era tax cuts are still front and center as a Congressional vote approaches. Speaking of politics, a Bloomberg National Poll showed that “more than 50% of Americans say they are worse off now than they were two years ago when President Barack Obama took office, and 2/3rds believe the country is headed in the wrong direction.” Additionally – and file this one in the “Ron-Paul-is-high-fiving-himself” category – another Bloomberg National Poll showed that “a majority of Americans are dissatisfied with Fed, and say it should either be brought under tighter political control by Congress or abolished outright.”

Great summary of the world from Hedgeye this morning:

This morning's global macro game is confusing. The US stock and bond markets are sending completely different messages as Asian stocks and bonds continue to break down. All the while European sovereign risk premiums continue to fluctuate like twitter.

Let's look at US markets first:

1. The SP500 had its 1^st up day in the last 3, making a bullish comeback from an outside reversal on the day prior, hitting a new YTD high at 1228.

2. The SP500 is now up +81.7% from its March 2009 lows and down -21.5% versus its October 2007 highs.

3. The immediate-term TRADE range for the SP500 moves to 1209-1245, with the daily downside risk being about equal with upside reward.

4. Volatility (VIX) at 17.74 is testing a breakdown towards its April lows; while this is a bearish contrarian signal, the VIX could easily test 16.

5. US stock market Volume and Breadth studies continue to flash bearish, despite higher prices, there is a very negative skew.

6. In our SP500 Sector Studies, 2/9 sectors are bearish (XLV, and XLU) and 7/9 bullish from an immediate-term TRADE perspective.

7. The US Dollar Index continues to flash bullish on both our TRADE and TREND durations, with intermediate term TREND support at $79.49.

8. US Treasury Yields continue to boom to the upside with 2s, 10s, and 30s all busting out into what we call Bullish Formations.

9. The Yield Spread (10s minus 2s) continues to widen at +10bps for the week-to-date, supporting the rally in Financials (XLF).

Overseas, the immediate-term game is much less confusing:

1. Chinese equities were down another -1.3% overnight and remain bearish from an immediate-term TRADE perspective at -14.3% YTD.

2. Indian equities got tagged for another -2.3% drop overnight as the BSE Sensex broke its intermediate term TREND line of 19,655.

3. Japanese equities are the only bullish immediate-term TRADE market in Asia as the POSITIVE correlation to the USD reigns supreme.

4. Australia's central banking guru, Glenn Stevens, continues to prove that raising rates and seeing unemployment drop can work together.

5. Germany, Russia, and the Netherlands continue to flash bullish TRADE and TREND signals in both stocks and bonds.

6. Spain, Italy, and Greece continue to flash bearish TRADE and TREND in both stocks and bonds.

7. Brazil looks like India, as stocks on the Bovespa are down every day this week and now bearish on both TRADE and TREND durations.

8. The Euro continues to flash bearish on both our TRADE and TREND durations with intermediate-term TREND resistance = $1.34.

Global Commodities markets continue to confirm what almost every country's central banker who has real-time quotes sees - inflation:

1. The CRB Commodities Index closed at 316 yesterday = +21% higher than Bernanke's decision in Jackson Hole to Quantitatively Guess.

2. Oil is in a Bullish Formation with immediate-term TRADE lines of support and resistance of $87.17 and $91.47, respectively.

3. Copper prices are testing ALL-TIME highs again this morning = +29% since The Ber-nank opted to sponsor inflation.

Gold, meanwhile, looks a little bit less-like most commodities all of a sudden. To a degree, if real-interest rates continue to push higher, the gold bulls will have to compete with that yield. That's new. Tops are processes, not points, but Gold will need to get back above its immediate-term TRADE line of $1390/oz to get me interested in getting long it again (I sold our GLD position on Monday).

Altogether, if you take the beginning and end of 2010, you can draw plenty of conclusions that are now crystal clear. From my global macro model's vantage point, the deep simplicity of all of these global macro factors and what they mean prospectively to the global markets remains as follows: Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding.

Trader talk from BofAMLCO:

Santa rally is in full force. Financials finally starting to lead the tape higher. Earlier this morning we traded to a new year high in the futures North of Tuesdays 1235 level. There is no supply out there to defend the Bears, and shorts are not playing ball. Jobless Claims could be a game changer, but even if there is a sell off the dips have been bought in full force. Later today we get wholesale inventories. Crude flat. The market gained yesterday despite the Euro weakness. You know my stance. Keep being bullish, I don’t see what takes the market lower.

On that note, if you have not seen this yet, it’s worth a chuckle. Click the video. Rated R, by the way:

http://www.zerohedge.com/article/buy-dip

Cramer positive WHR. BofAMLCO ups CTB, GT. BCAP ups JNS, LM, WDR. GSCO ups FMCN. JPHQ ups ARB as ARB reaffirms guidance. BLK makes positive comments at GS Financial Services Conference. Relational urges CRL to seek strategic alternatives. DMND beats by 4c. FCX announces split and dividend. GSCO ups GT. HITK beats by 20c. LINE announces 10M share offering. OXM beats by 3c. SAI beats by 6c. SIRI announces Howard Stern will renew for 5 more years. SWHC beats by 5c. LULU raises guidance. MSCO ups CM. UBSS ups TGI, WAG. MSCO cuts RY. WEFA cuts JNJ, PAYX.

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

Today’s Trivia: On this date in 1979, what virus was eradicated, marking the first and only human disease thus far to be driven to extinction?

Yesterday’s Question: According to The Economist, what percentage of New York City residents are foreign born?

Yesterday's Answer: 35.7% (!!) of New York City residents are foreign born.

Best Quotes: 2011 outlook (yes, it’s that time) from Barclay’s…

“Fresh of the presses, Larry Kantor , Global Head of Research, is out with his '11 Cross Asset Strategy. Bottom line, our primary recommendation is to be long equities in both developed and developing markets, which we believe are still reasonably valued. The environment is also favorable for commodities and credit, although absolute credit returns will likely be compromised by generally higher interest rates. Digging in, Larry highlights that he economic recovery is on track and growth is surprising on the upside, backed by a new round of policy stimulus. To wit, better growth, combined with easy and easier monetary policy, provides a very favorable backdrop for risky assets. That said, Larry warns that the reflation trade, however, may not last very long, and investors should position for continued volatility and the possibility of sharp reversals. With Equities, in the

U.S.

our base case for the S&P 500 at year-end '11 is 1,420 (the product of $91 operating EPS and a 15.6x multiple). We recommend

U.S.

industrials, technology, and energy, which benefit from an improving domestic growth outlook. In Europe, we prefer the emerging markets-leveraged basic resources, industrials and personal & household goods, the high-beta financial services, and the inflation exposed food retail. Across the aisle in Bonds, n-t we are neutral on

U.S.

rates, but we expect a sell-off to pick up pace in H2 11. We look for wider swap spreads medium term (on the still deteriorating fiscal situation). We recommend closing short duration positions in the euro area and being long 10y versus 2y and 30y in euro rates. Regarding credit, in the

U.S.

, BBs are still attractive relative to BBBs. We prefer selective investing in CCCs. As it relates to commodities, we continue to advocate investors stay long crude oil, copper gold and corn owning to strong demand, inventories that are still contracting and macroeconomic uncertainties. Finally, on the FX front, peripheral euro area issues will likely pull the EUR lower in the next quarter, but monetary policy will weigh on the USD. Sell NOK/SEK. Short AUD/CAD. Long GBP/JPY.”

Morning Note...

2010-12-08T09:14:00.001-05:00

Futures ~20bps higher this morning as investors continue to digest yesterday’s Bush-era tax cut extension (and subsequent Obama press conference – see WSJ editorial in quote section below for more on this - indicating that the cuts will in no way be permanent), increased negative speculation surrounding the U.S.’s massive insider trading probe, and a higher-than-expected 3pm Consumer Credit increase (whither personal balance sheet de-leveraging?). The USD is generally higher (+20bps) on the announced tax cut extension, which is also weighing slightly on equities. The ten-year Treasury yield also spiked higher yesterday as bonds sold off on the tax cut extension and speculation that the tax relief means the Fed could temper their bond purchases via QE2. In Asia, markets were mostly lower (ex-Japan) on continued speculation that

China

will tighten again. Europe is generally (+75bps on average) higher this morning. In corporate news, McDonald’s (MCD; -1.4%) missed November comparable stores sales estimates (+4.8% vs. +5.6%/e). Fortune Brands (FO; +4%) announced its intention to split the company into there separate businesses. Texas Instruments (TXN; -65bps) lowered guidance slightly. Costco (COST; -40bps) beat earnings estimates by 2c and Home Depot (HD; -85bps) slightly raised guidance ahead of today’s investor day. Oil -40bps. Gold -140bps. EUR/USD 1.3236.

Here are a couple interesting reads regarding yesterday’s Obama tax deal:

Obama’s Deal to Extend High-Earner Tax Cuts Unpopular (2010-12-08 13:24:57.494 GMT)

Dec. 8 (Bloomberg) -- Americans don’t approve of keeping the breaks for upper-income taxpayers that are part of the deal President Barack Obama brokered with congressional Republicans, a Bloomberg National Poll shows. The survey, conducted before, during and after the tax negotiations, shows that only a third support keeping the lower rates for the highest earners, and less than half of those respondents say the breaks for the wealthy should last for a shorter period than cuts for the middle class. Overall, two- thirds of those polled favor a permanent extension of the lower rates for the middle class. More than a fourth say all the tax cuts should be allowed to expire Dec. 31, as scheduled. The agreement Obama announced Dec. 6 would temporarily sustain the tax cuts for all income levels. The president said the compromise was needed to break a deadlock with congressional Republicans who vowed to block tax cuts for middle-income Americans if those for individuals earning more than $200,000 and couples earning more than $250,000 weren’t extended, too. “I’m as opposed to the high-end tax cuts today as I’ve been for years,” Obama told reporters yesterday. “In the long run, we simply can’t afford them. And when they expire in two years, I will fight to end them.” Still, many of the respondents in the poll conducted Dec. 4-7 said they wouldn’t support the compromise.

Tax-Cut Deal Alone Won’t Add Enough Jobs: Mohamed A. El-Erian (2010-12-08 02:00:00.4 GMT)

Dec. 8 (Bloomberg) -- President Barack Obama made a very important policy announcement Monday while also noting that it was “not perfect.” If approved by Congress, which is likely, its impact will be felt both inside and outside the U.S. Still, the key objective -- to generate durable jobs -- will be possible only if this is part of a broader policy push. After protracted negotiations that crossed party lines, Obama explained his willingness to maintain for two years the Bush tax cuts for all income brackets, extend federal unemployment insurance, cut payroll taxes by 2 percentage points for one year and reduce other taxes. The accord is important in three ways. First, it shows that America’s unemployment problem is finally at the top of Washington’s legislative agenda. Second, the measures take some pressure off the Federal Reserve, which has been pushed into unusual activism and policy experimentation to combat unemployment that remains stuck at almost 10 percent. Third, it signals that political compromises are possible in a city that has been characterized by massive polarization and fragmentation. While important, the package is a product of political compromise that is far from perfect. Its limitations are seen in both what the deal does -- and doesn’t -- include. Though it promotes economic activity, the package doesn’t do so in the most efficient manner. And it does little to address growing income inequality in the U.S.

Tensions Rise

This week’s announcement will also heighten tensions within each of the two political parties, with the Democrats being most at risk as the tax-cut compromise will disappoint Obama’s core supporters, who backed the president’s campaign promise of refusing to extend the tax cuts to the nation’s top earners. These imperfections, while notable, are inevitable outcomes of difficult political compromises. More important, they pale in significance when weighed against what the policy approach doesn’t include so far. The impact of the measures on economic growth will erode over time if not accompanied by two additional policy efforts.

Officials must explain how further short-term deterioration in America’s budget deficit will eventually give way to medium-term fiscal responsibility. In addition, we need a more meaningful push to improve America’s long-term competitiveness, which has been compromised by our lagging behind in infrastructure improvements and education, as well as resource misallocations.

Multiple Challenges

Without these two features, the compromise plan’s ability to generate durable job growth will be challenged by national and international forces. U.S. economic growth will rise in the short-term but at the cost of complicating economic management elsewhere in the world; and, over time, the U.S. will face an even greater challenge in dealing with its large and rising public debt. Markets understand this, judging from their immediate reactions to Obama’s announcement. The stimulus-induced boost to growth was reflected in an immediate rally in global equities and other risk assets, which fizzled by the end of the trading day in the U.S. yesterday. Commodity prices and the currencies of emerging countries strengthened, and Treasury bonds sold off sharply, consistent with a rise in medium-term fiscal concerns. These market reactions serve as a reminder to the Obama administration that this week’s important policy announcement is just a step in a long and complicated journey. More will be needed if the U.S. is to decisively address its most pressing economic and social problem: persistently high under-employment and unemployment.

(Mohamed A. El-Erian is Pimco’s chief executive officer and co-chief investment officer, and the author of the book “When Markets Collide.” The opinions expressed are his own.)

NFLX downgraded at JEFF. GSCO ups FWLT, KBR. ASMI upgrade at JPHQ. CEU announces $10M buyback. COO beats by 22c. GDOT announces secondary pricing at $61/share. KFN (KKR) announces 18M share offering. KFY beats by 6c. MIND beats by 3c. MW beats by 10c. NEWN raises guidance. POWL misses by 24c. PPO files for shelf offering. STWD announces 20M share offering. SWC secondary priced at $19.50. VVUS higher on approval for OREX’s Contrave. Global Hunter cuts WTI. BofAMLCO ups VVUS. JEFF ups NHP. MSCO ups D. DBAB cuts JCI. GSCO cuts MMM. MSCO cuts ETR, NEE. BARD cuts SRV. UBSS cuts WY.

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

Today’s Trivia: According to The Economist, what percentage of New York City residents are foreign born?

Yesterday’s Question: Name the world’s largest cocoa exporter.

Yesterday's Answer:

Ivory Coast

is the world’s largest cocoa exporter.

Best Quotes: Wall Street Journal Op-Ed…

Obamanomics Takes a Holiday

A two-year tax reprieve is better than current law but far from ideal.

Does President Obama like or loathe the two-year tax deal he has struck with Republicans? It was hard to tell from his grudging, testy remarks Monday and yesterday, but perhaps that's because he realizes he is repudiating the heart and soul of Obamanomics as the price of giving himself a chance at a second term.
In accepting the deal to cut payroll and business taxes and extend all of the Bush-era tax rates through 2012, Mr. Obama has implicitly admitted that his economic strategy has flopped. He is acknowledging that tax rates matter to growth, that treating business like robber barons has hurt investment and hiring, and that tax cuts are superior to spending as stimulus. It took 9.8% unemployment and a loss of 63 House seats for this education to sink in, but the country will benefit.

***

In this sense, the political symbolism is as important as the policy. Mr. Obama is signaling that businesses must be encouraged to make profits again so they can hire more workers, that "the rich" he so maligns should be able to keep more of what they earn, and even that wealth built up over a lifetime shouldn't be confiscated wholesale at death. In policy if not in Presidential rhetoric, class war and income redistribution are taking a two-year holiday.
This is not to say the deal is optimal for economic growth, and Republicans should not pretend it is. A two-year reprieve is far better than an immediate tax increase amid a still fragile recovery, but it also means that the policy uncertainty is carried forward. In the Keynesian universe, "temporary" tax cuts are virtuous because they stimulate immediately while ostensibly allowing government to reclaim the revenue later when the economy is stronger.
In the real world, businesses make investments based on the estimated return on capital over time, including the expected tax rate. What matters is the overall cost of, and return on, capital. The temporary nature of the tax cuts will provide less incentive to invest than would permanent reductions in the cost of capital. (See Messrs. Cooley and Ohanian nearby.)
The provision to allow business a 100% expensing deduction for 2011, and 50% in 2012, will help growth in those years. But it will do so in part by pulling investment forward from 2013. This is good for President Obama's re-election chances, but not so good for increasing the permanent level of business investment.
The same goes for the temporary cut in the payroll tax in the name of encouraging more hiring. The one-year cut to 4.2% from 6.2% in the employee portion of the Social Security tax increases the incentive to work. Because it doesn't favor some workers over others, it is also superior to the tax credits that Democrats wanted. But the proposal does nothing to reduce employer costs, even as ObamaCare is raising those costs as its mandates and regulations take effect.
This incentive to work also conflicts with the disincentive to work provided by another extension in jobless benefits. The deal's 13-month extension will cost taxpayers about $56 billion. As economist Larry Summers noted before he joined the White House, every jobless person has a "reservation wage," or the minimum wage he'll accept to take a job. The jobless rate will thus stay higher for longer as benefits induce some people to hold out for a better job than those that are available.
Another half-victory is the provision to set the estate tax at 35%, with an exclusion of $5 million. The rate was set to return to 55% with a $1 million exclusion on January 1, and Mr. Obama had wanted 45%. While the 35% rate also lasts only two years, the level of bipartisan support will make this rate politically difficult to increase even if Mr. Obama wins re-election. Meanwhile, Republicans can continue to campaign for repeal of this immoral tax on a lifetime of thrift.
Should Republicans have held out for more, since they would return in January with a stronger position? We wish they had won a longer extension, kicking the next possible tax hike further into the future. As it is, Mr. Obama made clear on Monday that he'll try again to raise taxes in 2013, figuring he'll be politically stronger if the economy improves. The growth policy victories here are partial and temporary.
Yet this deal is superior to anything we could have imagined six months ago. Much credit goes to Mitch McConnell and Senate Republicans for holding together against the class war attacks of Chuck Schumer and other Democrats. By holding firm, they divided the opposition. This proves again that Republicans win the economic debate when they make the case for lower taxes for everyone in the name of faster growth and job creation.

***

They should nonetheless not advertise this deal as an economic panacea. It is at best a transition from the failure of Obamanomics to what we hope is a better growth agenda when it expires in two years. GOP Presidential candidates in particular can explain why this deal improves on the last four years but also where it falls short and how to restore the prosperity of the 1980s and 1990s. Tax reform is one promising area for Republicans to tackle in the wake of endorsements by the deficit commission and Mr. Obama's own economic advisory group.
As for Democrats, many and perhaps most in Congress will oppose this deal as an ideological betrayal by Mr. Obama, but it is really an admission of reality. Democrats lost the election because their economic policies failed. Their caterwauling now is mostly short-attention-span theater for the MSNBC crowd. Mr. Obama's heart is still with the left, and he's making it very clear that he'll return to fighting to redistribute income in 2012, but for now he had to dump the Democrats to save his Presidency. As he likes to say, elections have consequences.

Morning Note...

2010-12-07T09:22:00.001-05:00

Futures ~1% higher this morning as Obama & the Democrats compromise on tax cuts and agree to extend the Bush-era cuts two more years to 2012. Additionally, in M&A news in the natural gas sector, AGL Resources will acquire Nicor for $2.4 billion. In other corporate news, Citigroup is ~3% higher pre-market as the government announced it sold its remaining $10.5 billion overhang in the company. Asia was mostly higher overnight and Europe is ~2% higher as the tax cuts were announced at roughly 7pm EST last night. Also, in Europe, EU finance ministers are due to officially vote for Ireland’s rescue package and they ruled out immediate aid for Portugal or

Spain

and refused to increase the current $750 million debt crisis fund. Oil +130bps. Gold +1%. USD -60bps. EUR/USD 1.34.

Regarding the tax cut extension – which includes a few other sweeteners, by the way – MF Global had this summary:

Tax Deal Framework

What Happened: The White House Office of Public Engagement held a conference call to discuss the tentative framework on the tax deal between the White House and Congress.

What This Means: The “kitchen sink tax bill” now has structure and is nearing the finish line. We stress that this is a framework and that nothing is set in stone. We expect the bill to be sent to Obama’s desk by next Friday, December 17th.

We believe this framework represents the floor to the tax negotiations. There is still plenty of room for more “sweetners” and many details remain for the negotiators (clean tech, ethanol, etc.).

The one year Doc Fix is moving independently of this bill. The $19.2 billion deal, expected to be brought to the Senate floor in the next 48 hours through a unanimous consent resolution, would be paid for by recovering a greater share of excessive subsidies expected to be paid to low-income people to buy health coverage beginning in 2014. The measure also contains a number of other Medicare provisions that would expire at the end of the year.

The Framework:

2 year extension for all Bush Tax Cuts in 2001/3 bill (including cap gains and dividends);

13 months Unemployment Insurance Extension;

13 months 2% payroll tax holiday on employee side (i.e., reduce FICA from 7.65% to 4.65% up to FICA wage base cap of about $105K);

1 year for “traditional” extenders (Research and Development);

Other extenders TBD (including BABs and other provisions from ARRA, SBJA, HIRE, Energy, etc.);

2 years for individual-level refundables (EITC, CTC, AOTC);

2 year AMT patch;

2 years Lincoln-Kyl Estate Tax ($5/$10M exemption and 35% rate).

From a technical perspective, btw, breaking up through 1230-1235, the S&P appears set for a near-term pop to 1300 (the next level of resistance):

BofAMLCO trader commentary this morning:

Good Morning – The President has made his first move of many to the middle. Bottom line he wants to keep his job, and will do everything to keep it. His fold to the GOP on taxes is just the beginning of his campaign for 2012. Markets reacting well to the news, making new year highs on its way to 1250. Treasury out of Citi, it will trade an incredible number of shares today. Ireland’s parliament to hold budget vote late this morning, it must be approved in order to receive aid. Consumer Credit is out at 3 p.m. est. I would like to see all the financials lead this tape higher. Crude above 90.00, no one seems to care. Inflation is real. Keep buying the market there is no supply.

TLB beats by 2c. VE upgrade at JPHQ. HWAY higher on earnings. FSYS lowers guidance. BofAMLCO ups SFD, TEL, WTW. GSCO ups STP, TSL. HSBC ups GFI. MSCO ups RHT. BofAMLCO cuts MWV, TIN. BCAP cuts NRGY. MSCO cuts FIRE. WEFA cuts NBR.

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

Today’s Trivia: Name the world’s largest cocoa exporter.

Yesterday’s Question: In pre-Bible days in ancient Rome, when a man testified in court, what did he swear on?

Yesterday's Answer: When a man testified in court in ancient Rome, he swore on his testicles.

Best Quotes: Hedgeye…

HEDGEYE

EARLY LOOK: GETTING PUNCHED IN THE FACE

"Everyone has a plan 'till they get punched in the mouth."
- Mike Tyson

There have been a lot of interesting Mike Tyson quotes over the years, some fit for print, others less so, but this one seems apropos for the times. The Fed tells us they have a plan, and they're implementing it. So far, the markets seem to like it. Let's see how their plan fares once they get punched in the mouth.

This summer we introduced our bearish thesis on housing with our 100-page report entitled: "How Low Will Housing Go in 2H10 and 2011". In that report we laid out our three separate home price models: our supply model, our demand model, and our combination supply & demand model. The output of those models forecast home price declines ranging from high single digits to 20%+ over the next 12-18 months. How have we fared so far? As the chart at the end of this note shows, the four major home price series that we track (Case-Shiller 20 City, Corelogic, FHFA, and Existing Home Sales Median Home Price) are all heading south. After peaking in the April/May timeframe on the strength of the tax credit, three out of four home price series are now solidly in negative year-over-year territory. The lone holdout, Case-Shiller, is a 3-month rolling average, which is why it lags the other series in reflecting the degree of slowdown. The next few months of Case-Shiller data will show a comparable negative trend.

For reference, the Corelogic series is the series now used by the Federal Reserve. How has the Fed's preferred series fared? According to Corelogic, home prices have rolled from being up +4.3% YoY in May 2010 to being down -2.8% YoY in September 2010, a negative -7.1% swing in four months. Looking month-over-month, the Corelogic series was down -1.8% sequentially in September (the most recent data available), which translates to the fastest rate of decline since February 2009.

The supply and demand imbalances were at the root of our housing call this past summer and nothing has changed on that front. The market is more dislocated today than it was when we made the call in the summer. At the time we made our call in June there were 3.99 million homes on the market for sale and existing home sales were running at a rate of 5.37 million, which equated to 8.9 months of supply. Today, there are 3.86 million home on the market for sale (October), while existing home sales are running at a rate of 4.43 million, which equates to 10.5 months of supply. Existing home inventory peaked at 12.5 months of supply in July. Based on our conclusion that home prices take one year to fully respond to supply and demand imbalances, we would expect to see July 2011 be the low watermark for year-over-year price trends in housing. The more important takeaway, however, is that between now and July 2011 the trends should continue to get worse. While it is possible that the market's "bad news is good news" mentality will persist and ongoing weakening in home prices will simply translate into greater and greater expectations for further quantitative easing, we continue to think that bad news is simply bad.

Another point to consider is the impact QE2 is having on the housing market. While recent demand statistics have been modestly upbeat (i.e. October pending home sales up 10.4% month-over-month), the reality is that mortgage rates have backed up sharply in November. The Bankrate 30-year conforming mortgage index has ballooned from 4.20% a month ago to 4.70% yesterday. For reference, a 50 bp backup in 30-year rates has a 5% negative effect on affordability.

It's also worth pointing out that no amount of stimulus or quantitative easing seems to increase banks' willingness to underwrite residential mortgage loans. In the most recent Senior Loan Officer Survey released November 8, the net percentage of lenders tightening access to prime mortgage credit rose to +9.3% from -5.5% quarter over quarter meaning that the average American is now finding it more difficult to get a mortgage than they were over the summer. The trend was similar for access to nontraditional mortgage credit: +9.5% of respondents reported tightening standards, up from +4.5% last quarter. This isn't helped by the fact that banks are currently engaged in trench warfare with Fannie & Freddie as well as the entire private-label MBS universe over mortgage putbacks. Further, there are 8.5 million borrowers who have either been foreclosed or are currently non-performing on their loan. This is a large slice of the overall homeownership pie that has been semi-permanently eliminated from the buyer pool (7 years for most lenders to look past a mortgage default). All of this has cast a pall over banks' willingness to underwrite new mortgages.

Many investors forget just how slippery the slope of negative home prices can be. Falling prices don't happen in a vacuum: they have two insidious offshoots. First, they generate a tangible negative wealth effect. For reference, for all the excitement resulting from the upward move in equities recently, consider that as a rough rule of thumb, every 100 points of upside in the S&P is roughly equivalent to a 5-6% rise in home prices based on there being total direct equity wealth of $10.8 trillion and total residential housing wealth of $17.1 trillion. That said, the wealth associated with housing is much more broadly felt as 65% of American families are homeowners, a far higher proportion than those with material equity wealth. Second, negative home price trends increase pools of underwater borrowers. We have shown that there are presently 11.3 million borrowers (20% of all borrowers) who are underwater. 4.9 million of whom are underwater by more than 25%. A 20% decline in home prices from here would increase those who are underwater to 21.9 million (46% of all borrowers) and those underwater by 25% or more would rise to 9.4 million (20% of all borrowers). Laurie Goodman, a Senior Managing Director with Amherst Securities, one of the leading providers of mortgage data analytics, has shown that loans with LTVs greater than 120% are currently defaulting at an annualized rate of 19.1%, while those with LTVs between 100-120% are defaulting at an annualized rate of 11.3%. Those are scary statistics when one considers that there could be 22 million borrowers in a negative equity position with a 20% drop in home prices from here.

The real question is, what will a 20% drop in home prices feel like for the markets and for the consumer? Our guess is that it will feel a lot like getting punched in the face by Mike Tyson.

Josh Steiner

Managing Director

Morning Note...

2010-12-03T09:16:00.001-05:00

Happy Friday… After the last couple of days of outright ebullience, a more somber mood has taken hold of the markets this morning as the much-anticipated November Change in Nonfarm Payrolls release from the Labor Department disappoints, as +39k jobs were created in the month versus the prior +172k and the estimated +150k. Futures are down ~60bps as the Unemployment Rate rose to 9.8%. Further, the “Underemployment Rate,” or the U6, which also includes those who have given up looking for work, stands at roughly 17%. When you also consider that the recent unemployment benefits extension is beginning to expire for many Americans and that the Bush tax cuts extension vote yesterday by the House may have been little more than posturing ahead of a more realistic Senate vote, recent bullishness has been somewhat tempered. If jobs fail to materialize, however, that sets the stage for political pressure to ensure the tax cuts are maintained and that QE2/ZIRP is justified and that maybe we’ll even see QE3 one day soon… Europe stable (-50bps on average) as the most recent bond offerings have gone off cleanly and the troubled countries bond spreads vs. the “safe haven” German spreads have narrowed. EUR/USD +90bps at 1.3335. Asia mixed overnight. Oil -60bps. Gold +75bps.

I thought Knight’s Fixed Income Dept. summarized this morning’s jobs data nicely:

With unemployment rising to 9.8% as job seekers re-enter the market (the pool of available labor rose 239K during the month and the civilian labor force rose 103K) we could have been okay with this report as it is normal for job recoveries to begin with encouraged workers. However when combined with NFP of 39K and Private Payrolls of 50K, it is hard to be encouraged. Discouraged workers rose and the "underemployment" level remains at 17%.

Where are the positives? The prior month was upgraded from 151K to 172K for NFP and up 1K to 160K for private payrolls. There was also not a distortion from the oft criticized birth/death ratio as new businesses were assumed to have resulted in a loss of 8K jobs. Thus, the number is "cleaner" than usual. Also temporary help rose for the fourth consecutive month, usually a positive sign of future permanent hiring, but we have seen it give a false positive before in this market.

But that is basically it. 39K is pretty far from 150K and 50K is a far cry from 160K. What is close? Well, 9.8% is pretty close to 10%. Unemployment cycles are longer at the zero bound and the retooling of workers and demand from an economy geared toward housing production is a lengthy process.

On the topic of bullishness, BTIG’s Mike O’Rourke also reminded us about the AAII sentiment indicator last night:

Domestically the recovery story remained on track. Same Store Sales in the retail industry were widely better than expected as were Pending Home Sales. Our favorite indicator, Initial Jobless Claims, upticked to 436,000. They continued the pattern of two steps forward and one step back. Regardless, this reading was still the 3rd lowest reading since August 2008. Next week's number will be an important one. The first week of December generally sees the largest percentage jump in the Non-Seasonally Adjusted number, and the seasonal adjustment usually only adjusts for 60%-70% of the rise. Even considering those headwinds, we expect the seasonally adjusted number to be in line with today's reading or better. AAII Sentiment is at (or above) the 65% bullish level (Bulls/(Bullls + Bears)) for the second consecutive week (as well as 5 of the last 7 weeks). As we always point out, 70% is the sell signal threshold. The caveat is that if the economic data shows material improvements as occurred in 2003, then the signal loses its significance. It appears as though this environment is playing out in a similar manner. U.S. Markets also benefitted from the European stability - let's hope that is not an oxymoron. The big problem with having a two-day rally in the Euro is that it is usually followed by a selloff. Nonetheless, we suspect that come 8:30 am tomorrow, the driving force behind trading will be the BLS Employment Situation report.

BCAP cuts KR, SWY. BofAMLCO ups CAN, IACI, SWS. CITI ups DD. FBRC ups NSM. GSCO ups PMCS. JEFF ups KND. JPHQ ups BBBB, POR. PIPR ups PWER. WEFA ups YGE. CITI cuts EBAY, ECL. BofAMLCO cuts ACGL. GSCO cuts MRVL. MSCO cuts CMG. NOMU cuts PSUN. UBSS cuts TMX. WEFA cuts BRCM, CSIQ, JASO, SOLF, ULTA.

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

Today’s Trivia: Name the only animal with four knees.

Yesterday’s Question: What is the nearest planet to the Sun to be orbited by a moon?

Yesterday's Answer: The Earth is actually the closest planet to the Sun to be orbited by a moon.

Best Quotes: Briefing.com summary…

Page One: Jobs Report Cools Down Hot Market Last Update: 03-Dec-10 09:02 ET

The equity market made another strong showing Thursday, distancing itself entirely from the notion that it would struggle if ECB President Trichet refrained from announcing plans to increase bond purchases in the eurozone. Alas, there were no struggles on Thursday as the S&P 500 rode a better-than-expected pending home sales report to a 1.3% gain.

Given the growing level of angst over Europe's debt situation and the military skirmish between North Korea and

South Korea

at the end of November, it is hard to imagine December getting off to any better start. The S&P 500 has surged 3.5% in the first two days alone and is within a snowball's throw of hitting a new 52-week high.

The latest push to own equities has come in the face of rising bond yields, which suggests to us an asset reallocation trade has been an added source of support for the stock market in early December as participants have been warming up to the idea that the U.S. economy -- and the U.S. consumer specifically -- is faring better than most assumed to be the case. Call the recent data an economic hot toddy if you will.

The November employment report, however, has thrown some cold water in the warm mix.

The headlines for the November employment report disappointed in just about every respect.

Nonfarm payrolls increased a modest 39,000 (Briefing.com consensus +130,000); private payrolls were up 50,000 (Briefing.com consensus +140,000); the unemployment rate jumped to 9.8% (Briefing.com consensus 9.6%); average hourly earnings were flat (Briefing.com consensus +0.1%); and the average workweek held steady at 34.3 hours (Briefing.com consensus 34.3).

The struggles of the labor market shone through in the indication that the percentage of people unemployed 27 weeks or longer ticked up to 41.9% from 41.8%; meanwhile, the "real unemployment rate," which also accounts for marginally attached workers and persons employed part-time for economic reasons, remained unchanged at 17.0%.

The latter number suggests one out of six workers over the age of 16 is either unemployed or underemployed.

Fortunately, there were upward revisions to September and October nonfarm payrolls, but a net gain of 38,000 jobs between those two months will be small consolation given the optimism that had been building in the wake of an improving initial claims trend and the recent ADP Employment Change report that estimated a 93,000 gain in private sector payrolls in November.

One of the more peculiar elements in the November report is that the jump in the unemployment rate was not the result of more discouraged workers coming back to look for work. The civilian labor force increased by 103,000 to 154 mln, but that increase is in line with normal population growth. The participation rate held steady at 64.5% as the number of employed fell by 173,000 to 138.9 mln.

The swing in the unemployment rate is a bit confusing when taking into account other reports/surveys pointing to increased hiring activity.

Of course, in a labor force of 154 mln workers, there isn't any great statistical significance between the 39,000 increase in nonfarm payrolls and the 130,000 consensus estimate. Nonetheless, there is quite a psychological difference for a market that had been expecting the headline surprise to be on the upside this time around.

Not surprisingly, the futures market saw a quick reversal, as did the Treasury market. The S&P futures, which were up three points ahead of the release, are now down eight points. The yield on the 10-year note, which touched 3.04% earlier this morning, is back down to 2.91%.