Morning Note...

Futures slightly lower (-10bps) this morning as pundits cite cautious comments from both Ben Bernanke and the IMF.  Yesterday, Bernanke said significant challenges still remain to the economic recovery as “the flow of credit remains constrained, economic activity weak, and unemployment too high.”  When asked about misalignments, aka “bubbles,” appearing in the US markets, he replied “it’s not obvious to me…that there are any large misalignments currently in the US financial system.”  The IMF predicted global recovery will be “sluggish.”  Further, yesterday Meredith Whitney also said “I haven’t been this bearish in a year…I think you can sit on cash for a little bit, because you have to wait for a leg down in valuations…the S&P is expensive across the board.”  She also predicted a double-dip recession and banks will need to raise more capital.  In economic news, the month-over-month Producer Price Index was +0.3% vs. the +0.5% expectation.  The prior reading has been -0.6%.  Year-over-year, the PPI is -1.9% (vs. -1.8% expectation) and the prior reading was -4.8%.  In corporate news, HD reported 41c/share vs. the 36c expectation, but is trading lower premkt.  TGT also beat expectations but gave cautious guidance about the holiday season.  TJX is also trading slightly lower on its earnings release.  SKS is trading higher on its surprise profit from cost-cutting.  FDX sees holiday volume up 8% over 2008. 

Volumes remain light and investors will continue to take their cues from the USD.  Obama made mention of yuan appreciation yesterday as the US-China trade deficit surged to a 10-month high.  Bernanke’s dovish commentary yesterday is long-term neutral to bearish for the USD, as interest rates should remain low for quite some time.  The Fed’s Yellen broke ground not seen since Greenspan’s “irrational exuberance” (i.e. commenting on equity markets directly) buy saying equities are “not overvalued.”  Total Net TIC flows surged to $134B in September from $25B in August, meaning money continues to flow into Treasuries.  Mauritius (my home for parts of ’97 & ’98) joins India in buying gold directly from the IMF.  Industrial Production and Capacity Utilization readings are due at 10am. 

AMAT to acquire SMTL for $11/share.  Pershing Sq increases MCD stake.  BCAP ups XOM.  UBSS ups HES, ITW, NFG.  WELA ups DVN.  ADG lower on earnings.  AOB lower on earnings.  BCRX announces 5M share offering.  Lehman Brothers estate sues Barclay’s Capital for $10B (BCS) & Nomura ups BCS.  JPHQ cuts BT.  CSIQ beats by 15c.  JPHQ cuts ES.  IRE lower on potential “bad bank bill” passage.  JEC misses by 5c.  UBSS cuts JOYG.  MG initiated Buy at BofAMLCO.  NEED ups OSUR.  KAUF ups PALM.  PSUN lower on earnings guidance.  CSFB cuts SII on 28M share offering.  SINA higher on earnings.  FBRC & PIPR cut SPWRA on acc’ting issues.  TGP 3.5M share offering priced at $24.40.  ZOOM higher on earnings.  ZUMZ cut at B. Riley. 

Asian mkts mixed overnight.  Europe slightly lower.  USD +55bps.  Gold -55bps.  Oil -30bps. 

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

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

NOVELLUS SYS              18.50    -17.11%            1750

JACOBS ENGIN GRP        40.80    -10.31%            88495

DILLARDS INC-A             14.66    +9.98%             78350

MICROCHIP TECH           24.91    -7.36%              1028

SMITH INTL INC             28.61    -6.99%              20300

AKAMAI TECH                25.95    +3.88%             100

AMERICAN TOWER-A      39.00    -3.75%              100

INGERSOLL-RAND           36.00    -3.3 %              4000

COVIDIEN PLC                45.50    +3.2 %              7239

Today’s Trivia:  How many lines does a sonnet have?

Yesterday's Answer:  20.6% of US adults smoked in 2008, up from 19.8% in 2007.   

Best Quotes: “The Fed Chairman provided his outlook for the economy today at a speech in New York.  To sum it up simply, the Fed Chairman is happy with the progress that has been made, but like everyone else, he is concerned about the likelihood of a weak recovery.  Like many, the Chairman views the Q3 GDP growth and the anticipated Q4 GDP growth as artificial although instead of that term, he uses the term “temporary.”  He noted that “My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds - in particular, constrained bank lending and a weak job market - likely will prevent the expansion from being as robust as we would hope.”  The balance of the Chairman’s speech reinforced where he sees the weakness and the potential setbacks.  This was a further and more in depth explanation as to why  the FOMC provided additional explanation on the “exceptionally low rates” for an “extended period” language at its meeting earlier this month.  He even reiterated the language from the FOMC statement in his prepared remarks today.  Undoubtedly, he reinforced a very dovish stance. 

For the past nine months, we have been pounding the table to convey that the Dollar weakness over that time was from a healthy re-risking in a post-Armageddon world.  We were encouraged to see that the Fed Chairman shares a similar view (not that it makes our assessment right or wrong).  The Chairman remarked that, “When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar.  More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely.”  From this, we extrapolate that the Chairman also shares our view that since this process is now complete, the Dollar is currently at an appropriate level. 

Considering nearly every asset class in the markets, Equities, Credit and Commodities, have all been called bubbles by various market participants and the media, the Chairman made the highlight comment of the day during Q&A.  In response to a question regarding asset bubbles, the Chairman commented, “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”  We wholeheartedly concur with that assessment.  Whether you agree or not, it is not often that a Fed Chairman gives such a candid response, especially one that is akin to a blessing for the current level of asset prices.”

--BTIG Note