Morning Note...

Futures began to reverse from slightly positive to negative at around 5am on European weakness.  S&P500 futures are currently down 75bps.  Europe is trending lower on wearker-than-expected German Industrial Output and a downgrade of Greece’s debt to BBB- at Fitch.  This follows on a Moody’s statement that the US and the UK could both potentially lose AAA status (due to “deteriorating public finances”), thus markets were already jittery.  Additionally, Dubai’s property arm (Nakheel) reported a $3.65B loss, which is creating some weakness “in sympathy” for both RBS (-6.5%) and HSBC (-3%), two banks with Dubai exposure.  Finally, recall that JPM downgraded Russia yesterday.  In geopolitical news, terrorist bombings in Pakistan continue, and the most recent was quite close to Pakistani Intelligence HQ.  There’s a bit of a civil war brewing there, between Taliban insurgents and Pakistanis seen as “an extension of American interests.”  Not good.  In corporate news, KR reports lower-than-expected earnings, MMM reaffirmed downside guidance for 2009 and in-line guidance for 2010, FDX guided Q2 higher after the bell last night, MCD reported lighter-than-expected same-store-sales in both the US and Europe, and the Goldman Sachs financials conference (currently in session, WFC presenting now & JPM presents at 3pm) may produce some headlines.  At 1pm, we’ll see results of the 3-year Treasury auction.  Looking north, Bank of Canada leaves rates unchanged, despite posting growth in their job sector last week.  It is widely assumed the FOMC will behave similarly at next week’s meeting, although Bernanke played it close the vest during yesterday’s speech and gave no hints that the Fed would move off ZIRP any time soon…

As the S&P is set to open below the key technical level of 1100, sell-stops may be elected leading to pressure that may create upside resistance for the broad market.  As discussed in this space recently, today’s headlines and subsequent fears stem from the massive transfer of private wealth to the public sector.  Such a shift will have repercussions, although most pundits have predicted it to be a 2010 concern.  Yet Dubai and Greece could certainly be the proverbial dominoes that kick off a broader ripple of exposure concerns…  Given this morning’s action, Bob Farrell’s recent letter (12/6/09) proves prescient: 

Tops take longer to put in place and one month’s much better than expected jobs report may only be a first step in raising expectations.  It is, however, just as important not to jump your expectations on good news after an already sharp rise as it was not to amplify downside thoughts on bad news after an extended decline earlier this year.

We also should keep in mind that sentiment has been growing more optimistic in recent weeks even before the surprisingly positive employment report.  Not everything shows sentiment moving toward an optimistic extreme but the Investors Intelligence poll of market letter writers we mentioned last week showed another drop in bears this past week to only 16.7%, the third lowest in over 20 years.  At the least, on these low percentage bears I.I. numbers, market progress was limited in coming weeks and in some cases months (until the bear percentage rose significantly again).  This is further reason not get too excited about better news on the economy.  In fact, at this point, with the market having advanced 67% in less than nine months, it is reason to be more cautious.  We suspect that, the better the economic news gets, the more upside momentum will deteriorate, or the response to the news will diminish.  The rationale: markets discount good news in advance and the liquidity created to counter bad times that propels assets upward, eventually gets diverted to the real economy.

After the big recovery of 2009, we think 2010 will be a difficult year.  We know a good market often is said to climb a wall of worry.  That is why we referred earlier to good news on the economy being not necessarily good news for the market.  Based upon the empirical observation, however, that the first legs of cyclical bull markets rarely last more than twelve months without entering into at least a lengthy corrective period, it seems likely the high will be in the early months of the year.

ARO announces buyback.  CITI ups SYY.  FBRC ups BMR, BXP.  MSCO ups FST.  TWPT ups JASO, STP.  UBSS ups DIOD.  BCAP cuts ENDP.  DBAB cuts TOO.  FBRC cuts AVB, EQR.  JEFF cuts EE.   AKAM tgt increased at Wedbush, JEFF, FBRC, DBAB. 

Asian markets lower overnight.  Europe down nearly 2%.  Note that Oil is nearing the $70 level on the downside, standing at $73/barrel this morning, down 125bps.  Gold -135bps.  USD +35bps.  Bond prices higher, yields are lower. 

Brightpoint News: 

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

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

KROGER CO                   20.18    -11.68%            1944957

KIMCO REALTY               12.26    -6.27%              119099

SAFEWAY INC                21.25    -5.26%              33972

CELGENE CORP              53.05    -4.47%              883286

GAMESTOP CORP-A        21.00    -4.24%              15708

BMC SOFTWARE INC      37.50    -2.95%              4900

SPRINT NEXTEL CO        4.06      -2.87%              1270347

SUPERVALU INC             14.04    -2.77%              800

MOTOROLA INC             8.35      +2.71%             187153

PROLOGIS                     13.36    -2.62%              800

MEMC ELEC MATER        12.80    -2.51%              11600

Today’s Trivia:  What year did the first motorized taxicab hit the streets of NYC?  And where did the name “cab” come from?

Yesterday's Answer:  Spain has the highest “under 25 yr old” unemployment rate, at a staggering 42%.   

Best Quotes:  “More Dubai concerns, Greek downgrade and the readthrough for other risky sovereigns (eg. UK... hence RBS -15%), the poor German IP, the FORTIS suspension, stops going off on the EuroStoxx at 1100 and 2875, Greek bonds vs Bunds at new wide of 225bps...

More likely that someone in the US has woken up, seen something they don't like, and dinged a few futures out on a very thin tape.  Doesn't take much to move these markets at the moment...”   --MLCO Europe desk chatter