Morning Note...

Futures -35bps this morning on euro currency weakness (and USD strength) stemming from a downgrade of Portuguese government debt and movement towards an IMF-led bailout of Greece.  Ratings agency Fitch lowered Portugal’s government debt one level to AA- and reduced its outlook on Portugal to “negative.”  Regarding Greece, France and Germany seem to be nearing agreement on IMF involvement, which would represent a resolution of sorts.  It’s worth noting, however, that amidst the negative European headlines, European services and manufacturing grew at the fastest pace since 2007 and German business confidence saw a boost.  The Euro-area purchasing managers index rose to 55.5 in March (up from 53.7 in February), and the Ifo Business Climate index jumped to 98.1 from 95.2.  In US economic news, Mortgage Applications were down 4.2% versus last week and February Durable Goods Orders were +0.5% vs. the +0.6% expectation.  Additionally, January Durable Goods Orders were revised upwards to +3.9% from +3.0%.  Note that New Home Sales data is due at 10am today.  ResearchEdge has a well-written but cautious piece out this morning.  See quote section below for the commentary.  In corporate news, energy giant ConocoPhillips (COP) announces a dividend raise and $5 billion buyback of shares.  Bonds are lower this morning – and yields are thus higher – on rumors that Japan is selling US Treasuries into their end-of-March year-end.  Additionally, SanFran Fed President Yellen (and probably future Fed vice-chair) made hawkish comments yesterday:

While it’s too soon to raise interest rates, the Federal Reserve will be ready to do so “when the time has come,” Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech in Los Angeles yesterday. The Fed’s pledge to keep rates low for “an extended period” is “appropriate” and that it made “no particular time commitment,” she said. Yellen discounted concern record budget deficits might fuel inflation. “The Fed has to be ready to take away the punch bowl when it’s necessary,” Yellen told reporters after the speech. “When the time has come, am I going to support raising interest rates? You bet. I don’t want to see inflation pick up.” (BBERG News)

As President Obama signs the HealthCare Bill into law, I thought this excerpt from The Gartman Letter “Cash for Clunkers” rant of two days ago (Monday 3/22) would elicit a fearful chuckle from most:

EFFICIENCY OF GOVERNMENT...................Think of it this way: A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year. A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year. So, the average Cash for Clunkers transaction will reduce US gasoline consumption by 320 gallons per year. They claim 700,000 vehicles so that's 224 million gallons saved per year. That equates to a bit over 5 million barrels of oil. 5 million barrels is about 5 hours worth of US consumption. More importantly, 5 million barrels of oil at $70 per barrel costs about $350 million dollars. So, the government paid $3 Billion of our tax dollars to save $350 million. We spent $8.57 for every dollar we saved. I'm pretty sure they will do a great job with our health care, though.

Research boutique Monness, Crespi, Hardt & Co. also made similar commentary yesterday regarding the CBO’s assertion that HealthCare reform will be deficit-reducing:

The government has a proud history of underestimating the fiscal impact of new entitlement programs.  For example, in 1965, official government projections were that Medicare would cost $9 billion in 1990.  Actual Medicare spending in 1990 was...$66 billion.

Regarding equity markets, there’s an interesting story out today about most Americans “missing the rally” and average investor psychology:

            Americans Say They Missed 73% Rise in S&P 500 as Economy Surged 2010-03-23 22:00:30.0 GMT By Mike Dorning

March 24 (Bloomberg) -- Americans are down on the economy and the markets even as stocks and growth indicators are up. By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year, according to a Bloomberg National Poll conducted March 19-22. Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago. During that period, a bull market has driven up the benchmark Standard & Poor’s 500 Index more than 73 percent since its low on March 9, 2009. The economy grew at a 5.9 percent annual pace during last year’s fourth quarter. “It’s very difficult to turn perceptions around once you’ve been through the proverbial economic wringer,” says Mark Zandi, chief economist for Moody’s Economy.com. “Everything is colored by the fact that unemployment is near 10 percent. It doesn’t really matter what you ask, you’re going to get the same answer.” Zandi says the poor performance people report on their investments “is very telling. It’s just a fact that everyone’s stock portfolio is up, or nearly everyone’s.” Even among investors with annual incomes exceeding $100,000, and who might be expected to follow their financial holdings’ performance, more say they have lost money compared with a year ago than say they have made money. J. Ann Selzer, president of Selzer & Co., a Des Moines, Iowa-based company that conducted the survey, says the disconnect is typical of the way Americans think about the economy.

ADBE guides Q2 higher.  BIDU cut to hold from buy at Mirae.  CNX raised at JPHQ.  DRI reported 3c better.  GIS lowered guidance.  JBL missed by 2c.  KAMN lowered guidance.  LEN reported better-than-expected.  MF higher on the appointment of Jon Corzine to CEO.  SONC earnings miss.  SBUX may raise dividend at today’s annual meeting.  USU higher on govt funding of nuclear energy.  DT cut at CSFB.  NRG removed from CB list at GSCO.  RRI cut at GSCO.  STD lower on Brazilian loan worries.  FBRC, BCAP downgrade UA. 

Asia higher overnight.  Europe lower across the board but rallies off the lows.  USD +120bps.  Gold -133bps.  Oil -167bps. 

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

JABIL CIRCUIT                17.13    -6.7 %              34754

SPRINT NEXTEL CO        4.08      +6.53%             4326966

ADOBE SYS INC              37.09    +5.31%             260896

LENNAR CORP-CL A        17.93    +5.1 %              55217

ANHEUSER-SPN ADR       50.45    -2.83%              1700

LIZ CLAIBORNE               6.91      -2.68%              600

PULTE GROUP INC          11.75    +2.44%             3631

NEWMONT MINING         50.33    -2.18%              4834

Today’s Trivia:  What was the first country to issue a paper currency? 

                                                                                                                                                                             

Yesterday's Answer:   Reebok is the alternate spelling for an African antelope, Starbucks is named after the first mate in Moby Dick, Subaru is named for the Pleiades star cluster (or, “The Seven Sisters”) because it was formed by a merger of seven companies, Adobe is named for the creek that ran behind the co-founder’s home, and Hitachi means “sunrise” in Japanese. 

Best Quotes:  “In writing the March 6, 2009 Early Look (when the S&P 500 was at 683) I used the following metaphor for how most people feel about the US stock market:

 "It's human nature to lose confidence when you become seriously ill.  You feel worthless and it feels like anything you say is meaningless and everything you do is pointless.   Everything you do is just plain wrong!  Yes, that is ANXIETY!  Anxiety robs you of your personality, kills your confidence and thus, you lose your identity." 

The good news is your confidence and personality gradually return, building up in layers, until eventually you feel like the person you were before you became ill.  In the end, you grow into a stronger person. 

So over a year later that is where we find ourselves.   After the government spent trillions of dollars we don't have, we are stronger, more confident and no longer anxious.  The statistics are remarkable - the S&P is trading at 1174 - up 74% from the March lows and the NASDAQ is up 90%. 

The most bullish thing a market can do is go up, and yesterday we had yet another higher high.  As the technicians say, "the S&P 500 remains within an entrenched up channel."  Yesterday, the S&P 500 was up 0.7% driven by the slightly better than expected existing home sales (although the absolute pace is anemic), the continued firming of prices in the steel sector, and improving trends in Semiconductor and Machinery names to help support the RECOVERY trade. 

In just a year, we went from a state of high anxiety to a state of confident hopefulness that events and trends in 2010 will be favorable. Market performance is telling us that there is a "public confidence in the economy."  That statement seems so ironic when the public has no confidence in the current administration, and FED officials and the Treasury cannot even admit to the extreme level of indebtedness of the US government. 

There is actually little confidence, exemplified by the confidence numbers.  The ABC consumer confidence numbers declined last week to -44 from -43, and according to a Bloomberg survey, by an almost 2-to-1 margin the average American believes that the economy has worsened rather than improved during the past year.

As negative as every consumer survey is, the performance of Consumer Discretionary (XLY) constituents speak to a consumer that says one thing and does another.  From Tiffany's to Red Lobster, the trends are getting better, not worse.  The market is headed higher because corporate profitability and cash flow are improving as every CEO finds him/herself in a save-my-butt-and-improve-profitability situation.   

If you are in the camp that interest rates and inflation are headed higher, on the margin the improvement in corporate profitability will slow.  We have been very careful to pick our spots in what to be LONG in this market, and that is not going to change.   We are better off today, relative to the high levels of anxiety back in March 2009, but there are enough global MACRO issues that could cause another ANXIETY attack at any time.

While we shorted the S&P 500 last week, I'm thankful we covered the position on Friday.  As we wake up today, we are now officially at ZERO percent allocation to both US and International Equities.”

--ResearchEdge