Morning Note...

Futures are ~10bps higher this morning as the stream of positive momentum (the DJIA has been up 8 wks in a row) continues, driven by solid earnings, increased M&A activity (Merger Monday?), and speculation the Fed will maintain low-interest rates for some time when they meet tomorrow and Wednesday.  In earnings news, Caterpillar (CAT; +4% premkt) posted solid numbers and raised guidance, as did Whirpool (WHR; +11%).  Healthcare giant HUM also beat estimates and raised guidance.  In M&A news, Hertz (HTZ) agrees to buy competitor Dollar Thrifty (DTG) for $1.2 billion.  Additionally, CKR is to be acquired by Apollo for $12.55/share cash and CLR is to acquire WX for $21.50/share.  In the finance world, Stifel Nicholas is buying Thomas Weisel for $300M.  However, the NY Times reports that Continental  & United merger talks have hit a snag on price.  In overseas news, Asian markets were mostly higher overnight, and Europe is roughly 1% higher despite Greek bond yields and credit spreads continuing to move higher.  In economic news, we’ll get U.S. Q1 GDP on Friday, China’s PMI Friday night, and Eurozone CPI and Unemployment Friday during the day.  Looking ahead, the earnings shift moves toward energy (CVS, XOM, CP, RDS, COP) and insurance (MET, ACE, ALL) this week.  Dupont (DD) will also report Tuesday, and Down Chemical (DOW) reports Wednesday.  Texas Instruments and RadioShack report tonight.

In general, roughly a third of the S&P 500 is set to report this week, yet most bellwether financials and tech firms have already reported earnings, thus forcing market participants to ask “what’s next?”  It appears – at least for the moment – that financial regulation in some form will be perhaps the most compelling catalyst ahead.  Whether in the form of a bank tax (as debated this wknd at the G20 summit) or a splitting off of derivatives trading from financial firms (as appears on the front page of today’s WSJ), markets may begin to discount this very real possibility for reform.  Note that the Senate today will make a preliminary vote to perhaps clear the way for a large regulatory overhaul bill to come.  Further, depending on how Lloyd Blankfein’s Senate testimony (tune in tomorrow) goes, we may see even more “Main Street” momentum toward that end.  As always, the cynic in me sees most of this as little more than political posturing ahead of midterm elections that concern (to put it mildly) the current administration and incumbent Democrats in Congress…but we’ll see what comes of it soon enough. 

Speaking of Goldman Sachs, here’s a interesting op-ed from Thunderstorm Capital’s John Dorfman (Bloomberg):

I don’t know whether Goldman will prevail if the SEC’s case alleging fraud goes to trial. If I were a lawyer, I could argue either side. As an SEC attorney, I would claim that Goldman created and sold to the public a security designed to fail. This was a synthetic collateralized debt obligation whose component investments were allegedly chosen by hedge-fund manager John Paulson because he wanted to bet against them. As Goldman’s defense counsel, I would say that Paulson’s opinion of those underlying investments doesn’t matter. What does matter is whether the risks were properly disclosed, and they were. I will watch the trial with great interest, assuming no out-of-court settlement is reached first. But as an investor, I maintain that it doesn’t matter who wins.

A guilty verdict might nick Goldman’s reputation. But the firm could withstand the hit, I believe. When the Exxon Valdez had a colossal oil spill in 1989, it harmed the reputation of Exxon (now Exxon Mobil Corp.) That didn’t stop Exxon shares from posting a total return of about 1,000 percent in the 21 years following the accident. If it loses, Goldman might have to pay a substantial fine. But many firms, from Microsoft Corp. to the big tobacco companies, have taken legal blows and come back to perform well. Consider Goldman’s record. Its revenue has climbed steadily: $4.5 billion in 1995, $16.6 billion in 2000, $25.2 billion in 2005 and $45.2 billion last year. Profits have also moved up smartly: $1.3 billion in 1995, $3.1 billion in 2000, $5.6 billion in 2005 and $13.4 billion in 2009.  What earnings multiple would you expect to pay for this sort of growth? I think that in normal times many investors would be willing to pay 30 times earnings for it, or more. Yet today, nervous investors value Goldman shares at only six times earnings and 1.5 times revenue. This seems like a bargain to me. At about $159, Goldman shares have declined more than a third from their 2007 high of about $247. Investors who don’t own the stock can thank the recession and bear market of 2007 to 2009, plus the SEC’s fraud complaint, for this buying opportunity.

Note BofAMLCO is out cautious on the consumer sector this morning:

Consumer Power: The performance of the US consumer stocks since the turn of the year has been nothing short of remarkable. Take a look at XRT, the US Retail SPDR. It is 39c (0.86%) short of its 2007 highs. As we turned the year, the consumer was one of the least loved sectors and understandably so. Payrolls were still negative, the unemployment rate was a lofty 10% and deleveraging was the buzzword for the sector. The drop in the unemployment rate to 9.7% and the stronger than expected consumer contribution to Q4 GDP has given the sector a shot in the arm. Retail sales data and the Q1 earnings from the consumer sector show a consumer who is spending again. However, the sustainability of this picture is called into question when one considers that the 4.5% annualized growth in consumer spending over the last eight months has come occurred when disposal income has grown only 1.3% in the same period. The vast majority of stimulus in the US has been targeted solely on getting the man on the street spending again and it appears to have worked. But these measures are temporary. BAML US Economist, Ethan Harris believes they are masking a structural shift in consumer behavior towards higher savings. He believes consumer spending will lag income for the next five years allowing the savings rate to return to a more normal 8% of income. This rise in the US savings rate is likely to be mirrored in a fall in savings rates in emerging Asia, resulting in a rebalancing in demand with little impact on global growth. This explains much of the reason why, as a House, we are long term bulls on the EM consumer and underweight the US consumer discretionary sector. If Ethan’s thesis proves correct, the XRT looks vulnerable at these levels.

Additionally, BCAP is cautious on equity markets in general:

Barclays US strategist Barry Knapp believes a sell-off in equity markets is coming as current optimism around the economy will be overshadowed by implications of financial regulatory reform and fiscal tightening in 2011.  Barry goes on to mention he is sticking with his underweight on consumer discretionary stocks given huge outperformance, peaking leading indicators, the segment's relative domestic focus and the trend increase in yields.

For those who consider the Greek tragedy to be reminiscent of Bear Stearns, Havard Professor & Author Ken Rogoff (the new Roubini?  Famous for his recent book This Time is Different: A Panoramic View of Eight Centuries of Financial Crises) would agree:

April 26 (Bloomberg) -- Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff. “It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.” Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate. Greece on April 23 triggered a 45 billion-euro ($60 billion) rescue package from the IMF and the euro region after its soaring deficit sent borrowing costs surging and sparked concern about a default. At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent. The likelihood is “better than 50-50” that others in the 16-nation euro area will end up requiring help from the Washington-based lender, said Rogoff, 56. He expects the IMF will eventually dispatch more loans to Greece than the as-much- as 15 billion euro it’s currently offering.

BSY cut at JEFF.  CAT beats by 11c.  DRAD gets FDA clearance.  HTZ to buy DTG.  CSFB cuts DV.  MDVN upped at ROTH.  MGIC higher on earnings.  NOK cut at BERN.  PMI lower on earnings; announces $600M offering.  IP raises dividend.  TWPG to be acquired by Stifel.  WHR beats by 80c and guides higher.  CRL to buy WX.  ANF upgrade.  JPHQ ups ZMH.  JCI upgraded at RW Baird. TMO upgraded at Jefferies. CF upgraded at UBS. SYY upgraded at UBS. LHO upgraded at RBC Capital. HEW upgraded at Goldman.  NWL downgraded at BMO Capital. TRMK downgraded at Keefe Bruyette. WNS downgraded at Goldman. NOK downgraded at Citigroup.

Asia mostly higher.  Europe +1% on average.  USd +25bps.  Oil -15bps.  Gold flat. 

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

WHIRLPOOL CORP          114.15  +11.67%           108072

APARTMENT INVEST      20.61    -6.78%  1500

MEADWESTVACO COR    26.72    -5.95%  100

LORILLARD INC              83.00    +4.31% 6563

DYNEGY INC-A                1.31      +3.97% 700

CATERPILLAR INC           71.41    +3.82% 722847

MASCO CORP                19.05    +3.81% 1000

OFFICE DEPOT INC         8.75      +3.55% 38700

HUMANA INC                  46.90    +3.01% 54063

MANITOWOC CO            16.00    +2.37% 9215

JOHNSON CONTROLS     35.30    +2.32% 2000

KB HOME                       19.77    +2.28% 2338

CENTERPOINT ENER       14.25    -2.20%  200

FISERV INC                    55.19    +2.03% 2507

LENNAR CORP-CL A        20.12    -2.0 %  44017

Today’s Trivia:  The end of this month marks the 10-year anniversary of “Civil Unions,” liberal interpretations of marriage laws aimed toward same-sex couples.  In what state did this law develop?

                                                                                                                                                                        

Yesterday's Answer:  Baywatch, the most widely watched television series in the world (142 countries and 1.1 billion viewers) debuted on April 23^rd, 1989 and aired until 2001. 

Best Quotes:  “Now that the market has essentially "filled the Lehman gap" with new 19 month highs, sentiment appears to be getting even more bullish.  Consider-

-  Small caps continue to lead with the Russell 2000 up 18.6% YTD.  Its strength becomes a self fulfilling prophecy since most believe illiquid small caps aren't bought unless there's strong conviction the economy is meaningfully better.  Chinese small caps have put the U.S. rally to shame.  The Chinese small cap index is up 29% YTD )105% in the last 12 months) vs. the Hang Seng (mostly large cap) down 2.9% YTD.

-  The 25 day average of put vs. call volume last week fell to a multi year low.

-  Hedge Funds long exposure to stocks is currently higher than it's been in all but 5% of all weeks going back to the beginning of 2000 (Barrons).

So while last week reinforced that dips will still be bought, it certainly feels like we're getting closer to everyone running to the same side of the boat.”  --RBCM trading