Morning Note...

Futures are ~55bps lower this morning in a reversal of yesterday’s psychology and market action.  Recall that futures were higher yesterday, and the market mostly held its ground, as mergers & acquisitions and earnings releases outweighed the potential financial regulation ahead and the fears of a “Greek contagion” in Europe.  Today, the latter two concerns are outweighing positive earnings releases from last night and this morning.  Regarding Greece and Europe, this morning’s front page of the German newspaper Bild basically says all you need to know on the current Eurozone issues:  “Why are we paying for the Greek’s luxury pensions?”  Worth noting that the National Bank of Greece is down 9% this morning and European credit spreads continue to widen out.  Good summary from JPM today:

Europe – CDS spreads wider again this morning; nothing really “new” out overnight (the problem is what wasn’t out overnight – still no real specifics around IMF/EU aid package); there are reports of more Greek strikes (the country’s air force called in sick in Monday according to Reuters, which the defense minister called disappointing), raising market worries that further austerity measures won’t be tolerated.  Meanwhile, Germany still appears to be dragging its feat when it comes to providing assistance (officials from Germany are still promising aid, but contingent on further budget cuts).  A report from Citigroup this morning says that Greece’s banks may run out of collateral used to get funding from the ECB (on Bloomberg).  There were some minor debt sales by Spain and Italy this morning.  A report this morning says Spain will have to sell EU150B in debt this year but has done only 26% of that number, the smallest % of a Eurozone country. 

In earnings news, Ford (F; -1.5% premarket) beat by 15c…3M (MMM; +4%) beat by 19c and raised guidance…Dupont (DD; +2%) beat by 18c and raised guidance…Boston Scientific (BSX; -4%) came in with lighter-than-expected earnings…UPS (+25bps) followed through on its prior pre-announcement and reported in-line… Daimler (DAI; +1%) swung to a Q1 profit…Deutsche Bank (DB; +1.5%) saw profit jump 49%...Lloyd’s Banking (LYG; +2%) returned to profitability…Texas Instruments (TXN; +2%) beat by 1c…

In economic news, the CaseShiller Home Price Index was largely in-line with expectations this morning.  April consumer confidence is due at 10am. 

Politics continue to move to the fore…for the last few weeks, earnings and improving economic data fueled markets higher and overshadowed developments in Europe and in Washington.  However, given the bulk of bellwether earnings are now past, Europe and Washington reform seem to be ruling the day, or at least ruling investor psychology.  Note that the Senate last night failed to pass the resolution to debate financial reform.  For a good summary from BTIG’s Mike O’Rourke, see the quote section below.  He makes a great point – last night’s vote was a win-win for Democrats…if it passed, Dems are seen as driving much needed reform.  And if it failed, Democrats have crucial ammunition to take Reps to task leading into midterm elections. 

Speaking of politics, “Hollywood” heads to the Hill today as all eyes will be on the Lloyd Blankfein testimony.  Wouldn’t it be great if at some point he borrowed from Nicholson and we were treated to a “YOU CAN’T HANDLE THE TRUTH!” rant?  Bloomberg actually has a story out predicting that all trading will stop at 10am when testimony begins, just as it did when Tiger Woods held his first press conference post-marital fidelity:  “Stock Volume May Be First Casualty When Fabrice Tourre Speaks to Congress - 2010-04-27 04:01:00.16 GMT.)  And as for Fabrice Tourre, we should find out if this guy is for real, or if today’s testimony is merely a stepping stone to his next career, and we’ll see him again soon on Dancing with the Stars or Survivor…

Amidst all the noise today, don’t forget the FOMC meeting and tomorrow’s 2:15pm statement release.  Note that Obama speaks today on regulatory reform in Illinois.  Recall that Friday brings U.S. Q1 GDP, Eurozone unemployment and CPI, and China’s PMI data. 

For a bullish view of the markets, consider the following from a Stifel Nicolaus MD, posted late last week:

I've had the fortune to market to dozens of customers in the last 2 weeks, and the one constant theme is "When is the market going down?" Good luck w/ dat…  While we may have slight pullbacks, there are several events working in US equities favor:  

Believe it or not, many PM's are chasing their benchmarks right now. They have been looking for the pullback in 2010 that has yet to occur en masse. They will begin chasing this tape. The bond market is in a bubble. Whether Treasuries, Agencies, Munis or Corporates, so much money has chased yield - it has driven many spreads exceptionally tight. $ will rotate from Treasuries into Equities Forget the 10% unemployment rate - focus on the 90% employed. Why? They have considerably better job security than they did 1 year ago, and are starting to come out of the bunker and open their wallets. The market is acting like it could care less at the moment what Barry is doing down in DC. HIs speech yesterday on Fin Reform sparked the rally. Aside from the pullbacxk in HC this week, it seems the market is discounting reform.  When the Greece situation widens out to the other PIIGS (as it will), you will see flow from Emerging Market Equities and Debt into the good 'ol USA. Our EM Bond team is already starting to notice investors roatting away from EUEM Debt .  Deals - HY, IG, EM Bond deeals are handling the "refinance" bubble in Debt.  M&A - CTL/Q -Chatter Airlines, Banks will Consolidate for Deposit growth (no loan growth).  Finally, the Tide is rising. Some have pointed to recent surveys (MLCO) showing Fund managers are in 3% cash - This contraian indicator has been exceptionally good at predicting Market Pullbacks. The wrinkle is that a pile of money is coming off the sidelines (MM Funds down $1T from the peak, and still have another $1T to go till normalized) - and where it has been flowing into Bonds - the shift is occuring: AMG data just released showed Equities getting the largest inflows in a year (5/19), and the 3rd largest in 3 years (4/18/07). Like it or not, the tide is rising.....

If you’re bearish, here’s some quotable stuff from Jeremy Grantham’s April-end letter:

What could go wrong, preferably in the next few months? Some combination of the following: an unexpected second leg down in house prices and a continued rise in the level of defaults, leading to a crisis at Fannie, etc.; a wash-out in commercial real estate and private equity caused by refunding problems (along the lines of Goldman’s and Morgan Stanley’s recent real estate fund wipe-outs) that result in a chain of major defaults in properties like Stuyvesant Town; a crisis in the euro where Portugal or Spain or Greece, or all three, default and strange things start to happen; a rapid rise in commodity prices, despite the anemic growth of the developed world, which, with the same caveats, I also think is quite likely; competitive devaluations leading to a serious trade war; or my colleague Edward Chancellor’s favorite, two or three wheels falling off of the Chinese economy, which today acts as the main prop to global growth. Okay, enough. We all know that there is plenty that could go wrong. Some combinations would be enough to break the market but still leave the economy limping along. This would be far better than having the market rise through the fall of next year by, say, another 30% to 40%, along with risk trades similarly fl ourishing and then all breaking. The possibilities of this happening seem nerve-wrackingly high. The developed world’s financial and economic structure, already none too impressive, would simply buckle at the knees.

OLN reports lighter-than-expected.  RSH beats by 5c.  AIG cut at KBWI.  AMP trading lower on earnings beat.  ASH lower on earnings.  AZN sees EU approval for Crestor but also will pay $520M to settle charges regarding the drug Seroquel.  BEAV higher on earnings.  CPO higher on earnings.  JEC lower on earnings.  NEM is higher on earnings.  BofAMLCO ups TEX.  BCAP ups HOT, MAR, ESRX.  DBAB ups MRVL, STI.  GSCO ups PPDI.  OPCO ups HRB.  SUSQ ups HMA.  UBSS ips TCO.  WEFA ups BA.  BofAMLCO cuts BMO.  BCAP cuts CHSI, SXCI, LNT.  DBAB cuts HBAN.  BARD cuts CHH.  SUSQ cuts NDAQ.  UBSS cuts PCL. 

Asia mostly lower overnight – Japan was higher.  Europe down 1.5-2% as the Euro appears set to test a key level of support.  USD +70bps.  Oil -120bps.  Gold -50bps.

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

UNISYS CORP                33.80    -12.53%            985

TELLABS INC                  9.17      +11.56%           322316

LEXMARK INTL-A            43.52    +8.94%             81886

ESTEE LAUDER               65.85    -5.9 %              6470

CUMMINS INC                74.00    +5.25%             88130

XEROX CORP                 10.77    -5.11%              500

OFFICE DEPOT INC         8.52      -4.8 %              10679

PLUM CREEK TIMBR        41.51    -4.62%              700

WESTERN UNION           18.70    +4.41%             14507

AMERICAN INTERNA       42.60    -4.29%              153069

3M CO                           91.10    +4.19%             93725

MASCO CORP                17.30    -3.89%              1800

BOSTON SCIENTIFC       6.79      -3.82%              289544

PULTE GROUP INC          13.52    +3.68%             2000

CIT GROUP INC              42.00    +3.19%             11388

JACOBS ENGIN GRP        47.50    -2.4 %              4500

US STEEL CORP             61.45    +2.3 %              306146

Today’s Trivia:  What is the difference between entomology and etymology? 

                                                                                                                                                                        

Yesterday's Answer:  The “Civil Union” law was passed into law ten years ago in Vermont. 

Best Quotes:  For at least the next 24 hours, the environment has once again reverted to all politics, all of the time.  The big news after the close tonight was the down to the wire vote on the motion to proceed with debate on Senator Dodd’s Restoring American Financial Stability Act (RAFSA).  Republicans managed to hold their ranks to sustain the 41 votes necessary to filibuster the bill.  They were also joined by Democrat Ben Nelson of Nebraska who voted no after the Financial version of the “Cornhusker Kickback” was stripped from the legislation.  Nelson had been pushing a measure that would grandfather in light capital requirements for derivatives contracts already outstanding.  Among other financial firms, Omaha based Berkshire Hathaway stood to benefit from the measure.  The Democrats viewed the potential for the vote as a win-win.  If they get the votes, they advance the legislation.  If the Republicans filibuster financial reform, it is political ammunition for the election.  Now that the votes are on the record, and that bridge has been crossed, it should become harder to for the Democrats to peel off defectors.  For the Republicans, Nelson’s vote switch will play politically for them.  They will say it is evidence that without the backroom deals such as the “Cornhusker Kickback,” Health Care reform would not have passed.

Almost reminiscent of Health Care reform, within their own caucus the Democrats are having trouble reaching consensus on important issues.  The squabble over the derivatives reform between the White House, Agriculture Committee and Banking Committee has become comical.  The plan, which calls for Banks to spinout their swaps desks, is viewed as so extreme that the Fed is trying to stop it.  Fed staff offered official guidance on the impact of the measure.  It is impressive when your Central Bank comments that an aspect of your financial reform will "impair financial stability and strong prudential regulation of derivatives; would have serious consequences for the competitiveness of U.S. financial institutions; and would be highly disruptive and costly, both for banks and their customers.”  No wonder Americans have such little faith in their elected officials.  At this point, financial regulatory reform should have been as easy to pass in this country as the Patriot Act.  Instead, the Administration has taken the “It’s my way or the highway” approach, the Republicans have sustained their voting block and those areas of the financial markets desperately in need of reform continue to lack transparency. 

Mike O’Rourke, CMT

Chief Market Strategist

212.593.7564