Morning Note...

Futures are slightly lower this morning (-20bps) as the ADP Employment Change came in slightly worse than expected, at -84k vs. -75k/e.  Despite the “miss,” this represents the smallest drop since March 2008, and the November reading was also revised slightly higher, to -145k from -169k.  Some consider the ADP release an early indicator of Friday’s official Change in Nonfarm Payrolls, which is expected show flat to slightly positive job growth for December.  Also, according to the Gartman Letter “…the heavy focus on private service jobs in the ADP report does give a much clearer picture of that part of the economy relative to non-farm payrolls. Thus, the ADP data “misses” government jobs created each month. This helps to explain, to a great degree, why the ADP figures often “undershoot” the actual non-farm payrollj obs figure reported two days later.”  In corporate news, global agriculture giants MOS and MON (-2.5%) are trading lower on weaker than expected earnings, and fast-food restaurateur SONC (-10%) missed by 3c and guided lower.  On the positive side, national discount store FDO is trading higher (+10%) on an earnings beat.  Across the pond, the EU has descended on Greece, and concerns over sovereign default – as a general theme – continues.  Iceland is also making headlines as it defends its default risk after its debt was downgraded to junk status.  Further, there is news of a $23B Kuwaiti consumer bailout plan on the tape, which is somewhat surprising.  If the Kuwaiti consumer, awash in oil money, is facing difficulty, what does that say for the rest of us? Markets were mixed in Asia overnight, as Japan’s Finance Minister Fuji stepped down for health reasons.  Weather is affecting markets globally, as the recent cold spell has boosted some commodity prices, metals in particular.  The DofE crude oil inventory numbers will be closely watched today, given the cold winter weather.  Politics are in the news this morning, as Democrats suffer a couple of retirement announcements.  Further, the announced retirement of SEC Chair Chris Dodd is certainly causing speculation as to what – if any – financial regulation may now lie ahead.  Recall that the latest FOMC meeting’s minutes are due for release at 2pm today.  ISM Non-Manufacturing Data will be released at 10am. 

Plenty of recent talk about the AAII sentiment numbers registering the most bullish levels since 2007 and the VIX nearing a new post-Lehman low… In terms of trading feel, action remains difficult to gauge, perhaps because not all bodies are “back in their seats” or there’s a general lack of conviction.  For whatever reason, the market feels somewhat complacent.  Additionally, I don’t believe we ever really saw a true round of “profit-taking” into year end, and those “long and strong” may simply be staying the course for the moment.  In other words, there is a lack of sellers in the marketplace.  However, given the bullish whisper numbers ahead of tomorrow’s retail sales and Friday’s unemployment data, I have to wonder to what extent the good news is already priced in to this market.  Could we be setting up for a “sell the news” scenario?  Hard to tell at this stage, but it’s beginning to feel that way…  For the conspiracy theorists, TrimTabs released a special report late yesterday that speculated as to the true driver behind the 2009 rally.  See the quote section below for the text. 

ANGO trading higher on earnings.  Cramer positive ASEI.  BCAP ups BRKS.  GSCO ups BZ.  BZH lower on announced stock offering.  BofAMLCO ups CLNE, CREE, CVA, EAT.  GSCO cuts CMC.  BCAP ups DOW.  UBSS cuts DT.  JPHQ cuts ERJ.  TWPT ups FNSR.  IP removed from Conviction Buy List at GSCO.  JPHQ cuts IRBT.  PIPR cuts KNXA, POOL, SNN.  UBSS cuts KSU.  GSCO cuts LMT, LPX.  CITI ups MAN.  GSCO adds MLM, MMM to Conviction Buy List.  MOS misses by 3c.  Cramer positive NICE.  BofAMLCO cuts ORA.  SAIC upped at JPHQ.  PIPR ups SMA.  RAJA ups SWIR.  GSCO cuts WY.  BARD ups CERN.  WEFA ups MGA, TEN.  JEFF cuts TWTC.  BARD cuts ZBRA.

Asia mixed overnight.  Europe slightly lower.  USD +10bps.  Oil flat.  Gold +1%.

Brightpoint News: 

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

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

FAMILY DOLLAR ST        30.25    +10.04%           940562

BIG LOTS INC                 30.00    +3.59%             200

TYSON FOODS-A            12.83    +2.89%             34700

MARSH & MCLENNAN      21.93    +2.76%             2866

WALGREEN CO               36.08    -2.49%              60027

CIENA CORP                  12.15    +2.45%             292383

MONSANTO CO              83.08    -2.26%              262508

DOW CHEMICAL             31.17    +2.26%             29204

DISCOVER FINANCI        14.76    -2.25%              1133

VORNADO RLTY TST      71.00    +2.17%             100

LOCKHEED MARTIN         76.00    -2.12%              9000

Today’s Trivia:  Where is the nation’s oldest bar, and what year did it open?

Yesterday's Answer:  The only active diamond mine in the United States is in Crater of Diamonds State Park, in Pike County, Arkansas.   

Best Quotes:   “Sausalito, Ca, Jan. 5 – TrimTabs Investment Research CEO Charles Biderman in a special report said today that it wasn’t traditional sources of capital that pushed the U.S. markets up more than $6 trillion since March, and wondered whether it was the Federal Reserve and the U.S. government pulling the levers behind the sharp rise.  “We have no way of proving this,” said Biderman, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.”  Biderman warned that if government has been behind the sharp stock rise, it could trigger a major equities meltdown when the government stops buying and even worse, starts selling.  The special report follows below:

The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The wealth effect of rising stock prices soothed the nerves and boosted the net worth of the half of Americans who own stock.

We cannot identify the source of the new money that pushed stock prices up so far so fast. Historically, the market cap has risen about 10 times the amount of net new cash invested in equities. For the most part, the roughly $600 billion of net new cash since March needed to boost the market cap $6 trillion did not come from the traditional players that provided money in the past:

• Companies. Corporate America has been a huge net seller. The float of shares has ballooned $133 billion since the start of April.

• Retail investors through funds. Retail investors have hardly bought any U.S. equities through funds. U.S. equity funds and ETFs have received only $20 billion since the start of April. Meanwhile, bond funds and ETFs have received a record $355 billion.

• Retail investors through direct investments. We doubt retail investors have been big direct purchasers of equities. Market volatility in the past decade was the highest since the 1930s, and retail investor sentiment has been mostly neutral since the rally began, although it brightened in the past week.

• Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But foreign purchases may have slowed in November and December because the U.S. dollar was weakening last fall.

• Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $9 billion from April through November.

• Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.

If the money to boost stock prices did not come from the traditional players, it must have come from somewhere else. We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government and major banks could support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. What if Ben Bernanke, Tim Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy? After all, after-tax income was down more than 10% y-o-y in Q1 2009, and the trillions the government committed or spent to prop up various entities was not working.

One way to manipulate the stock market would be for the Fed or the Treasury to buy a nominal $60 to $70 billion of S&P 500 stock futures each month for as long as necessary. Depending on margin levels, as little as $5 billion to $15 billion per month was all that was necessary to lift the S&P 500 by 67%. Even $15 billion per month would have been peanuts compared to what was being doled out elsewhere.

Since the stock market was extremely oversold in early March, not only would a new $60 to $70 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $295 billion in newly printed shares that have been sold since the start of April.

This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. Some market watchers have charted that virtually all of the market’s upside since mid-September has come from after-hours futures activity.”