Tuesday, February 2, 2010

Looking in the Rear View Mirror at Todays Markets

Equities hold their gains and finish the session near the highs of the day. SP500 +1.3%, R2K +0.8%, and the Nasdaq +0.86%. SP500 up ~2.7% already this week and is now down just 1% for the year. Some of the items aiding stocks today: 1) earnings – specifically from EMR, CMI, and DHI (former two spurred impressive rally in the capital goods stocks while the latter name helped the builders to a 6% spurt higher); 2) Greece worries abating – various European officials today have said today that the Greek budget proposal will be signed off on Wed morning; 3) Washington – sense that the worst may have past when it comes to WH proposals. The 15bp bank liability tax was adjusted to exempt repos in response to industry feedback. There have been reports (on CNBC, FT, etc) that Sen Dodd doesn’t favor the “Volcker Rules” and that a final financial regulatory overall bill may not include the former Fed chairman’s recommendations. Today’s Volcker hearing was on the benign side (nothing incremental was released); 4) China - there continues to be reporting out of China each morning about actions taken by the government to engineer a cooling in economic growth, but the market is hoping for this headline risk to cease w/the Chinese New Year (the week long holiday starts 2/14).

· Color from the desk - Encouragingly, whereas Mon’s strength for the most part came on the back of short covering, today the buying participation broadened a bit (so a bit more vanillas picking spots on the long side). Volumes also picked up (something that was absent on mon). That said, covering accounting for the bulk of the strength Mon and again today. Similar to Mon, its mostly a “sellers strike” that is permitting stocks to levitate (i.e. the large vanilla sellers and shorts that hit the market last week haven’t showed up Mon and so far Tues).

· Equities sectors – pretty broad participation in today’s rally although the one lagging group is an important one (the banks). The SP500 Industrials is the best acting group today – a lot of this has to do w/the strength in Capital Goods (up >2%). EMR and CMI both rally 9% after earnings – this is sparking a rally in the other heavy industry names. The transports climb ~0.6%+ w/airlines helping – the airline index (XAL) jump 3% on back of positive CAL RASM figures (elsewhere in trans, UPS shrs are flattish after earnings). The homebuilders rally 6% on back of DHI’s earnings today (DHI rallies 12% post its results although didn’t make it above resistance levels for the year @ ~$14). The financials essentially trade inline w/the broader tape although banks dip (SP Bank Index falls ~0.7% and is one of the few groups in the red today); the desk notes a rotation out of regional banks (which dominate the SP Bank index) and into larger money centers/brokers (like C, GS, MS, etc). This is a reversal of the trade that has been in place for the last few weeks. The SP500 Bank index is still up 9% YTD and is the best acting group in the market. Health care jumps ~1.8% and outperforms – strength is pretty broad in the space (CI +4%, MRK +3.3%, FRX +3%, CVH +3%, etc; PFE reports earnings Wed morning). Tech is a mild laggard today (although the SOX is inline w/the SP)

Economics Headlines

· Pending home sales increased 1.0%m/m in December after plunging 16.4% in November. The pending home sales index leads existing home sales by one to two months, and it implies that existing home sales will be little changed between December and January. Existing home sales were 5.45 million, annualized, in December, down 16.7% from November. A Reinhart

Catalysts to Watch

· Treasury announcement due Wed - The Treasury will release details of discussions with its debt advisory group Wed, as well as how much in 3-, 10- and 30-year securities will be auctioned next week (Bloomberg)

· The Senate Banking Committee will be hosting 2 hearings to discuss bank prop trading (Paul Volcker will be testifying at the first hearing on 2/2 and execs from GS and others, will be speaking at a separate hearing on 2/4). Volcker’s testimony Tues started at 2:30pmET.

· Sales – retail same-store-sales come Thurs morning.

· Central Banks - In Europe, both the BoE and ECB will hold meetings with interest rate decisions (Thurs morning)

· There is a G7 Finance Ministers meeting Feb 5-6 in Canada

· Greece - The European Commission expects to give an assessment of the Greek budget plan on Feb. 3.

· Obama is slated to speak to Senate Democrats on Wednesday during their annual issues retreat – CQ Politics.

Corporate Events

· Tues Feb 2: Earnings after the close (DHX, WBSN, ADS, FISV, RVBD, ACE, MET, VRSN, TSO, BRE, MYGN, AJG, MEE, AFL, MTW, MWA, PXD, SGI, JDSU, QSFT, AMX, UMC, UNM, NWS, CHRW, RVBD, IRF). Auto sales for the month of Jan will be reported.

· Wed Feb 3: earnings before the open (CMCSA, DBD, HW, WU, ITG, HNT, OIIM, IP, TWX, CVLT, SVVS, LAZ, SSTI, TMO, R, SLAB, MKTX, SPIL, Electrolux, Autonomy, CKSW, NOV, ARW, PFE, BDK, Toyota, Roche, AOL, RL). Earnings after the close (AKAM, MHO, WFR, NVLS, CDNS, IEX, BRCM, V, YUM, RNOW, ONNN, CBG, STLD, DLB, THQI, EFX, FNF, AVB, OPNT, INSP, DCP, CSCO, THG, WSH, KIM, Lenovo). Analyst meetings (AXP).

· Thurs Feb 4: earnings before the open (CI, SLE, UFS, CINF, BG, AGN, LZ, MKSI, POWI, NCR, HOT, HSP, CME, BKC, TEN, MGI, UIS, MCO, SNA, SBH, BCE, BR, Deutsche Bank, Santander, GSK, VOD, BR, BHE, MA, DO, CLX, NOC, RAI, BDC, RDS, UN/UL, MF, PENN, KLIC, K). Earnings after the close (PBI, SUN, MCHP, IN, CNW, HLIT, SIMG, PWAV, N, VRTX, FIS, DNB, SNCR, BLKB, MFLX, MCRS, SRCL, EW, SFLY, SFSF). Retailers will report their Jan sales on Thurs 2/4. Analyst meetings (EK, WFR).

· Fri Feb 5: earnings before the open (AET, AIV, WY, YRCW, AON, SPG, BPO, PPL, LEA, BZH, BRKS, G, TSN, Panasonic, AXL). Analyst meetings (EMR, STJ, GLW). Shareholder meetings (TSN, XRX, ACS).

Economics Calendar

· Tuesday, Feb. 2nd: US (Pending Home Sales, ABC Consumer Confidence, Auto Sales)

· Wednesday, Feb. 3rd: US (Challenger Job Cuts, MBA Mortgage Applications, ISM Non-Manufacturing); Eurozone (UKConsumer Credit, German PMI Services, Eurozone PMI Services, Eurozone Retail Sales); Other (New Zealand Unemployment Rate).

· Thursday, Feb. 4th: US (Non-Farm Productivity, Jobless Claims, Factory Orders, Retail Sales); Eurozone (BoE Interest Rate Decision, ECB Rate Decision, German Factory Orders); Other (Australia Retail Sales, Reserve Bank of Australia Quarterly Monetary Policy Statement, Canada Building Permits, Swiss Trade Balance, Canada PMI).

· Friday, Feb. 5th: US (Monthly Jobs #, Unemployment Rate, Consumer Credit); Eurozone (UK PPI, German IP); Other (Japan Leading Index, Canada Employment figures).



· Hardware – LXK shares up ~10%+ on the day following strong earnings this morning. CRAY shares up 4% following a competitor’s upgrade. HPQ shrs outperforming, up ~1.5%, on back of the LXK earnings release. IBM, EMC, DELL, AAPL all up small.

· PALM – the stock climbs ~8% on back of pos. Deutsche comments; RIMM shrs also act well (up 2-3%). Other wireless OEMs act well (NOK and MOT both up 2-3%).

· Semis – the SOX climbs ~1% on the day; WFR acts well ahead of earnings Wed; memory stocks (SNDK, MU) also outperforming. AMD, QCOM, and TSM are among the weakest semis.

· AXE – the stock falls ~1% after earnings; weighing on peers CTV, BDC (although the whole group is off its lows)

· Software – NOVL shares up 6% and outperforming today (not clear what is behind today’s strength; recall the stock was highlighted positively over the weekend in Barron’s).

· Internets – AOL shrs climb 3% ahead of earnings Wed morning; AMZN flattish but well off its lows of earlier today. EBAY and GOOG all flat-to-dwn.

· Networking – EXTR up 8% and outperforming after earnings last night. ADCT, CIEN, ALU all outperforming.

· Best Performing SP500 tech stocks (from Bloomberg): LXK, NOVL, WFR, MOT, GLW, SNDK, NTAP, ORCL, TDC, JDSU

· Weakest performing sp500 tech stocks (from Bloomberg): CPWR, LSI, QCOM, BMC, AMD, EBAY, GOOG, QLGC, MA, KLAC


· Discount brokers –the group was hit after Fidelity announced some commission price cuts earlier in the session; AMTD, SCHW, and ETFC all for sale today (off few % each).

· MS, GS – both stocks rallying along w/the strength in the big money center banks; more optimistic view around Washingtonregs helping rally the group.

· Smaller brokers – seeing a lot of strength in smaller brokers – TWPG +6%, LAZ +6%, RJF +3%. EVR dips 4% coming away from its earnings release.

· Asset managers – the group is in the green for the most part; AMG up another 2% and extending its rally from yesterday. OZM is very strong, rallying 7% on the day (OZM released an 8K this morning detailing strong returns for the month of Jan).

· Insurance – the big focus in the group shifting to earnings; we will hear from 5 stocks after the close today – ACE, AFL, AJG, MET, UNM all hit post the bell today. Life stocks are outperforming for the most part (led by LNC and HIG, both of which are up 3-4%). RGA is underperforming after earnings.

· Banks – notable trend in the space today whereby regionals (which had been so strong for most of ’10 so far) come for sale and the largest money centers/brokers get bought (BAC, C, GS, MS, etc). In regional land, weakness in names like CMA, CYN, MI, RF, STI, USB, PBCT…..desk notes that a lot of the selling today is really sector rotation (vs. aggressive selling in the regionals).

· MI stocks – the group is rallying today – MTG +5-6%, PMI +8%, GNW +4%, MBI +2%, RDN +7%

· Credit cards – the group is rallying today; COF, AXP, DFS all up ~1-3% on the day.

· Best Performing SP500 financials (from Bloomberg): LNC, CBG, GNW, HIG, DFS, MMC, AIV, PFG

· Weakest performing sp500 financials (from Bloomberg): ETFC, JNS, PNC, RF, BK, STI, SCHW, USB, WFC, PBCT

Consumer & Retail

· Consumer up with the tape. Household Products outperforming on the Staples front with TUP +6% after earnings (NWL +5.5%, AVP +4.3%, EL +4.3%, etc. up in sympathy) ….Beverages up post-PBG earnings with KO system outperforming PEP system …Ag products outperforming post-ADM and CPO earnings beats….In Food, HSY getting a lift post earnings (but well off highs) and DOLE is down over 4% after preannouncing Q4 adjusted ebitda below the street…..PM bouncing back from recent weakness as USD moves off highs (+2%) and sell-side makes pos. read-through comments from Imperial Tobacco's trading update. Autos higher across the board ahead of a slew of earnings this week and Jan Auto sales which on the whole came in better than expected. In Restaurants, BKC underperformed while YUM outperformed ahead of earnings Weds night/Thursday. In Retail, Specialty names outperform following ANN's upside preannouncement (stock +18%)….BKS traded up 7% (was up 18% earlier) after Burkle asked BKS to waive a provision preventing unwanted takeovers and allow him to acquire as much as 37% of the shares….OMX gained ~6% on positive sell-side comments…in smallcap grocers, GAP gained 9% on sell-side upgrade.


· Industrials: Today’s momentum was stronger than the early morning short squeezes that we saw last week. The weird thing is we didn’t seeing any real vanilla's add. We realize we should give it time b/c they typically wait for a few days of positive momentum to be comfortable adding further, thereby chasing the momentum. It seems the sell on the news action has abated. This time last week stocks like EMR and CMI would have been down on the day despite blowout earnings. Momentum in the stocks was strong all day and those that shorted them early quickly covered and continued to play the game. The same was true in DHI today. Multis, machinery, and aero/def names were up 2-3% and finished near their highs thanks to the positive earnings and market rally. Education stocks were mixed after COCO's earnings report this morning. COCO was off around 3% on the news.

· Transports: Transports were mixed as UPS gave “ok” guidance, leading investors to turn away from the lower beta plays. Truckers were all off today as capacity issues continued to weigh on the space. Rails were up with the tape as the group clawed back a bit after getting slammed last week. Airlines outperformed following a positive January RASM release from CAL.

· Materials: Materials lagged the tape a bit as investors took some profits following yesterday’s short covering-driven rally. Metals and steel stocks rallied off their lows to perform mostly in line with the tape, finishing near their highs of the day. The space was pretty encouraging as we saw many stocks bounce off their 200-day moving averages yesterday and continue higher through today. Chemicals were mostly higher, although earnings from DOW weighed on parts of the space, namely EMN and HUN. Paper and packaging stocks were stronger on the heels of CCK’s earnings this morning.

· Energy: Energy was in line with the tape as spiked nearly $3, moving above $77.25. Integrateds outperformed with the exception of MRO and BP following their earnings releases this morning. Servicers and drillers were also stronger with the higher price of oil. E&Ps were stronger today as natural gas edged higher towards $5.50. Coal stocks were down early following PCX’s earnings, but rallied off their lows to close in positive territory. Investors will focus on MEE as it is set to report earnings after the close.

Industrials/Materials/Energy Outliers

· DHI was up 10.5% after a very good earnings report, lifting the rest of the homebuilders 3-7%.

· CMI was up 9% after beating earnings and guiding FY10 revenues higher.

· OSK was 4% on the heels of CMI’s earnings and also after news that the Pentagon has approved the purchase of 2800 more MRAP vehicles according to Indsidedefense.com. NAV rose 3% in accord.

· EMR was up 10%, breaking its 52-week high after beating earnings, revenues, and guiding FY10 EPS higher than the st. IR is up over 4% on the back of the news.

· GE was up around 3.5% today. Recall last week it was one of the stocks that held its ground, making this a very favorable relative long as of late.

· HON and MMM lagged again as investors move out of the low-beta names and into the higher beta plays.

· MAN was up over 3.5% after beating on the top and bottom line this morning.

· CAL’s January RASM beat lifted the airline space, led by LCC and UAUA, both up 6-7 pct.

· WHR was 8% after beating on earnings, revenues, and guiding higher than the street.

· DOW fell 3% as earnings missed after stripping out a one time tax gain.

· ADM rose over 4% after beating earnings estimates this morning.

· CCK jumped 9% after giving positive guidance for FY10.

· BP fell 3% following a disappointing earnings / guidance report.


· As the tape broke 1100 in the afternoon, we saw the large cap names trade mostly in line ahead of NWSA’s earnings after the bell. CBS lagged down ~1.5% as LCAPA lead the group (up ~4.15%) on the heels of SIRI approaching the $1 mark. Cable stocks traded higher than the content providers, with CMCSA outperforming; they report tomorrow pre-market. After many shorted the newspapers on the GCI earnings yesterday, that group bounced back today to post a modest gain. TRI (up ~2.6%) led the info services higher after it was upgraded by RBC.

· After selling off this morning, LEAP turned positive during the afternoon as the other prepaid, PCS stayed negative. Telecom was led today by S, who finished up ~8% as traders saw the possible LEAP merger as a positive for Sprint’s prepaid division and a decrease in competition within the group. T led the other wireless stocks up ~1.4%, while the towers were better for sale with few buyers looking to rotate into the defensive names.

· The morning trend of the buyers moving out of the large cap casinos and into the regional gamers continued, with the exception of MPEL, which finished up ~9%. MGM also was able to turn positive, as we continued to take profit taking in LVS/WYNN. Gaming equipment traded mostly in after underperforming yesterday and late last week.

· Lodging as a group outperformed, let by HOT (up ~2.75%) as consumer discretionary stocks strengthened with the tape in the afternoon. Cruise lines CCL/RCL continue to trade higher, even as crude rose nearly $3 to approx. $77.50 near the close.

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