Overview:
· Levels: SP500 ends down 34 points/3.12% to 1063 (finishing at our lows); the SP500 is now off 1% on the week, off 4.66% YTD, and is down 7.5% from the 1150 recent highs. The Dow closes off 258 pts (finishes right at 10K). The R2K finished off 3.4% and the Nazz was down 3%.
· Sentiment on the desk - tone similar to late last week….vanillas are selling and shorts are more comfortable laying out positions; buyers are on strike; the short covering that helped so much Mon/Tues not around today; dip buyers on the sidelines and not stepping in to defend. The selling wasn’t really panicked today and was relatively orderly – even as we closed on the lows. Not a ton of single stock activity (i.e. ETFs/index activity is dominating). The trade on the desk remains to sell any rally (instead of buying dips); volumes are higher on pullbacks and we continue to end near the lows on days w/big sell-offs. Technicals increasingly precarious – we broke under last week’s lows (of 1071); people now watching 1063 (Oct ‘07 downtrendline).
· Fundamental items weighing on stocks: 1) European sovereign concerns – the usual suspects seeing their CDS costs widen in Europe (an index of the PIIGS CDS is at the highest level since back in Feb/Mar ’09). There are worries that an imminent Greek strike will imperil that country’s efforts to cut its budget; a Spanish debt sale had to be cut; there is a political vote occuring in Portugal today that could result in higher spending; etc. Also – the ECB press conf today failed to allay market concerns. 2) economic worries – while the manufacturing economy has been very strong, this hasn’t translated into the service sector (see yesterday’s non-manufacturing ISM) or to the jobs market (see today’s jobless claims). Labor has been the one missing piece of the recovery story and many are wondering if/when it will come. There are growing fears that tom’s BLS report will miss the St and show very large revisions; 3) US gov’t actions – two actions today (both crossed around 11amET) worried investors (the Cuomo lawsuit against BoA and the Boxer/Webb bonus tax bill).
· Equity Sectors – red across the board today; financials, energy, and materials are all off >3.5%. Tech, health care, industrials, discretionary, staples, utilities, telecom services finish off >2%. The Semis and Airlines look like some of the weakest groups today (off 4-5%). Hard to find any market segment that was down less than 2% today. Some of the lodging stocks were green earlier in the session on back of HOT’s earnings, but that stock (and the whole group) gave up all their gains. There were a few retailers that benefit from strong sales today (like ANF, M, GPS, BIG) but the retail index on the whole still closed down 2%.
· Best Performing SP500 Stocks: ANF (sales), M (sales), BIG (sales), AGN, RX, CSCO (earnings), COST, MET. In the whole sp500, there were only ~15 stocks flat or higher on the day. CSCO ekes out small gain (up 9 cents/0.4%).
· Weakest Performing Sp500 Stocks: WFR (earnings/outlook), MWW (earnings/YHOO deal), EK (’10 guidance), TIE, MA (earnings), ODP, CLF, MEE, JDSU, AKS, AES, AMD, ATI, CNX, CME (earnings), GNW, JBL, AVP, CBG (guidance), GCI.
· FX – some of the most important underlying trends have been occuring in the FX markets. The DXY is up ~2.7% YTD already and is close to breaking north of 80. The Euro plunged more than 1% against the buck today and is down nearly 9.3% since peaking on 11/25 (@ 1.51). The yen plunged 2% against the dollar today (the steepest 1 day decline since Jul ’09). Helping the dollar over recent weeks has been an aggressive unwind of dollar-funded carry trades, sparked by: 1) fears around European sovereigns; 2) worries about the end of US extraordinary policy (mortgage buying ending in Mar and the Hoenig dissention); 3) widening growth differentials between the US and Europe (see today’s weak German manufacturing orders). The dollar strength is wrecking havoc esp. in commodities and commodity-linked equities.
· Commodities: Commodities plunged today, finishing at their lows, as sovereign debt worries caused a sharp spike in the dollar. Oil fell around $4 towards $73. Gold fell almost $50 to $1063, a level not seen since early November. Copper was down sharply again today, off nearly 4 pct, falling below $2.90. Natural gas managed to stay flat today amid cold weather.
· Corp Credit: Corp credit was terrible today. HY lost 1 3/8 of a pt but the real story was IG. IG spreads widened 8 bps today and finished at their lows of the day.
· Treasuries: Treasuries were up sharply today as investors fled to safety. Yields on 2s moved down to 80 bps while yields on 10s fell to 3.59 pct. The 2-10 year spread flattened a bit today to 279 bps.
Catalysts to Watch
· JPMorgan jobs preview – from M Feroli - our forecast is for an increase of 20,000 in employment Fri morning -- a number close to consensus and one that incorporates about 10,000 new Census workers. The data we received this week has lent some downside risk to that number. In particular, the ongoing move up in claims -- even though it is for data after the payroll survey week -- implies that the smoothed measure of claims in mid-month was higher than previously thought. There were some bright spots: both ISM employment indices increased. While the Challenger survey of layoffs did increase 26,000 during the month, this data is non-seasonally adjusted and when one regresses on monthly dummies, the January effect looks for an increase of exactly 26,000. The ADP employment report anticipates private sector job loss of 22,000 tomorrow, though this survey has tended to be consistently weaker than the BLS data in recent monthsEconomic Headlines
· Initial jobless claims rose to 480,000 in the week ending January 30 from 472,000 in the week ending January 23 and a recent low of 432,000 in the week ending December 26. The latest figures are clearly concerning, as they raise the possibility that claims are stabilizing at a high level. The current level of claims could be consistent with small employment gains, and indeed we continue to expect that there was a 20,000 rise in nonfarm employment in January. However, claims would need to continue dropping to be consistent with larger payroll gains, which are essential for bringing down unemployment. Abiel Reinhart
· Nonfarm business productivity continued to surge in 4Q, rising 6.2%q/q, saar, and 5.1%oya. This was the third straight quarter in which productivity grew at a fast pace, and the increase in productivity over the last three quarters is the greatest in any such length of time since the mid-1960s. Robust productivity growth has allowed US economic output to recover without there being a corresponding increase in employment. Abiel Reinhart
· US Factory orders – came in better at +1% (vs. St +0.5%).
· German manufacturing orders fell 2.3%m/m in December (J.P.Morgan: +0.8%, consensus: +0.2%), a move which offset most of the gain seen in the previous month. In 4Q as a whole, orders were up only 2.6% at an annual rate, after rising more than 30%ar on average in 2Q and 3Q. The weaker orders trajectory weighs on the outlook for industrial production growth, which looks set to slow in coming months. Nicola Mai
Consumer & Retail
· Consumer sold off with the tape; Retail sold off for the most part as SSS were largely inline with raised expectations. Names gaining the most post SSS are M (+3%), GPS (+3%), ANF (+4%), PLCE (+3%), COST (+0.6%), NDN (+14%) and WTLSA (+4.5%). Alternatively, TGT (dn 3%), BJ (dn 1.5%), DLTR (dn 4%), FRED (dn 7%), KSS (dn 4%), URBN (dn 3%), AEO (dn 4%), ARO (dn 6%) and BKE (dn 9%) all fell. Electronics retailers are under pressure led by HGG (dn 7%) with RSH also off 5.5% and BBY dn 4%. In Restaurants, BKC is up over 3% after earnings came in better while YUM sold off 5.6% after its report. Autos under pressure across the board after TEN's earnings missed, more neg TM headlines crossed and LAD negatively preannounced (stock dn 24%). In Staples, CLX traded flattish and outperforming the HPC space after earnings while AVP sold off 7%....Tobacco stocks were down with tape after RAI's miss ….in Food, K is off ~5% and BG sold off 3% after earnings....TSN dn 2.7% ahead of earnings tomorrow and post-Pilgrim’s Pride earnings/comments re Chicken industry.
Industrials/Materials/Energy
· Industrials: After breaking 1085 and 1076 (2/1 low) the next support level is 1066 (1//29) which is right around where we sit. Industrials were better for sale today as the broader market moves lower. We saw institutions trimming across multi’s, machinery, etc. As we’ve been saying, the recent rally was financed by short covering and there was almost no vanilla sponsorship, so they don’t feel great. We saw longs trim in builders, building products, and E&Cs. Aero/def names were down today despite positive earnings out of NOC this morning. Education stocks lagged today after DB downgraded a few names this morning and we saw some shorts cover in staffing names after their sharp fall for the past two weeks.
· Transports: Transports all came for sale today. Rails continued to be dead money, with the space of 2-3 pct. Freight lagged the tape and TLs continue to come under pressure on the back of CHRW’s earnings yesterday. LTLs were relative outperformers this morning, but rolled over to perform with other transports ahead of CNW’s earnings this evening. Airlines lagged the tape today amid a few downgrades on ALK, CAL, and DAL.
· Materials: Materials were down sharply today as sovereign debt worries in Europe continue to push the dollar higher and weigh on the space. Copper stocks underperformed as the price of copper fell below $2.90. Chemicals and fertilizers were down with the rest of the space today.
· Energy: Energy stocks lagged the tape today as crude plunged around $4. Integrateds, servicers, and drillers were all off to the tune of 2-5 pct. E&Ps and coal stocks were sharply lower, off 3-5 pct despite natural gas making small gains. Shipping and tanker stocks lagged as well despite the first advance in the Baltic Dry Index in seven days
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