Wednesday, February 3, 2010



· Market Update – there are a bunch of earnings-related situations that are pressuring the broader tape. The strong short-covering that helped so much on Mon and Tues not repeating today. The problem is that outside of short covering, we aren’t really seeing vanillas stepping in on weakness to add to long positions. That said, we aren’t seeing the across the board selling/shorting that hurt so much late last week. Some fundamental items weighing on the tape today: 1) eco headlines - the ADP “beat” the St, but still showed private sector job losses; a separate survey from Challenger revealed a sharp uptick in layoffs. Meanwhile, the service sector continues to suck wind (as evidenced by today’s non-manufacturing ISM). 2) a few earnings situations pressuring major groups (like MET in financials and PFE in health care). 3) new sovereign worries in Europe – focus on Portugal and Spain – see below. Looking at technicals, 1105 is near-term resistance (we hit 1102 this morning) while 1095 is support (approx. the lows of the session so far).

· Equity Sector Update – red across the board but financials and health care are weakest performing groups. Within financials, the regional banks fall more than 2% on the day as this group sees profit taking for a second consecutive session (note its still up >7% YTD, one of the best groups, but has been for sale over last 24 hrs +; capital raising hurting sentiment). Life insurers are also for sale on back of MET’s earnings (MET is off 4%). Health care drops >1% on the session, w/PFE falling 2%+ on back of earnings. The HMOs are also weak (reports that Congress next week will vote on ending the industry’s anti-trust immunity hurting sentiment). Tech is flattish on the day, one of the better groups (JDSU, LXK, GOOG, WFR, AAPL all helping the space while VRSN and WU dip 6% after earnings). The transports fall 1.7% and are one of the weaker groups (R falls 9% and CHRW is off 6% - both on earnings). Energy is off ~0.5%, w/coal stocks strong (MEE earnings helping) while refiners are weak (TSO dwn 5% post earnings). In the materials, paper stocks coming for sale after IP earnings (IP falls 7% on the session today). Media is one of the market’s best performing groups today (NWSa is up 6% after earnings although TWX dips 1.5%).

· Best Performing SP500 stocks (from Bloomberg): NWS, LXK, SKW, BDK, NOV, ROP, CBS, PCS, MEE, JDSU

· Weakest performing sp500 stocks (from Bloomberg): R, RL, WU, VRSN, IP, MI, CHRW, TSO, WAG, ZION

· Sovereign CDS - European sovereign CDS tightened in the last 48 hrs in anticipation of a successful Greek budget review from the European Commission……that review came this morning and spreads are actually widening back out. There are worries now that Greece won't be able to achieve its budget goals - Greece’s General Confederation of Greek Workers, the country’s largest labor group, proposed a general strike for Feb. 24 and said its representatives would quit a committee set up by the government for talks on pension reform after the announcement of plans to raise the retirement age. Away from Greece, some of the other "PIIGS" are in the headlines - Portugal's debt agency IGCP cut its planned T-bill placement to 300 million euros from the planned 500 million as yields spiked versus January's placement - this caused spreads to widen. Also - The Spanish government Wednesday upped its forecast for the 2010 budget deficit, but reiterated its commitment to reducing the deficit to 3% of gross domestic product in 2013

· Commodities: Commodities are mostly weaker today as the dollar strengthens. Oil is off 20c to $77 after a mixed inventory report. Natural gas is flat at $5.45 Gold is off $5 to $1113, trading at its lows of the day. Copper is tanking today, falling over 3% amid continued concerns in China.

· FX: USD (DXY) is 0.4% today and at its highs of the session. The dollar jumped 0.4% against the Euro and Pound, and gained 0.8% on the Yen. The Euro was up 0.4% against the Yen.

· Corp Credit: Corp credit is outperforming the tape today as IG spreads narrow ¼ of a bp and HY gains 1/8 of a pt.

· Treasuries: Treasuries sold off slightly today as 2s move up 1 bp to 86 bps and the yield on 10s moves higher to 3.67 pct. The 2-10 year spread steepened a bit to 281 bps. Treasury auction size announcement today was inline w/forecasts; will auction $40 billion in three-year notes on Feb. 9, $25 billion in 10-year notes Feb. 10 and $16 billion in 30-year bonds Feb. 11 (Bloomberg).

Catalysts to Watch

· Energy – EPA conf call coming up @ 3pmET today – to discuss energy announcements.

· 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)

· ECB – preview from JPMorgan’s Greg Fuzesi - With new ECB staff forecasts and the next set of exit decisions from the non-standard measures due at the March policy meeting, the ECB will not make any policy changes at tomorrow's meeting. Therefore, interest during the Q&A will focus on recent events and in particular on Greece and on the fiscal stresses in the region. On growth, the recent data have done little to challenge the ECB's downbeat growth forecast. On the non-standard liquidity policy, most of the ECB's current commitments extend to mid-April, so that decisions on this are unlikely until the March meeting.

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

Corporate Events

· Wed Feb 3: 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 – webcast starts 2:30pmET).

· 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, 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

· 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).

Economics Headlines

· JPMorgan Global All-Industry PMI Reading - The record wide gap between the global manufacturing and services PMIs persisted in January. J.P. Morgan’s global manufacturing surprised with a strong increase on the month, lifting the aggregate index to the highest level since 2004. The manufacturing output and orders indexes each vaulted to near 60, pointing to highly robust growth in industrial output near-term. In contrast, the global services PMI was little changed from the subdued level of previous months. David Hensley

· ADP - The Macroeconomic Adivsers/ADP employment report showed a 22,000 decline in private nonfarm payrolls in January. We see balanced risks around our forecast for a 10,000 gain in private payrolls and a 20,000 gain in total payrolls in Friday’s employment report. Although the ADP report still shows declines in employment, the size of declines is steadily shrinking. The report showed a 178,000 fall in October, a 121,000 fall in November, and a 61,000 fall in December. Abiel Reinhart

· ISM Non-manufacturing - The ISM nonmanufacturing index edged up to 50.5 in January from 49.8 in December, suggesting that growth in services GDP remains fairly soft. The index is now technically at its highest level since May 2008, although the improvement over recent months is not that substantial. The nonmanufacturing index continues to substantially underperform relative to the manufacturing index, which surged to 58.4 in January. A Reinhart.



· Group is an underperformer as regional banks are very weak following two capital raises announced last night, insurers are mostly lower following a mixed reaction to earnings from a slew of companies last night and large caps take a breather after recent outperformance. The combination of headlines continuing to be light from the Morgan Stanley Financials Conference and Volcker's testimony yesterday means earnings headlines are driving the group's direction and flow. Both HFs and vanillas continue to be very active with vanillas continuing to be better for sale into strength while HFs are using market weakness today to cover and buy financials as they underperform. In banks, we're seeing lots of vanilla supply in the regionals following strong outperformance in January. We're only seeing money flow passively into the money center names. In brokers, we're seeing HF money continue to support the large cap brokers as the "Volcker Rule" risk appears to be subsiding. In insurance, we're seeing HFs add to positions in the group on today's pullback; not seeing any long-only support to the group on the pullback.

· Brokers – LAZ dips 4% on back of earnings (EPS came in below expectations due to a compensation charge). RJF rallies following an upgrade from FBR Capital.

· ITG shrs fall 8-9% after earnings come in below expectations.

· Life insurance – MET shares fall 5% after earnings; BV came in below expectations and the co confirmed it was talking to AIG about a potential deal to buy ALICO. UNM dips 2% post results. Weakness in the whole group today – LNC, PNX, PFG, HIG, PL, PRU are all off 1-2%+. On the upside, AFL rallies 3% after its earnings.

· Non-life insurance – ACE shares climb more than 1% on the day after earnings. In the broker side, AJG rallies 3% after earnings (WSH up in sympathy – WSH reports earnings tonight).

· Banks – the smaller regionals continue to come for sale; recall this group underperformed on Tues and is for sale again. This space is still up 7% YTD, one of the best acting groups; has been seeing profit taking after strong run. In regional land today, FITB, KEY, MI, STI, ZION are weakest. Money centers are outperforming a bit - C and BAC are both up small on the day.

· Credit cards – the group seeing some profit taking after a strong rally on Tues; COF, AXP, DFS are all off 1-2%. AXP is hosting an analyst meeting today (webcast starts 2:30pmET). The ADS earnings out last night could be weighing on the space. V reports after the close tonight and MA reports Thurs morning.

· MI stocks are all off across the board; MTG, PMI, GNW, MBI, RDN, ABK all down 2-4%. Reuters article this morning discussing how ABK has hired Blackstone to help it restructure; ABK has said in past filing that it is working to address liquidity concerns (Reuters)

· REITs – JLL shares are up 5% after earnings – giving a boost to CBG, which reports after the close today.

· Best Performing Sp500 Financials (from Bloomberg): AFL, NDAQ, CBG, ICE, GS, BAC, JNS, C, ETFC, CME

· Weakest performing sp500 financials (from Bloomberg): MI, STI, ZION, HBAN, FITB, MET, RF, HIG, KEY, AIV


· Tech - trends similar to Tues on the tech desk; ie, we are almost exclusively buyers in tech land ahead of CSCO numbers. We cont to see a mix of HFs buying and vanillas adding to/defending positions on the pullback today; vanilla sellers we saw last week not really back yet pressing stocks. VRSN a good example of this today...stock dropped after earnings but buyers are certainly around defending

· Hardware – LXK shares climb 5% - extend their rally from Tues 9stock had a very strong move on back of earnings). AAPL, DELL, HPQ, IBM, NTAP all higher while EMC in the red. Pretty quiet in the space.

· ADS – the stock falls 6% after earnings disappoint last night

· Semis – the SOX is flattish on the day. WFR rallies into its earnings tonight (stock up >2% - this is the best performing SOX member). Semi equipment stocks mixed – NVLS acts OK ahead of earnings tonight while AMAT, LRCX, and TER are all for sale. ATMI is up 5% after results this morning. NETL is up 14% after earnings come in better last night. people watching for earnings from BRCM and NVLS after the close tonight. Analogs are all in the red (MXIM, TXN, MCRL all dwn 1%+ - this is one of the weaker semi sub-sectors). MCHP shrs flattish after earnings (strong) and the SSTI deal. IRF climbs 2% after earnings.

· PCs – decent strength in OEMs (AAPL, HPQ, DELL) while supply chain names weak (MSFT, INTC, MU, AMD). Tonight we get earnings from Lenovo.

· Software – red across the board today in software; QSFT falls 7% after earnings last night disappoint (Goldman downgraded the stock this morning). RHT, ADBE, CRM are among software outperformers. CVLT up small post earnings.

· VRSN – the stock dips 6% after earnings come in below expectations.

· Networking – RVBD falls 5% while APKT rallies 26% - both on earnings. The broader space is in the red – ADCT, ADTN, CTV, CIEN, JNPR all in the red. CSCO tonight the next big catalyst for the group to watch. EXTR gives back some of yesterday’s strong rally (which came on earnings).

· Best Performing SP500 tech stocks (from Bloomberg): LXK, JDSU, MOT, YHOO, AAPL, GOOG, WFR, GLW, CRM, XLNX

· Weakest performing sp500 tech stocks (from Bloomberg): WU, VRSN, AMAT, NOVL, TER, MU, ADP, AMD, HRS, XRX

Consumer & Retail

· Consumer stock down on the session but trading relatively inline with the tape. Retail flows on the light side ahead of Jan SSS tomorrow morning. Big story of the morning was RL’s earnings beat which fell short of expectations sending the stock dn ~9%. In Hardlines, Home Improvement stocks are lower, led down by LOW on a competitor downgrade….Broadlines holding in better than Specialty on the whole….

· In Restaurants, equity desk is seeing rotation within QSRs out of BKC ahead of earnings into MCD (competitor upgraded today) while YUM trades off 2% ahead of earnings tonight. In Autos, group is mostly lower with the exception of BWA/LEA ahead of their earnings reports and JCI on pos read-through from news that WMT dropped XIDE as a supplier of auto batteries. In RVs, THO preannounced Q4 revs ahead of St. intraday sending shares rallying over 4% (WGO trading higher as well on pos read-through).


· Industrials: No major themes in the space today as many groups are still searching for direction. For the most part, industrials are better for sale this morning as ISM non-manf. # comes in worse than expected. Almost all of our flows are being dominated by HF's predominantly covering and adding to shorts. 1105 will be the next big level and for the most part we still haven't seen the institutions come in to chase the momentum on this move over the past 2-3 days. We are seeing vanilla buying in building products and construction material names. Education stocks are mostly higher today after selling off yesterday on COCO’s earnings. Aero and def names are also outperforming today.

· Transports: We are seeing dedicated funds sell Truck brokers and TLs alike on the back of CHRW's weak report (lot of covering this morning as well in CHRW). We are also seeing vanilla buyers in parcels. We are two ways better to buy in NAV with the favorable MRAP announcement yesterday. Rails are relative outperformers today, led by KSU after UBS listed the space as short-term buys in anticipation of new money flowing in following the BNI takeover. Airlines are weaker following some profit taking from Mon and Tues rally as well as higher crude.

· Materials: Materials are down with the tape today. We are seeing vanillas trim longs in ferts and metals (although some selective institutional buying in metals as well). Copper stocks are all lagging today as copper falls below $3. Fertilizers are much stronger today following positive demand comments from K+S and news of a pricing increase from Uralkali. Paper and packaging stocks are all weaker after earnings from IP.

· Energy: Energy stocks are down with the tape today. Integrateds, servicers, and drillers are all down with the tape after rallying yesterday. Refiners are lagging today, led down by TSO’s weak earnings report last night. E&Ps are also weaker today as natural gas stays flat. Coal stocks are all stronger today on the heels of MEE’s earnings release last night.

Industrials/Materials/Energy Outliers

· R is down 9% (off its lows) after an earnings miss and weak guidance.

· CHRW is off over 6% after missing earnings.

· KSU is up close to 1.5% after being put on UBS’ short-term buy list.

· NAV and OSK are up 1 and 3%, respectively, after a favorable MRAP announcement yesterday, although the announcement appears to be more of a positive surprise for NAV and somewhat a neg for OSK.

· CMI is up close to 1.5% (off its highs) after a few price target increases and follow-through from earnings. News of renewing contract w/ Chrysler is known and shouldn't be a surprise.

· ROP is up 3.5% after beating earnings and raising guidance.

· BDK is up 3.5% after reporting earnings this morning.

· Gold stocks are stronger today after DB initiated coverage on a few names today.

· Fertilizer stocks are all up 2-4% today after positive reports on a price increase from Uralkali and positive comments from K+S regarding demand for potash.

· NLC is off 5% after weak guidance this morning.

· IP is off close to 7% after earnings this morning. The rest of the space is down in sympathy.

· BECN, OC, and SSD are down 3-5% on BECN’s earnings this morning.

· TSO is off close to 6% after reporting weak earnings last night.

· ACI is up over 4% after being upgraded to buy at Steifel Nicholas.

· MEE is up around 3% after reporting earnings last night and being upgraded from sell to hold at Citi.

Media & Leisure

· As the tape drops below 1100, the “old media” stocks have outperformed today, on the heels of NWSA’s across the board beat in earnings yesterday. Buyers have been rotating into NWSA, CBS, VIAb and DIS and moving out of TWX, whose guidance for 2010 EPS came up a bit shy of bullish estimates. This group has also been lifted by the weakness in cable, as CMCSA’S in line earnings seemed to be a non-event.

· One of the leaders in the sp500 today has been NYT (up ~2.8%) as a combination of buying ahead of their earnings next week, positive sentiment about improving ad markets, a boost from NWSA (who said on their CC they will also be implementing a “pay for content model”) and being a bit oversold after GCI’s earnings on Monday has caused the buying today.

· Within telecom, the wireless stocks have been led by the prepaids, as LEAP is up ~1.46% and PCS is up ~ 1.7% as we have continued to see shorts covering with the possibility of a merger renewed by the WSJ article on Monday. The towers are trading in line as the defensive buying in those names has stopped.

· Within leisure, we are seeing lodging stocks and cruise lines trade in line with the tape many investors are taking profits following a rally in the group yesterday.

· Within casinos - MPEL has given almost all of its 10% gain from yesterday back this morning, as LVS/WYNN/MGM are all underperforming. Regional gamers are trading down with the large cap stocks, despite ASCA’s in line earnings. Gaming equipment is mixed with IGT & WMS outperforming and BYI down ~2.56%.

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