Thursday, February 4, 2010

TODAYS MARKETS- 02.04.2010

Today’s Top Stories & Catalysts
· Sovereign Credit – the PIIGS remain front-and-center - In Europe, Greece, Portugal, Spain
Sovereign CDS Sharply Wider Thurs morning follows news Wednesday that 1) the European
Commission had put Greece under more pressure to cut its deficit, 2) that the Portuguese
government sold only EUR300 million of treasury bills at an auction vs. an indicative offer of
EUR500 millon, and 3) the Spanish government raised its budget deficit forecasts for 2010
through 2012 which led Spanish borrowing costs to spike during an auction today.
· In Asia, China stocks were weak out of the gate on continued tightening headlines with the
FT reporting today that regulators have imposed a partial ban on listed companies raising
capital from equity markets in the latest move by the country to extract liquidity from the
monetary system, however stocks largely shrugged off the news (China shares reversed most
of their earlier losses).
· Europe – trading dwn ~1% - big morning of earnings. Financials dip ~1.6% in Europe on
back of two big earnings reports out of Santander and Deutsche Bank. STD’s #s were solid
(esp. in light of peer BBVA) but the stock comes for sale (STD down ~3% and BBVA off
another 3.8%). Deutsche Bank’s headline earnings # were fine, but like other IBs, revs were
weak and a lower comp ratio (along w/some tax benefits) helped. That stock also dips. In
the UK, Vodafone rallies 4% after very strong earnings/guidance (key highlight is the organic
European service revenue growth rate of -3.2% which compares to consensus -4.2% and -
4.6% in Q2). On the flip side, Unilever sells off ~4% on back of its report (#s were OK but
outlook is weighing). Royal Dutch Shell falls ~1.8% after earnings.
· BOE - Bank of England Maintains Bank Rate at 0.5% and Maintains the Size of the Asset
Purchase Programme at £200 Billion
· Tech Update – tech’s big test today – the pattern throughout tech earnings, going back to
INTC a few weeks ago, has been for great earnings reports to be met w/selling pressure; as of
last Fri, tech was one of the weakest groups YTD, coming off of its ’09 performance, when it
was the best performing sector. CSCO last night represents a test for tech – the co’s Jan-end
Q #s came in better than expected, mgmt guided ahead of the St for Apr, and tone on the call
was positive (mgmt talked about a broad upturn, seen across product lines and geos). There
were caveats for the bears (like a big uptick in raw materials inventories, extended lead times,
mgmt talking about ramping up hiring, guidance for Apr being helped by an extra week and
recent acquisitions, and Chambers’ caution to analysts not to ratchet up ests beyond the Apr
Q), but if CSCO last night isn’t enough to help give a boost to tech, it could be a further blow

to sentiment. Separately, on the tech inventory front, JPMorgan’s C Danely has his
proprietary communications inventory update out this morning – “shows that total supply
chain inventory decreased 15 days QoQ from 74 days in 3Q09 to 59 days in 4Q09, below the
normalized level of 87 days and the average Q4 inventory level of 76 days”

· Credit Cards – AXP, V, MA - V earnings after the close Wed came in better than expected.
AXP held an analyst day conf call (started late in trading Wed) and repeated that conditions
continue to show signs of improvement on the credit front and that billings for the month of
Jan came in ahead of expectations. AXP said it would be reinvesting a lot of its credit benefit
back into the business in ’10 (so talked about higher opex for ’10). MA reports earnings
Thurs before the open. The next major catalyst for the group beyond earnings will be the
master trust #s for Jan (which will hit Tues 2/16).

· Regional Banks – the group in the US has been under pressure for the last 2 days amid
worries of capital raises; JPMorgan’s V Juneja has a note this morning on this subject. “We
estimate that SunTrust may have to raise around $2 bil to repay $4.9 bil of TARP. We
project Regions would have to raise about $1.8 bil to repay $3.5 bil of TARP. By our
estimates, Fifth Third would need to raise $1.7 bil of common equity to repay $3.4 bil of
TARP” (see full note link below under “Financials”).

· Consumer – update – bunch of earnings this morning (inc. CLX, BKC). Also – today is
same-store-sales day (companies will be posting Jan sales) – COST #s hit early this morning
(came in pretty much inline). COST’s pos. commentary on food price inflation could be
helpful for the standalone grocers today. On the art front, Sotheby’s (BID) posted a better
than Impressionist & Modern evening sale in London last night; Auctioned ₤146.8 million
(including the buyers’ premium), well above the high end of the pre-sale range of ₤69-102
million (excluding the buyers’ premium).

· Men at Work stole Down Under - Australian band Men at Work copied a well-known
children's campfire song for the flute melody in its 1980s hit Down Under and owes the

· Moody’s warns on US credit rating (this headline actually hit earlier in the week for is a
feature article on the FT home page) – it didn’t cause much impact when it first crossed the
wire - “Unless further measures are taken to reduce the budget deficit further or the economy
rebounds more vigorously than expected, the federal financial picture as presented in the
projections for the next decade will at some point put pressure on the triple A government
bond rating,”

· Mortgage spreads – how much an impact will the end of Fed buying have? In a survey
of some of the 4,000 people attending a securitization conference this week, 73 per cent of
respondents expected spreads on mortgage-backed securities to go “much wider” when the
Fed ceases buying mortgage bonds; many portfolios are very underweight mortgages at this
point – FT

· Job creation -
Sens. Chuck Schumer (D-N.Y.) and Orrin Hatch (R-Utah) released a plan
Wednesday to give tax breaks to companies that add new workers, a proposal that is likely to
become a key component of the jobs bill Senate Democratic leaders are hoping to unveil this
week. Washington Post.

· Korea
- Obama decided that North Korea should remain off the U.S. list of states that
sponsor terrorism – Bloomberg

· Greece, Portugal, Spain Sovereign CDS Sharply Wider Thurs morning; follows news
Wednesday that the European Commission had put Greece under more pressure to cut its
deficit; that the Portuguese government sold only EUR300 million of treasury bills at an
auction, compared with an indicative offer of EUR500 millon; and that the Spanish
government had raised its budget deficit forecasts for 2010 through 2012. Spanish borrowing
costs spiked during an auction today – the country sold 2.5 billion euros ($3.5 billion) of the
securities to yield 2.63 percent today, compared with 2.14 percent the last time the notes were
issued on Dec. 3. Spreads on a credit default swap index of developed European sovereign
borrowers rose above 100 basis points for the first time Thursday. Traders note “panic
buying” in sovereign CDS. There is worry that Greece won’t be able to achieve its budget
cuts as its largest union (GSEE) is planning a mass strike on Feb 24. DJ/Bloomberg

· Greece – the IMF on Thurs reiterated that it stands ready to offer assistance to Greece,
although understands that other members of the EU would like the resolve the matter
themselves – DJ

· Greece under EU protectorate as funds shift fire to Portugal; One banker described
events as eerily similar to market confusion before the failure of Bear Stearns and Lehman
Brothers in 2008, this time involving sovereign states rather than banks. It is assumed that
Europe must in the end rescue Greece, but Germany is so far sticking to its "no bail-out"
mantra and nobody knows for sure how the drama will end. London Telegraph.

· U.K. house prices
rose for the seventh consecutive month in January due to a
combination of increased demand and low supply of properties to buy on the market, but the
gain was smaller than in previous months, mortgage lender Halifax said Thursday.
· U.K. Car Scrappage Program Extended for a Month. The U.K. government extended its
car scrappage program for a month until the end of March or whenever the available funds
run out, whichever is the sooner, Business Secretary Peter Mandelson announced.
· U.K. car registrations rose by 29.8% in January to 145,479 units the Society of Motor
Manufacturers and Traders said in a statement on its Web site today.
· China curbs companies’ capital raising - regulators have imposed a partial ban on listed
companies raising capital from equity markets to repay bank loans or replenish working
capital; the latest move by the country to extract liquidity from the monetary system; At least
34 companies, mostly in the industrial and real estate sectors, have cancelled or reduced plans
to raise money through private placements or secondary offerings – FT
· Shanghai banks’ ratio of delinquent mortgages would almost triple should prices in China’s
second- most expensive property market fall 10 percent – Bloomberg
· China banks - Banks in China led the retreat after China’s sovereign wealth fund denied
reports that it was looking to buy shares in the country’s top banks (FT)
· China hits back at US over trade and currency - Chinese foreign ministry spokesman Ma
Zhaoxu said the value of the Chinese yuan was not the main reason for the country's trade
surplus with the US. BBC
· China should let the yuan strengthen before raising interest rates, to avoid fueling
inflows of capital that may stoke inflation, government economist Zuo Chuanchang said.
owner years of royalties, a court ruled today (The Guardian).

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