Friday, February 19, 2010

Today’s Top Stories & Catalysts 02.19.10

Morning Levels:
· SP futures -8pts to 1097.5 after trading as low as 1093 overnight
· Euro Stoxx -0.7% but off worst levels
· Japan dn 2%; China closed; Hong Kong dn 2.6%; India dn 0.8%; Australia dn 0.4%;
· USD (DXY) up 1%
· Gold down $10 to $1109
· Crude down $1.1 to $78
· Corp Credit IG spreads narrower by ½ a bp and HY up ¼ of a pt.

Today’s Top Stories & Catalysts

· Credit Call this morning from E Beinstein - In this week’s publication we remove our
tactical underweight position recommended in January, and we again expect bond
spreads to fall. Since mid-January bond spreads and yields have widened, HG bond supply
pressure has abated, and the European Union support of Greece has been confirmed. Also, the
political rhetoric against the banking industry from Washington has slowed. The economic
data over the past month continues to support our view of a gradual economic recovery,
though more so in the US than in Europe. Finally, 4Q earnings were very strong. They
confirm that company credit worthiness continues to improve with lower costs, debt, and
leverage and higher revenue. Bank earnings suggest we are at or near the peak of the credit
loss cycle, positive for future bank earnings.
· Fed Action - discount rate spooking markets (US$ strong, eqties/TSYs weak), but was
expected and doesn’t signal a shift in monetary policy. From JPMorgan’s B Kasman: “This
move does not alter our view that the Fed's first policy rate hike will come in 1H11”; Fed
officials made comments Thurs night in wake of the discount rate action and downplay the
potential for near-term action on Fed Funds rate. The fact the discount rate hike didn’t come
during an FOMC monetary policy decision meeting emphasizes the fact that this wasn’t a
monetary move (see more in “Fed Update” section below).
· Greece - Greece says a complex debt deal with US investment bank GS that has come under
scrutiny by the EU was legal and will be explained in a letter being sent by the finance
minister to the European Union. Greece has until today to supply answers about how it used
the transactions (NY Post). Also today, S&P lowered its credit ratings on all 'AAA' rated
Greek securitization tranches to 'AA' on account of its view of increased Greek country risk
and Moody's is Reviewing For Downgrade Aaa Ratings Of Most Greek Structured Finance
And Covered Bond Transactions
· Eurozone eco data out overnight was mixed with UK retail sales falling more than expected
and French Business Sentiment worse while on the flip-side, Italian IP grew more than
expected and Jan PPI rose more than expected.
· In Asia, China remains closed for New Year’s Holiday but Japan and HK were both off more
than 2%. Interestingly, Chinese equities options activity signals growing concern over
Chinese stock prices with options traders paying the most to protect against a drop in Chinese
stocks since the depths of last year’s global financial crisis (Bloomberg).
· Tech update – pretty much more of the same from tech Thurs night; DELL and IM were
both positive on demand trends (similar to what we heard back in Jan and Wed night).
However, both companies had disappointing news on the margin front and the stocks sold
off. In the case of DELL, both gross and op margins were a touch light (for the gross miss,
Dell talked about a larger consumer mix, which has lower margins, and rising component
costs). IM missed on the gross front although beat on op margins (w/EPS overall beating).
The next big catalyst for tech will be the sell-side conference season and the mid-Q updates -
Goldman has a conf next week and Morgan Stanley the week after - these forums will give
companies a chance to update on the status of Q1 (i.e. are things still pacing better-thanseasonal;
how is the outlook for June shaping up; etc). Also - we will start getting formal
mid-Q updates in early Mar.
· Focus for Consumer space today likely to be centered on CAGNY, Grocers and Retail.
1) For the Grocers , the Food-at-Home component of the CPI release at 8:30amET will be in
focus for signs of continued sequential improvement (recall yesterday Processed Food PPI
turned positive and both WMT/WINN made pos comments re food deflation bottoming).
This morning the WSJ’s Heard on the Street is cautious on the reflation trade. 2) CAGNY
2010 wraps up today with presentations from DF, ENR AVP and KO. DF’s presentation will
be closely watched following the stock’s recent sell-off on earnings while ENR’s presentation
will be one of the few occasions in which management talks to the St.(co does not hold a
quarterly conf. call). Recent concerns for the stock have been over increasing price
competition in the battery segment (see J. Faucher’s note from 1/21 “Competition Heating Up
in Batteries”
3) In Retail, JCP will be the next large retailer to report earnings following WMT
· “Volcker Rules” - U.S. Senate Banking Committee members are considering a watered
down version of the 'Volcker rule' unveiled last month; Committee members are leaning
against a strict ban on banks' proprietary trading and are considering requiring regulators to
strengthen supervision of banks that are involved in such activities – Reuters
· Bank capital standards – the White House is considering issuing an executive order forcing
banks to adopt stiffer capital standards; while WH officials are still hopeful that the Senate
can deliver a piece of legislation that would address capital standards, they are prepared to
move forward w/an executive order if need be. FT
· Bank profits - Fed Move May Signal End to Easy Bank Profits; curve could start to flatten
out, crimping bank profits; Banks have been able to borrow money cheaply and put it to work
in lucrative ways,

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