Friday, February 19, 2010

Week In Review

Week In Review

· Equity Levels: the SP500 climbs 3% this week, the Nazz 2.7%, and the R2K 3.4%. On a YTD basis, the SP500 is still down small (off 0.25%) while the RTY is up 1%.

· Equities Update – the desk continues to note an improved tone from investors; Fri 2/5 increasingly appears to have been an (interim?) low for this pullback, as a steep sell-off that day was stopped at ~1040 and the market was able to rally back into the green. Larger vanillas are starting to nibble on the long side while shorts are increasingly reluctant to lay out fresh exposure and are using any pullback to cover. Whereas for most of late Jan/early Feb the trend was to sell rallies, we are shifting back a bit to the ’09 pattern of buying dips; the market over the last couple weeks has grown much more resilient. Volumes and conviction levels still aren’t all that high and investors are preferring to take action via indices/ETFs vs. individual stocks. Also – the tape drifted higher during a holiday-shortened week in the US when China wasn’t trading (or producing news) – things could get tougher next week as Wall St gets back to full strength and Asia starts trading again. Technically, we made some progress on the upside (finally breaking up above the 1100 resistance level) but couldn’t quite sustain a move north of the 50day MA (1108-1109 on the sp500 cash).

· Helping equities this week: 1) some relief on Greece; 2) M&A activity (SPG/General Growth and TRA/Yara were the big notable deals); 3) earnings reviewed well (Barclays, MRK, GPC, Q, and DRI were all taken as positives; 4) eco #s coming in strong – Empire and Philadelphia survey readings both came in better than expected (although jobless claims #s in the US were more tepid).

· Equity sectors – the strength was pretty broad this week. The financials climbed ~4% w/the banks outperforming; the BKX index is up ~9% on a YTD basis and continues to outperform the market. Strong credit card master trust #s, along w/pos. earnings from European financials, helped to rally the group (Barclays was up 20% over the last 5 trading sessions – the co reported earnings Tues morning). The REITs climbed ~6% this week, helped in large part by the General Growth/SGP deal, although the space is still down 1.7%. Industrials, media, utilities, materials, transports were all up 3-4% this week. HC underperformed, due to weakness in the HMOs (the HMOs fell ~1% on the week, hurt after Washington officials made comments critical of recent proposed rate hikes). The homebuilders were flat this week although are still up ~13% on the week (the market’s best performing group on a YTD basis).

· Best Performing SP500 stocks this week: SII (SLB takeover article in WSJ), CLF (earnings/materials strength), WFMI (earnings), X (materials strength), ODP, JCP (earnings), IRM, INTU (earnings), RRC, ATI, PCLN (earnings), CHK (earnings), JDSU, DE (earnings; note JPMorgan upgraded the stock this week), SPG, AKS, BAC, IP, SNDK

· Worst Performing SP500 stocks this week: WYNN (sympathy w/LVS and MGM earnings), FMC, DELL (earnings), UNH, NVDA (earnings), WLP, HUM, APOL (profits warning), MA, PHM, AMZN, DHI, IGT, ORLY, GPS, CI, AVY, SLB, KEY.

· Treasuries – Treasuries sold off across the board this week before bouncing slightly on Friday following the softer CPI (2yr yields climbed about 10bp to 0.92%; 10yr yields climbed ~8bp, and 30yr yields inched up ~5bp). The 2-10 spread was flattish on the week. Weighing on prices: 1) record TSY auction size coming up (during the week of 2/22, Treasury will auction a total of $126 billion in coupon debt. This includes $118 billion in two-, five- and seven-year conventional notes plus $8 billion worth of $30-year inflation-linked securities); 2) FOMC minutes said that several Fed members discussed selling assets; 3) worries about China ownership (China sold a record amount of its U.S. Treasury holdings in December (it sold $34B, bringing its holdings down to $755.4B); Japan is now the largest holder for the first time since Aug ’08).

· FX – the DXY extended its march higher this week (it was up about ~0.5%), helped not so much by more European worries (although was continues to give a bid to the buck) but b/c of the growing differential between US/European policy (US actions/rhetoric becoming more hawkish although are still accommodative) and eco growth. Update from JPMorgan’s J Normand - Over the past six weeks several major central banks have surprised with the timing and course of their exit strategies. The net result has been dollar positive, and while it is premature to conclude that the dollar is transforming from a funding to an investment currency, it can still rally further this month. Policy remains hazy, data are mixed and positions are not overly long dollars. Stay long USD vs commodity currencies and add shorts in European FX to the basket.

· Europe – there were a ton more headlines about Greece and other European sovereigns, but equities shrugged off the noise this week for the most part. The European Finance Ministers meeting this week provided about as much detail as last week’s broader EU Summit (there was a commitment made to aid Greece but only should the country reach a crisis state, which it hasn’t, and no specifics were provided about precise aid mechanisms). Spain did get off a bond sale this week and had decent demand and press reports have suggested that Greece will attempt to come to market next week to rebuild market credibility. There was a NYT article that received a lot of attention accusing “Wall St” of aiding Greece and other sovereigns of hiding their true debt loads from the EU. European equities traded higher – the DJ Euro Stoxx was up 4.5% while the FTSE climbed >4%. However, FX remains a drag and subtracted from the gains (priced in US$, the DJ Euro Stoxx gain of 4.45% fell to 4.12% and the FTSE’s 4.19% rally fell to 2.8%). The UK pound dipped 1.5% (hurt in part by a larger than expected budget deficit) and the Euro was off small. Financials were some of the best performing stocks in Europe this week following a bunch of decent earnings reports – Barclays surged 20% over the last 5 days while RBS and Lloyds moved up ~8-10% in sympathy (those latter two report Thurs and Fri, respectively). Over on the DJ Stoxx, BNP advanced 11% and ING was up 8% (both on earnings). L’Oreal and Daimler were laggards (both on back of disappointing earnings).

· Credit – as strong as stocks were this week, credit had an even larger rally; IG tightened nearly 8bp this week while HY rallied nearly 3bp. In JPMorgan’s weekly credit update (published Fri morning by E Beinstein), we removed 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.

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