Morning Review - 101110

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.
com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
Stocks climbed higher Friday, with the Dow closing above the key 11,000 mark for the first time since May 3, as Morning Markets Briefing
investors speculated weak labor market data will spark Fed actions to stimulate the economy (S&P 500: +61
bps, Dow: +53 bps, Nasdaq: +77 bps). All 3 major US indices closed out the week with gains in excess of 1.3
percentage points. The Friday jobs report showed nonfarm payrolls dropped 95K in September, while private Market Commentary: October 11th, 2010
sector employment saw a gain of 64K workers, less than the 75K that economists had predicted. The A snapshot of the markets through the lens of
unemployment rate was constant at 9.6%. Meanwhile, wholesale-level inventories grew at a higher-than- ConvergEx.
expected pace of 0.8% in August, down from 1.5% growth the prior month.
Pay Attention! Never Mind… We Can’t.
Summary: Human attention spans are notoriously short: only a matter of seconds for “complete” attention, and 7-8 minutes for something that passes for general interest. That’s always
been the case, as far as behavioral psychologists can tell. What is changing behavior towards even shorter spans, apparently, is the pervasive power of the Internet. Shorter attention
spans aren’t just a challenge in everyday tasks like childrearing (high school students study much less than 50 years ago) but also capital market-related phenomenon like perceptions of
volatility and risk. Moreover, shorter attention spans may well be playing a role (whether they know it or not) in policymakers’ decisions around how to boost
investor/managerial/consumer confidence. The tradeoff, of course, is what may grab attention today could well have very negative ramifications tomorrow.
The simplest description of successful investing could well be something like this: “Accurately predict changes in group perception and find securities that leverage those predictions.” You
can usually summarize a successful investor’s edge into an observation of what new “reality” they saw before others. Warren Buffet – the value of global brands and their residual
streams of income. John Paulson – the impending mortgage crisis. George Soros: central bank currency interventions are just artificial sources of supply/demand with little long-term
impact on fundamental price trends.
Those changes in investor perception are tied to the psychology of markets and how humans process information. That, in turn, boils down to a nebulous but important concept called
“attention.” Change in perception means a change in what gets our attention.
Market Commentary – Pages 1-4, Equities/Conferences & Earnings – Page 5, Fixed Income – Page 6, Options – Page 7, Exchange-Traded Funds/Indexes – Page 8, Social Media &
Internet Blogs Top Stories – Page 9
1
©2010 BNY ConvergEx Execution Solutions LLC. May not be redistributed without express permission. All rights reserved
1
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
We can examine just what holds Americans’ attention – and for how long – by looking at the most popular websites and how long we stay on them. The attached chart shows the Top 30
websites and how long, on average, we use them at one stretch, courtesy of www.alexa.com. A few observations:
• Facebook is the hands-down winner in terms of time spent on the site. Every visitor spends an average of 32 minutes perusing the goings-on of friends and family and updating
their own profile and information.
• The only other sites that can hold users’ attention for 10 minutes or longer are Yahoo! (presumably because of email and news content), youtube (where the average length of a
video is around 2 ½ minutes), Google, and shopping/classified sites craigslist and eBay.
• The other 24 sites in the top 30 only hold user attention for 3 – 8 minutes apiece. Sports trumps hard news, with ESPN (8 minutes) trouncing The New York Times and CNN at 5
minutes each. The search for knowledge seems to flicker only briefly, with Wikipedia at 5 minutes. Personal finance is also a lower attention span effort, with Paypal and Bank
of America websites coming in at the 5 minutes mark as well.
• Financial news is generally on the lower end of the attention spectrum. While not in the top 30 sites, www.wsj.com only holds readers on the site for about 3.5 minutes,
according to alexa, although this statistic does spike to just over 4 minutes during periods of market volatility. Bloomberg’s online offering is about the same at five minutes,
and the Financial Times website holds the typical user’s attention for just shy of three minutes.
All this is a long stretch away from the statistic once used by The Wall Street Journal to promote advertising in the newspaper – that the typical reader spent almost an hour reading the
daily Bible of capitalism.
It isn’t just online where attention spans prove short.
• Filmmakers have, over the last 100 hundred years, figured out how to edit movies to fit human’s relatively short ability (7-8 seconds or so) to maintain focused attention. In fact,
behavioral psychologists have parsed out the editing process of 150 popular movies and found that they tend to share the same short-cycle editing that dovetails with human
attention (see http://www.joyoffilmediting.com/?p=2603).
• High school students study significantly less now than fifty years ago, according to another study. High school seniors in 1961 spent an average of 40 hours per week hitting the
books; their counterparts today study for an average of 27 weeks. There are certainly productivity enhancements that should push that number down – word processing versus
the typewriter, and the Internet versus the encyclopedia and the library card catalog, to name two examples. (See the study results here: http://education-
portal.com/articles/Working_Hard_or_Hardly_Working_Analysis_Shows_Decline_in_Studying_Among_Todays_College_Students.html). But it does appear that these
productivity tools have simply allowed for less study time rather than improved the amount of content consumed. Where has the time gone? If the alexa data is accurate,
Facebook and youtube appear to be some of the answer.
• Use of the Internet and its relationship to attention span is a relatively new field of study, since the Net itself is both relatively new and constantly evolving. Yet, at least some
psychologists think it is changing human attention to be even shorter than its seemingly pre-wired 7-8 minute span and eight second “complete” mental focus.
(See http://news.bbc.co.uk/2/hi/science/nature/1834682.stm.)
The capital markets live in this world, where human attention spans are short and our consumption of information increasingly caters to this fact. While I don’t pretend to think that this
phenomenon alone drives market prices, just consider what an innately short human attention span, combined with shorter “bursts” of information gathering, might be doing to markets
and our perceptions of them.
2
• It makes stocks seem more volatile than their historical norms, even if statistical measures like the CBOE VIX index say they are not. When I started in the business in 1991, most
retail investors got their investment information from the stock and mutual fund listings in the newspaper. Quote screens were for professionals only. Now, anyone who wants it
can get intraday real time quotes for free online.
That instantaneous access to price information may fit the 7-8 second span for a human’s “complete” attention, but it also reinforces the notion that stocks are risky investments,
as they can move up or down a percent or two in a day and yet close unchanged. I can’t help but think the retail investors have increasingly chosen fixed income investments
as much for their lack of intraday volatility as much as for their overall lack of price movement.
• Economic policymakers are on a much tighter leash as a result of inherently short human attention spans and the small amount of time people spend consuming business news.
Remember that sub-five minute hold that sites like www.wsj.com and www.ft.com have on their readers? That’s not just a problem for the salespeople that want to sell ad space
on those sites. It is a deeper, more existential issue for the Federal Reserve, which uses policy tools that take 6-12 months to take hold, if not longer.
I cannot argue that either the Fed’s or current Administration’s efforts to revive the economy have been effective; at best, they created a blip in demand that has not taken
lasting hold in the broader economy. At the same time, it is easy to see that naturally short attention spans and bite-size investor consumption of financial news also give little
time for the blunt tools of fiscal and monetary policy to take root in consumer and investor confidence. “If it is not working right away, it must not be working at all” would be
a logical conclusion for investors that rely on shorter and shorter attention spans to filter economic data and news.
The average reader can absorb 250 words a minute, so at this point you have spent four minutes on this note. I won’t make you go the full 7-8 minutes of normal attention span, but
rather wrap this up in less than one minute.
My essential point is that human attention spans are short and the way we consume information is likely making them shorter. Since a portion of the current economic malaise is
fundamentally tied to a lack of investor, consumer and managerial confidence, policymakers are clearly taking steps that address the need to make capital markets look better
immediately. That’s fine for now – the market is clearly responding to the Fed’s implicit promise of another round of monetary stimulus. What is less clear, of course, is the longer-term
price to pay for appealing to the short-term needs of human attention.
3
4
U.S. EQUITIES
Shares of AA soared 5.7% after it kicked off 3rd quarter earnings season by topping both profit and revenue estimates, as well as raising it forecast for global aluminum
demand growth this year to 13% from 12%. FO (+7.4%) and JCP (+2.7%) strengthened on news that Pershing Square Capital Management purchased 11% and 16.5%
stakes in the respective companies. Meanwhile, feed stocks including SFD (-6.7%), PPC (-7.5%) and TSN (-7.7%) traded lower due to an expected decline in corn stocks
caused by weather conditions over the summer. Among financials, BAC (-1.0%) announced it would halt foreclosure proceedings in all 50 states, while PNC (0.0%) said it
would stop sales of foreclosed homes in 23 states for 30 days.
Important Earnings Today (with Estimates) From…

 GPN: $0.69 S&P Futures
Source: Bloomberg One Day (High –1162.75; Low – 1145.50):
Important Conferences/Corporate Meetings Today:

None
Prior Day SPX (High – 1167.73; Low – 1155.58; Close – 1165.15): Three Day (High – 1163.75; Low – 1147.25):
Source: Thomson ONE
5
FIXED INCOME
Two-year Treasury yields continued the streak, sliding to another record low of 0.3351% before settling at 0.34%. Five-year yields also hit a record low for a 5th
consecutive day, falling 3 bps to 1.0686%, as a disappointing jobs report fueled expectations the central bank will purchase assets to stimulate the economy.
Meanwhile, 10-year debt yields dropped to the lowest level intraday (2.3302%) since January 2009 before closing the day at 2.38%, as the benchmark security gained
for a 4th week.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with

Consensus):
None
6
U.S. EQUITY
OPTIONS
SPX – Despite a brief selloff in before the open, the underlying index spent most of the regular trading session comfortably near unchanged to positive with a range of -0.2 to
+0.8, ending +0.7%. The implied volatility as measured by the VIX ended down about 4%, as would be expected on a quietly up day. There were a couple of large ‘disaster’
protection trades. The November 850 puts were bought over 6,000 times for $0.45-50 and the December 725 puts were bought about 15,000 times for $0.55. In a more typical
bearish trade, the December 1185 calls were sold 8,000 times @ $27.00 when the futures were about 1155.
ETF – The market trended higher despite the release of bleak jobs data; the VIX closed lower on the day and overall options volume was light. We highlight a large print in GLD
as one investor positioned for downside through buying 20,000 Dec 118 Puts and selling 40,000 Dec 100 puts in a 1X2 put spread. In sector flow XRT (Retail) had one bearish
investor buying the Jan 42 / 36 put spread 20,000 times. DBA (Agricultural Fund) saw elevated volumes as call buyers were out at the Nov 29 and 30 strike with one investor
purchasing ~8,500 Nov 30 Calls outright. Lastly, in SDS (UltraShort S&P500) paper sold 10,000 Dec 35 Calls.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 10/ 4/ 2010 10/ 5/ 2010 10/ 6/ 2010 10/ 7/ 2010 10/ 8/ 2010 30-Day Implied Vol
1 DTV MKC MKC MKC MKC 48.20
2 MFE MFE PTV MFE MFE 5.76 BIGGEST MOVERS
3 PTV DTV DTV PTV PTV 7.93 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
4 RSH PTV MFE DTV DTV 22.52
PDCO 25.91% 25.84 MKC -27.72% 34.45
5 PG RSH RSH RSH RSH 39.21
28.78 AIV 18.44% 39.06 PEP -21.60% 16.14
6 CLX CLX CLX CLX MYL
7 FSLR FSLR FSLR PCS CLX 18.24 RL 16.90% 34.19 MTB -20.66% 31.16
8 FDO PG PG MYL HSP 32.66 M 12.79% 40.54 MAR -18.08% 33.36
9 MJN BMC APOL PG MRK 23.97 MEE 12.23% 50.56 BMC -17.40% 41.30
10 HSP STZ BMC APOL PCS 50.63 MFE 10.73% 5.58 ANF -17.27% 44.97
11 APOL HSP MRK FSLR FSLR 47.14 CPWR 10.19% 45.20 ROST -13.42% 26.35
12 KMB MRK HSP M APOL 48.85 C 9.52% 33.34 ADBE -10.36% 29.81
13 MRK KMB CA HSP M 39.20 IBM 9.28% 18.88 PNW -9.70% 19.11
14 HRS VRSN PCS MRK PBI 26.30 PCS 8.45% 51.74 DVA -9.52% 24.90
15 SWY HRS CHRW KMB VRSN 31.02
16 BMC CA QCOM SJM CHRW 24.86
17 CA MJN GME CHRW SJM 21.77
18 MYL APOL VRSN PBI AMGN 28.63 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
19 STZ GME MYL CA MJN 33.43 historical volatility ratio. Above we identify the 10 most positive and negative movers.
20 GME MYL SJM VRSN SWY 29.66
21 T CHRW KMB AAPL K 20.17 The table to the left represents the 25 highest 30 day implied to historical volatility
22 VRSN SJM MJN HRS HRS 33.80 ratios within the S&P 500 companies. The green represents names new to the list while
23 AGN KG ABT AMGN KMB 14.71 the red represents names that have fallen out.
24 CHRW SWY HRS QCOM FTR 32.29
25 CL FDO AAPL GME GME 36.43
SJM AGN FDO ABT PG
PBI T SWY MJN CA
AMGN CL KG PCS AAPL
MAT STZ QCOM
7
Exchange-Traded Funds/Indexes
Prior Day Peformance of Largest ETFs by Asset s S&P 500 Sect or ETFs
Name (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf YTD Perf Sector Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 0.56% Energy XLE 1.25% 2.37% Telecomm IYZ -0.09% 9.24%
SPDR Gold Shares GLD N/ A 0.99% Health XLV 0.26% -0.97% Technology XLK 0.56% 1.66%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkt s 1.20% Industrials XLI 0.83% 15.85% Consumer Discretionary XLY 1.03% 15.42%
iShares MSCI EAFEIndex EFA Foreign Large Blend 0.65% Utilities XLU 0.31% 2.68% Financials XLF 0.27% 2.08%
iShares S&P 500 Index IVV Large Blend 0.53% Consumer Staples XLP 0.21% 6.50% Materials XLB 1.97% 3.79%
Prior Day Top Volume ETFs Currency ETFs
Name Ticker Category Shares Traded Currency Ticker 1-Day Perf YTD Perf Currency Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 158,094,030 Australian Dollar FXA 0.49% 9.54% Mexican Peso FXM 1.17% 4.90%
PowerShares QQQ QQQQ Large Growth 77,347,324 British Pound Sterling FXB 0.58% -1.49% Swedish Krona FXS -0.20% 7.13%
Financial Select SPDR XLF Specialty - Financial 57,535,671 Canadian Dollar FXC 0.73% 3.67% Swiss Franc FXF 0.34% 7.15%
Financial Select SPDR XLF Specialty - Financial 55,426,570 Euro FXE 0.09% -2.91% USD Index Bearish UDN 0.29% -0.11%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkt s 46,990,061 Japanese Yen FXY 0.37% 13.07% USD Index Bullish UUP -0.36% -2.95%
Prior Day Top Performers VIX ETNs Fixed Income ETFs
Name Ticker Category Daily Return Name Ticker 1-Day Perf YTD Perf Bonds Ticker 1-Day Perf YTD Perf
PowerShares DB Agriculture Dble Long ETN DAG N/ A 17.98% iPath S&P 500 VIX VXX -4.58% -54.80% Aggregate AGG 0.20% 5.46%
Teucrium Corn Fund ETV CORN N/ A 14.16% Short-Term Futures ETN Investment Grade LQD -0.10% 8.60%
PowerShares DB Agriculture Long ETN AGF N/ A 11.28% High Yield HYG 0.34% 2.04%
iPath DJ-UBS Grains TR Sub-Idx ETN JJG N/ A 10.56% iPath S&P 500 VIX VXZ -0.82% 9.63% 1-3 Year Treasuries SHY 0.00% 1.80%
ELEMENTS MLCX Grains Index TR ETN GRU N/ A 9.36% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.04% 12.84%
20+ Year Treasuries TLT -0.44% 15.94%
Ot hers
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.99% 22.69% Crude Oil USO 1.95% -7.97%
Silver SLV 3.22% 37.43% EAFEIndex EFA 0.65% 2.88%
Natural Gas UNG 1.04% -42.16% Emerging Markets EEM 1.20% 11.40%
Major Index Changes: SPDRs SPY 0.56% 4.57%
None
ETFs in the Headlines and Blogs:

 Three Real Estate ETFs to Watch if the IMF is Right - http://etfdb.com/2010/three-real-estate-etfs-to-watch-if-the-imf-is-right/
 ETF Update: The Lure of Brazil - http://seekingalpha.com/article/229036-etf-update-the-lure-of-brazil
8
Top Online Social Networking Stories
Latest Popular Digg.com Business News

 Why Your Company Needs Paid Sick Days - http://www.focus.com/fyi/human-resources/your-company-needs-sick-paid-days/
 Why Walmart struggles in India - http://www.globalpost.com/dispatch/india/101006/walmart-economy
 America’s Most Expensive Colleges - http://www.forbes.com/2010/10/04/americas-most-expensive-colleges-business-most-expensive-colleges_slide.html
Calculated Risk
 Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - http://www.calculatedriskblog.com/2010/10/employment-population-ratio-part-
time.html
 September Employment Report: 18K Jobs Lost ex-Census, 9.6% Unemployment Rate - http://www.calculatedriskblog.com/2010/10/september-employment-report-18k-
jobs.html
The Big Picture

 NFP -95K - http://www.ritholtz.com/blog/2010/10/nfp-95k/
The New York Times

 Flawed Foreclosure Documents Thwart Home Sales - http://www.nytimes.com/2010/10/08/business/08frozen.html?_r=1
 The End of the Tunnel - http://www.nytimes.com/2010/10/08/opinion/08krugman.html
Bespoke Investment Group

 Dem Turnaround Yet to Happen - http://www.bespokeinvest.com/thinkbig/2010/10/8/dem-turnaround-yet-to-happen.html
Zero Hedge
 BLS Issues Update on Perpetual Upward Data Bias: 366,000 Overestimate for Year Ended March 2010 - http://www.zerohedge.com/article/bls-issues-update-perpetual-
upward-data-bias-366000-overestimate-year-ended-march-2010
 Goldman Finds That QE2 is Now Mostly Priced In - http://www.zerohedge.com/article/goldman-finds-qe2-now-mostly-priced
 Payrolls Plunge by 95K, Unemployment Rate 9.6%, Private Jobs Up 64K, U-6 Shoots Up to 17.1% from 16.7% - http://www.zerohedge.com/article/payrolls-plunge-95k-
unemployment-rate-96-private-jobs-64k-u-6-shoots-171-167
The Baseline Scenario

 Will the Volcker Rule Really Be Enforced? - http://baselinescenario.com/2010/10/07/will-the-volcker-rule-really-be-enforced/
Econbrowser
 The Incidence of Unemployment and Underemployment, by Income - http://www.econbrowser.com/archives/2010/10/the_incidence_o_1.html
9
GENERAL DISCLOSURES
This presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is provided for general informational
purposes only and should not be relied on for any other purpose. It is not, and is not intended to be, research, a recommendation or investment advice, as it does not constitute
substantive research or analysis, nor an offer to sell or the solicitation of offers to buy any BNY ConvergEx Execution Solutions LLC (“ConvergEx”) product or service in any jurisdiction. It
does not take into account the particular investment objectives, restrictions, tax and financial situations or other needs of any specific client or potential client. In addition, the information is
not intended to provide sufficient basis on which to make an investment decision. Please consult with your financial and other advisors before buying or selling any securities or other
assets. This presentation is for qualified investors and NOT for retail investors.
Please be advised that options carry a high level of risk and are not suitable for all investors. To receive a copy of the Options Disclosure Document please contact the ConvergEx
Compliance Department at (800) 367-8998.
The opinions and information herein are current only as of the date appearing on the cover. ConvergEx has no obligation to provide any updates or changes to such opinions or
information. The economic and market assumptions and forecasts are subject to high levels of uncertainty that may affect actual performance. Such assumptions and forecasts may prove
untrue or inaccurate and should be viewed as merely representative of a broad range of possibilities. They are subject to significant revision and may change materially as market,
economic, political and other conditions change.
Past performance is not indicative of future results, which may vary significantly. The value of investments and the income derived from investments can go down as well as up. Future
returns are not guaranteed, and a loss of principal may occur. The information and statements provided herein do not provide any assurance or guarantee as to returns that may be
realized from investments in any securities or other assets. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a
limited view of a particular market.
The opinions expressed in this presentation are those of various authors, and do not necessarily represent the opinions of ConvergEx or its affiliates. This material has been prepared by
ConvergEx and is not a product, nor does it express the views, of other departments or divisions of BNY ConvergEx Group, LLC and its affiliates.
10

Morning Review - 101110

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Morning Review - 101110

Uploaded by

Copyright:

Available Formats

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.

Pay Attention! Never Mind… We Can’t.

It isn’t just online where attention spans prove short.

Important Earnings Today (with Estimates) From…

Important Conferences/Corporate Meetings Today:

Source: Thomson ONE

Source: Bloomberg Source: Bloomberg

Today’s Important Economic Indicators/Events (with

CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

ETFs in the Headlines and Blogs:

Top Online Social Networking Stories

Latest Popular Digg.com Business News

The Big Picture

The New York Times

Bespoke Investment Group

The Baseline Scenario

You might also like