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Morning Review - 091410

Morning Review - 091410

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09/14/2010

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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 gained Monday (S&P 500 +1.1%, Dow +0.8%, Nasdaq +1.9%), boosted by new global banking rules that were less stringent than feared and a report out of China showing that industrial output rose almost 14% year-over-year last month. For the first time since early August, the S&P 500 broke through its 200-day moving average. The U.S. Treasury monthly budget report for August showed a deficit of $90.5 billion for a fiscal year-to-date deficit of $1.26 trillion, trailing the $1.38 trillion deficit at this time last year. Congress returns from its month-long break this week, with the small business jobs bill as one of the items atop the agenda. Tomorrow Kroger and Best Buy are slated to announce earnings before the bell, while retail sales are due out at 8:30am.

Morning Markets Briefing
Market Commentary: September 14th, 2010 A snapshot of the markets through the lens of ConvergEx.

Cooking Up a Sustainable Rally – Analyst Revenue Estimates a Key Ingredient
Summary: Our monthly review of analysts’ revenue expectations for the 30 companies of the Dow Jones Industrial Average finds no fear of an upcoming “double dip” when it comes to revenue growth for these large multinational companies. The worst sales “comp” is expected to be in somewhere in the first half of 2011, at 5-6% yearon-year growth, but that’s not bad when you consider that Q1-Q3 of 2009 saw negative 6-10% comparisons. That’s the good news. On the more cautious side, analysts do continue to trim Q310 and Q410 expectations for top line growth. Third quarter comps are expected to run +11.5% versus last year, down from an +11.9% comp estimate last month for the same period and a 13.2% expected comp logged by analysts back in May 2010. Analysts are also cutting fourth quarter expectations, now publishing revenue estimates of 6.1% growth year-on-year, down from 6.5% last month and the 7.8% growth expected back in May.

I like to cook, but I hate to bake. The reason is that cooking – that’s anything from grilling some steaks to making duck confit – feel like it has some room for interpretation. A few more garlic cloves in a sauce? No problem. A little more cilantro in the salsa? Why not? It just personalizes the flavors to what you like. But try the same slipshod measurements with a cake and you court disappointment, if not outright failure. Baking is more akin to chemisty; the instructions are precise for a reason. If the recipe calls for walnut oil, don’t try Crisco. It won’t work. If you need baking soda, don’t try baking powder. They aren’t the same thing. Trust me. I have tried and failed so you don’t have to. And so it seems to me that the “recipe” for a sustainable rally in equities is – for the moment - more like baking than cooking. As we have seen this year – let’s not forget that the S&P is up all of 0.6%, despite the rip in early September – the ingredients for a sustainable rally are hard to find, let alone portion correctly for a good outcome in equity land. If anything, the multiyear rally in bonds has the carefree feel of a Southern cooking show, where a pinch of deflation and a cupful of slow growth are all your need for a delicious plate of fixed income inflows.

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
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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

We all know that growth in corporate earnings and cash flows are a one key ingredient to a sustainable rally, and by that measure alone stocks look cheap to many investors. If the companies of the S&P 500 can really earn anywhere near close to $88 in operating earnings over the next year, as is the current consensus, then market bulls hope that will spark a better price-earnings ratio than the 12X currently implied by this expected level of earnings. The purist, of course, will point out that expectations for reported earnings (with writedowns, writeoff, and other “bad stuff”) are only expected to reach $74 per S&P 500 share over the next year. That puts the market much closer to 15x earnings and a closer-to fair-value kind of valuation. Just as with cooking or baking, however, sometimes you need to substitute when your preferred ingredient is not available. That is tricky, as I have mentioned above, especially when it comes to baking and other finicky stuff like calling stocks. Still – with earnings expectations unable to really give stocks a reason to shine (at least so far this year) – let’s look at the top of the income statement: revenues. Maybe we can do something with margarine if there is no butter available. Every month we track analysts’ earnings expectations for each of the 30 stocks in the Dow Jones Industrial Average. In the accompanying charts we show the average growth in expected top line “comps” for both all the companies in the DJIA, and just the non-financial enterprises. Our basic premise is that equity markets would – ideally – like to see revenue expectations rising among the analysts that cover these companies. After all, we know that these large multinationals have done a great job cutting costs to match the sluggish economies in the U.S. and much of the developed world. But how much can we expect in the way of help from actual end demand? And when will it start to create the environment for earnings surprises based on better-than expected revenues rather than better-than-expected cost cutting? Our data points to three conclusions: • Analysts do not expect sluggish global economies to create a “double dip” in revenue comps for the 30 companies surveyed here. Yes, sales comps are expected to slip a little in the next few quarters, from 11.5% in Q310 (versus Q309) to 4.5% in Q111 (versus Q110). But keep in mind that these companies did post some pretty nasty negative comparisons back in 2009, so the mid-single-digit expectations for the first part of next year are still pretty benign. • Analysts are, however, continuing to trim expectations for revenue growth for Q310 and Q410. In fact, they have been doing so for the past few months. Back in May 2010, the analysts of the Dow 30 companies thought Q310 would be +13% better than last year. Now, the expectations hurdle is an 11.5% comparison. The pattern for Q410 is similar; expectations back in May were for a 7.8% comp. Now 6.1% will make analysts happy. • Analysts are also pulling in their horns – modestly – for the first half of 2011. Both Q111 and Q211 are now slated to run just 4.5-5.0% better than the same periods in 2010, down from 5.8-6.5% expected growth earlier this year. Our attempt to substitute revenue growth for earnings expansion in the “stock market rally” recipe has, in all fairness, not been an unqualified success. Analysts are not increasing their expectations for a top-line tailwind to earnings expectations. On the contrary – they are cutting revenue estimates. Every month for several months, truth be told. So what explains the recent flight to stocks? I think it has to do with the first observation – that revenues will not turn negative in the first part of 2011. Fair enough – where there is life there is hope, after all. But I would prefer using the real thing in the “stock market rally” recipe – increases in revenue expectations – before serving up a dish of “unmitigated bullish outlook” for guests.

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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

Expected Y/Y Revenue Growth: Q3 2010
17% 15% 13% 11% 9% 7% 5% All Dec Jan Feb Mar April May June Ex-Fin July Aug Sept
12.1% 11.6% 11.3% 10.5% 9.9% 13.2% 12.9% 12.0% 11.9% 11.5% 15.1% 14.7% 14.0% 13.6% 14.1% 13.4% 13.6% 13.0% 12.1% 11.6%

Expected Y/Y Revenue Growth: Q4 2010
9% 8% 8% 7% 7% 6% 6% 5% All Feb Mar April May June July Ex-Fin Aug Sept
6.8% 7.8% 7.6% 7.1% 6.9% 6.5% 6.1% 7.6% 7.8% 7.3% 6.9% 7.0% 7.1% 6.7% 8.1% 7.8%

Expected Y/Y Revenue Growth: Q1 2011
8% 7% 6% 5% 4% 3% 2% 1% 0% All April May June July Aug Ex-Fin Sept
6.5% 5.2% 5.2% 7.5% 6.6% 6.5% 6.1% 6.3% 6.2%

Expected Y/Y Revenue Growth: Q2 2011
8% 7% 6%
5.8% 5.1% 5.0% 6.3% 6.7% 6.2% 5.9% 5.8%

4.9%

4.6% 4.5%

5% 4% 3% 2% 1% 0% All June July Aug Sept Ex-Fin

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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

Expected Y/Y Revenue Growth: Full Year 2010
16% 14% 12% 10% 8% 6% 4% 2% 0% All Sept Oct Nov Dec Jan Feb Mar April May Ex-Fin June July Aug Sept
5.6% 4.8% 11.0% 10.9% 11.2% 11.0% 9.3% 9.4% 10.4% 9.8% 9.6% 8.8% 8.1% 12.8% 13.3% 11.7% 12.7% 13.0% 12.1% 11.3% 11.5% 10.6% 11.1% 9.8%

Actual and Expected Y/Y Quarterly Revenue Growth
20%
15.2% 15.0% 17.8% 18.0% 13.6% 8.2% 6.1% 5.0% 5.6% 4.5% 11.5% 6.7% 5.8% 6.2% 6.2%

15% 10% 5%
9.6%

6.8% 6.0%

0% -5% -10% -15% Q1 '09
-7.1% -6.4% -10.9% -13.2% -14.6%

ALL

EX-FIN

-10.4%

Q2 '09

Q3 '09

Q4 '09

Q1 '10

Q2 '10

Q3 '10

Q4 '10

Q1 '11

Q2 '11

Q3 '11

Ticker

Current Revenue Estimate for Next 4 Quarters

Exp Y/Y Revenue Growth in Q3 '10

Exp Y/Y Revenue Growth in Q4 '10

Exp Y/Y Revenue Growth in Q1 '11

Exp Y/Y Rev Growth Q2 '11

Current Current Current Current Q3 Rev Est Q4 Rev Est Q1 Rev Est Q2 Rev Est IBM CVX MMM XOM UTX MCD PG JNJ CAT KO TRV WMT BA HPQ JPM AXP DD MRK VZ DIS MSFT HD KFT T CSCO INTC PFE BAC GE AA
24,106 52,860 6,807 98,869 13,926 6,182 20,179 15,174 10,446 8,289 5,402 102,643 16,504 32,743 24,654 6,786 6,725 11,238 26,333 9,982 15,859 16,673 12,026 31,199 10,742 11,013 16,665 27,239 37,847 4,888 27,879 52,850 6,472 98,007 14,585 6,021 21,097 16,205 11,114 7,637 5,243 117,762 17,223 32,690 24,707 7,107 6,712 11,578 26,395 10,456 19,110 14,692 13,260 31,291 11,075 11,439 17,082 27,247 41,092 5,299 23,619 56,910 6,718 101,237 12,832 5,761 19,761 16,072 10,011 7,883 5,316 105,518 16,614 32,309 25,740 6,827 9,282 10,966 26,531 9,141 16,060 17,089 12,420 31,168 11,448 10,708 16,094 28,188 35,204 5,339

Dec Est Jan Est Feb Est Mar Est Apr Est May Est June Est July Est Aug Est Sept Est Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010 Q3 2010
2.75% 8.14% 7.10% 19.96% 4.28% 4.63% 5.15% 5.44% 27.25% 7.12% 0.77% 6.14% -3.08% 3.35% -6.97% 6.77% 12.41% 90.10% -0.08% -0.52% 17.76% 2.21% 4.37% 1.16% 10.62% 5.98% 45.17% 8.69% 1.29% 15.95% 10.46% 12.13% 3.53% 4.15% 7.04% 22.28% 5.15% 3.37% 4.81% 5.88% 25.50% 6.19% 0.00% 5.69% -3.47% 3.47% -9.31% 9.64% 10.67% 84.26% -0.46% 3.48% 19.50% 2.41% 12.68% 1.05% 17.22% 10.31% 47.31% 9.21% 2.62% 23.99% 11.27% 13.04% 3.53% 4.15% 7.01% 22.28% 5.26% 3.27% 4.40% 5.80% 25.50% 6.22% 0.00% 4.94% -4.07% 4.78% -9.07% 9.92% 10.67% 87.97% -0.59% 3.85% 19.61% 3.87% 16.13% 1.08% 17.22% 10.82% 47.34% 10.22% 2.62% 23.99% 11.62% 13.40% 3.60% 15.83% 6.74% 23.85% 5.04% 2.93% 4.52% 5.29% 24.87% 6.38% -0.01% 4.93% -3.38% 4.90% -9.23% 9.18% 10.25% 88.60% -0.66% 4.08% 19.86% 3.80% 21.80% 0.96% 17.57% 11.02% 47.12% 9.98% 2.90% 21.06% 12.13% 14.04% 4.05% 18.94% 7.52% 27.46% 5.19% 2.92% 4.46% 4.35% 38.99% 5.44% 0.87% 4.89% -2.50% 5.53% -9.63% 13.38% 10.38% 88.47% -0.69% 4.44% 20.85% 3.97% 22.22% 0.99% 18.94% 16.53% 46.44% 12.47% 2.63% 17.37% 13.23% 15.09% 4.12% 18.94% 6.92% 23.87% 4.65% 1.47% 2.85% 3.28% 37.49% 4.69% 0.87% 4.41% -2.24% 5.94% -9.63% 13.40% 9.27% 87.61% -0.11% 4.00% 21.01% 4.33% 24.92% 1.04% 20.91% 16.46% 45.18% 13.12% 2.75% 15.91% 12.91% 14.68% 3.97% 12.27% 6.37% 18.73% 4.32% 0.37% 2.26% 2.23% 38.67% 3.77% 0.93% 4.41% -2.31% 5.98% -10.06% 13.57% 8.58% 86.54% -2.83% 3.92% 20.72% 3.80% 24.82% 1.22% 20.89% 16.25% 43.94% 11.72% 2.09% 11.48% 11.95% 13.61% 2.30% 13.37% 9.65% 18.78% 4.14% 1.80% 1.79% 0.61% 42.87% 3.04% 1.16% 4.47% -1.59% 5.92% -14.19% 12.98% 12.81% 85.77% -3.40% 3.98% 23.42% 3.53% 23.19% 1.10% 21.34% 23.73% 43.39% 5.41% 0.61% 5.70% 11.92% 14.07% 2.29% 13.37% 9.91% 20.19% 4.12% 2.24% 1.88% 0.62% 43.13% 3.04% 1.16% 3.25% -1.10% 6.39% -14.34% 12.80% 12.81% 85.74% -3.42% 1.17% 22.75% 1.91% 22.68% 1.12% 19.08% 17.30% 43.63% 4.63% 0.13% 5.91% 11.48% 13.60%

Feb Est Mar Est Apr Est May Est June Est July Est Aug Est Sept Est Q4 2010 Q4 2010 Q4 2010 Q4 2010 Q4 2010 Q4 2010 Q4 2010 Q4 2010
3.36% 27.70% 4.48% 15.95% 4.16% 2.36% 3.31% 1.92% 25.65% 3.29% 0.67% 5.17% -6.14% 4.38% 4.49% 7.91% 5.27% 22.07% 0.61% 2.86% -2.09% 3.37% 11.59% 1.26% 19.03% 4.58% 6.39% 15.34% 1.29% 2.71% 6.76% 6.93% 3.36% 27.70% 4.39% 15.95% 4.35% 2.13% 2.79% 2.18% 25.65% 12.88% 0.67% 4.27% -6.19% 7.85% 4.84% 8.24% 5.27% 24.67% 0.42% 2.86% -2.07% 7.81% 12.90% 1.28% 19.03% 5.11% 6.97% 16.35% 1.25% 3.63% 7.55% 7.81% 3.44% 10.91% 4.17% 18.65% 4.50% 1.83% 2.65% 1.87% 24.77% 11.02% 0.68% 4.33% -6.10% 7.96% 4.27% 7.43% 4.44% 25.77% 0.36% 3.52% -1.35% 7.57% 18.66% 1.19% 19.29% 5.26% 6.96% 15.88% 2.15% 1.50% 7.12% 7.33% 4.09% 19.48% 4.74% 17.38% 4.84% 1.92% 2.92% 0.85% 36.37% 4.39% 0.99% 4.33% -3.99% 8.67% 2.50% 10.14% 3.13% 25.02% 0.18% 3.85% -0.12% 7.81% 18.92% 1.29% 20.53% 9.75% 6.03% 16.89% 2.06% -0.22% 7.82% 8.09% 4.23% 19.48% 4.46% 13.28% 5.02% 0.61% 1.48% -0.20% 35.39% 3.62% 0.99% 3.57% -3.79% 9.00% 2.50% 10.35% 3.01% 24.35% 0.66% 5.02% 0.09% 7.25% 20.62% 1.42% 22.58% 9.74% 4.91% 17.60% 2.01% -0.31% 7.63% 7.82% 4.00% 12.63% 3.93% 8.55% 4.71% -0.46% 0.79% -1.26% 38.25% 2.50% 1.10% 3.68% -3.62% 8.86% 2.91% 10.45% 2.06% 23.47% -1.89% 4.75% 0.20% 6.71% 20.55% 1.60% 22.53% 9.44% 3.93% 15.99% 1.65% -1.63% 6.88% 6.97% 2.37% 8.57% 5.61% 9.01% 3.47% 0.80% 0.44% -2.10% 40.53% 1.69% 1.05% 3.66% -4.07% 8.87% -2.03% 9.85% 4.56% 23.21% -2.54% 5.10% 0.47% 6.35% 20.04% 1.42% 22.81% 15.81% 3.32% 9.17% -0.38% -2.84% 6.47% 7.06% 2.38% 8.57% 5.71% 9.09% 3.44% 0.81% 0.34% -2.09% 40.72% 1.69% 1.05% 2.84% -3.98% 9.06% -2.10% 9.52% 4.56% 23.46% -2.57% 7.36% 0.46% 4.77% 19.81% 1.40% 20.58% 8.23% 3.40% 8.66% -0.83% -2.47% 6.13% 6.70%

Apr Est May Est June Est Q1 2011 Q1 2011 Q1 2011
3.35% 15.60% NA 18.07% 7.41% 4.33% 4.19% 5.99% 20.89% 30.44% 0.67% 6.55% 4.48% 5.25% -6.96% 1.92% NA -1.28% 1.67% 6.72% 9.80% 3.94% 9.29% 2.32% 10.82% 5.58% -4.90% 8.63% NA 1.53% 6.53% 7.48% 3.78% 18.78% 6.38% 19.04% 6.55% 3.69% 4.42% 5.36% 17.67% 6.41% 0.52% 5.09% 8.49% 1.90% -5.06% 3.20% NA -6.76% 1.04% 4.40% 9.75% 0.30% 5.46% 2.71% 10.31% 4.92% -6.17% -6.24% 0.21% 8.88% 4.66% 5.93% 4.11% 18.78% 6.38% 18.65% 6.49% 2.79% 2.68% 4.74% 18.00% 5.96% 0.52% 5.54% 8.04% 4.33% -5.06% 3.63% NA -0.63% 1.47% 5.44% 10.17% 3.73% 8.96% 2.44% 11.88% 4.97% -6.17% -4.46% 0.21% 7.03% 5.19% 6.49%

July Est Q1 2011
4.29% 16.79% 5.08% 16.65% 6.49% 1.29% 2.38% 4.65% 20.17% 5.68% 0.50% 2.24% 8.04% 4.33% -3.88% 4.32% NA -0.63% -0.51% 5.06% 10.14% 3.27% 8.99% 2.47% 12.05% 4.87% -4.17% -4.48% -2.73% 7.72% 4.87% 6.14%

Aug Est Sept Est Q1 2011 Q1 2011
3.39% 9.05% 5.83% 15.57% 6.13% 2.70% 3.06% 2.82% 22.21% 5.26% 1.25% 6.09% 10.09% 4.34% -8.63% 3.34% 6.00% -2.06% -1.42% 5.15% 10.92% 3.06% 10.42% 1.68% 12.18% 9.94% -3.75% -11.82% -3.83% 8.93% 4.60% 6.30% 3.33% 18.12% 5.83% 12.17% 6.13% 2.70% 3.04% 2.82% 21.52% 4.76% 1.25% 5.68% 9.19% 4.73% -8.63% 3.34% 9.40% -4.00% -1.42% 6.54% 10.74% 1.34% 9.74% 1.69% 10.41% 3.97% -3.88% -11.83% -3.83% 9.24% 4.47% 6.15%

June Est July Est Q2 2011 Q2 2011
4.38% 12.05% 8.67% 14.59% 5.53% 4.22% 3.94% 5.58% 16.33% 6.29% 1.05% 6.22% 7.26% 5.84% 2.66% 5.26% NA 0.59% 2.78% 5.03% 9.24% 4.38% 4.14% 1.82% 12.07% 4.13% -3.63% 3.70% NA 7.78% 5.78% 6.22% 4.30% 16.67% 8.72% 16.99% 5.75% 3.58% 4.01% 6.07% 17.83% 5.41% 1.47% 7.10% 7.61% 5.84% 6.74% 5.31% NA 0.77% 0.57% 5.63% 8.96% 4.28% 4.25% 1.71% 12.09% 4.14% -4.93% 3.53% NA 13.00% 6.34% 6.68%

Aug Est Sept Est Q2 2011 Q2 2011
4.19% 5.83% 7.01% 15.00% 4.00% 4.29% 5.19% 4.43% 19.46% 4.94% 1.25% 6.94% 13.24% 5.36% 2.38% 5.09% 6.65% -1.99% -0.01% 5.36% 7.29% 3.92% 5.02% 1.63% 12.18% 3.74% -6.11% -1.71% -2.33% 10.38% 5.09% 5.92% 4.27% 14.50% 7.01% 12.29% 4.00% 4.24% 5.22% 4.43% 18.72% 4.51% 1.25% 7.11% 13.53% 4.53% 2.38% 5.09% 10.10% -2.03% -0.01% 1.91% 6.85% 2.75% 4.89% 1.65% 10.74% -1.48% -5.27% -2.16% -2.33% 11.34% 5.00% 5.83%

24,736 2.67% 60,691 8.24% 7,203 5.62% 103,857 16.36% 14,446 2.66% 6,197 4.63% 19,914 4.91% 16,009 5.44% 12,357 27.25% 9,065 6.94% 5,759 0.84% 111,099 5.69% 17,680 -2.29% 32,121 3.32% 26,223 -6.47% 7,207 3.72% 9,486 N/A 11,116 91.69% 26,769 -0.18% 10,193 -0.58% 17,137 17.62% 19,943 2.26% 12,852 4.83% 31,315 1.08% 11,999 10.41% 10,605 5.02% 16,407 47.11% 28,523 9.89% 36,572 0.00% 5,775 8.08% Average: 9.89% Average Ex-Financials*: 11.62%

*Financials include AXP, BAC, GE, JPM and TRV. **WMT, HPQ, DIS, HD and CSCO have not yet reported Q2 '10 revenue. Source: ThomsonOne

4

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

U.S. EQUITIES Many financials advanced after news that banks will have until 2018 to comply with new Basel III banking capital rules, which are also not as strict as feared. Keefe, Bruyette and Woods upgraded the European banking sector to “Overweight” from “Neutral,” while Sanford Bernstein lifted its rating on several regional banks to “Outperform” from “Market Perform.” Additionally, Citigroup cut 3rd quarter profit estimates for GS (+2.7%) and MS (+2.1%), though both traded higher. In M&A news, DTG (+5.4%) accepted HTZ’s (+7.9%) $1.56 billion bid, and HPQ (+0.2%) announced it will buy ARST (+25.1%) for $1.5 billion in cash.
Important Earnings Today (with Estimates) From… BBY: $0.44 CBRL: $1.12 KR: $0.36 PLL: $0.64
Source: Bloomberg

S&P Futures
One Day (High –1124.00; Low – 1112.00):

Important Conferences/Corporate Meetings Today:
Bank of America Merrill Lynch Investment Conference – San Francisco, CA Barclays Financial Services Conference – New York, NY Credit Suisse Small and Mid Cap Conference – Boston, MA Deutsche Bank Technology Conference – San Francisco, CA Goldman Sachs Global Retail Conference – New York, NY Morgan Stanley Global Healthcare Conference Robert W. Baird Health Care Conference – New York, NY Rodman & Renshaw Global Investment Conference – New York, NY Prior Day SPX (High – 1123.87; Low – 1113.38; Close – 1121.92): Three Day (High – 1124.00; Low – 1101.00):

Source: Thomson ONE
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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

FIXED INCOME Treasuries advanced Monday, pushing the benchmark 10-year note yield down from a 5-week high, as the U.S. government’s monthly Treasury budget report showed a smaller-than-expected deficit in August ($90.5 billion – down from $103.6 billion in the year-ago month) and the Fed purchased $3.4 billion in U.S. debt. The current fiscal year-to-date budget gap is $1.26 trillion, compared with $1.37 trillion at the same time last year. Yields on 10-year notes dropped 6 basis points to 2.74% after rising to 2.85% early in the trading session.

Source: Bloomberg

Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus):
Retail Sales (8:30am EST): 0.3% o Excluding autos: 0.4% Business Inventories (10:00am EST): 0.6%

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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

U.S. EQUITY OPTIONS

SPX- The index had a steady gain Monday, ending +1.1%, with a range of+.3% to +1.3%. The VIX reflected the positive mood, ending down 3.3%. There were several trades which also reflected this net complacent upside mood. For example, the December/June 1100 put spread was sold 5,000 times @ $47.50. The October 1050 puts were sold several times over 5,000 on the day. The October 1050/1165 strangle was also sold over 2,000 times. However, the largest trade of note was the sale of the September/October call spread 20,000 times for $1.35, which was a likely roll of a short September call position. ETF- Even with scant economic news, the market opened higher before selling off a bit, and then rebounding to close up 1.1%. In SPYs we noted what looked like a short-term hedge as paper bought Oct 112 /109 put spreads 30,000 times. In sector flow, we saw a volatility buyer in XLP (Consumer Staples) through the purchase of 20,000 Oct 28 calls delta neutral. In the international space, one EEM investor sold ~7,000 Oct 42 /40 put spreads, while in EFA paper sold the Oct 52 /50 put spread 20,000 times. Lastly in FXI (FTSE/Xinhua China 25 Index), we saw one investor making a volatility play through selling 27,500 Oct 40 puts delta neutral.
Rank
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 20 21 22 23 24 25

9/7/2010
MKC ARG NOVL Q FDO STZ YHOO PEP NKE GENZ MAT PX MSFT PBCT CAM AZO DTV C CTL SLM WAG BMY KR MCK COG AXP MO BSX NTRS VIA/B CB

CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY 9/8/2010 9/9/2010 9/10/2010 9/13/2010 30-Day Implied Vol
ARG FDO NOVL Q MKC PEP STZ DPS SLM GENZ YHOO NKE PBCT MSFT CEPH CLX MAT HSP AZO PX MCK C JEC STR WPI SLM WAG BMY COG CAM DTV CTL KR ARG FDO NOVL Q DTV MKC GENZ FTR SLM YHOO STZ CLX NKE HSP PNW PEP GIS STR CEPH MSFT WAG MAT WPI PX KR JEC C MCK AZO PBCT DPS ARG FDO NOVL FSLR Q DTV GIS STZ GENZ DTE CEPH SLM YHOO HSP CLX NKE WFR AZO MSFT PX PEP CTXS RSH WAG MAT KR WPI PNW FTR MKC STR ARG FDO NOVL MKC Q CEPH FSLR AGN STZ DTV GENZ SLM HSP PEP YHOO CLX KMB AZO WAG WFR JEC PX NKE GIS BBY MAT RSH CTXS DTE MSFT 39.45 31.10 54.15 26.24 20.50 35.42 40.03 29.96 30.42 24.24 27.77 47.02 35.02 16.65 30.50 15.95 14.43 25.35 26.52 44.42 32.02 22.64 25.75 24.52 41.28

BIGGEST MOVERS
Top 10 MKC AGN ODP KO SJM CTAS XOM SPG LSI SLE 41.07% 40.07% 27.45% 24.47% 19.92% 19.85% 18.89% 18.30% 17.20% 16.70% 30-Day Implied Vol 26.24 29.96 63.54 15.75 18.32 27.23 19.66 29.54 39.90 23.34 Bottom MSFT AEE XRX NU AMD DTE ZION HIG TSS GNW 10 -24.86% -24.46% -20.38% -18.27% -14.87% -13.13% -12.64% -11.99% -11.05% -10.22% 30-Day Implied Vol 24.01 19.04 35.81 16.83 55.30 19.21 44.24 44.02 28.77 46.41

We ranked the S&P 500 companies from the highest to lowest 30 day implied to historical volatility ratio. Above we identify the 10 most positive and negative movers. The table to the left represents the 25 highest 30 day implied to historical volatility ratios within the S&P 500 companies. The green represents names new to the list while the red represents names that have fallen out.

7

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

Exchange-Traded Funds/Indexes
Prior Day Peformance of Largest ETFs by Assets
Name (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf

S&P 500 Sector ETFs
YTD Perf Sector Ticker 1-Day Perf YTD Perf

SPDRs SPDR Gold Shares iShares MSCI Emerging Markets Index iShares MSCI EAFE Index iShares S&P 500 Index
Name

SPY GLD EEM EFA IVV

Large Blend N/A Diversified Emerging Mkts Foreign Large Blend Large Blend

1.11% -0.09% 2.39% 1.82% 1.05%
Shares Traded

Energy Health Industrials Utilities Consumer Staples
Currency

XLE XLV XLI XLU XLP

0.73% 0.24% 0.99% 0.45% 0.11%

-3.68% -4.02% 10.47% 1.81% 4.08%
YTD Perf

Telecomm Technology Consumer Discretionary Financials Materials
Currency

IYZ XLK XLY XLF XLB

0.90% 1.79% 1.21% 2.13% 1.61%

5.94% -3.49% 9.67% 3.06% 1.09%

Prior Day Top Volume ETFs
Ticker Category Ticker 1-Day Perf

Currency ETFs
Ticker 1-Day Perf YTD Perf

SPDRs Financial Select SPDR iShares MSCI Emerging Markets Index PowerShares QQQ iShares Russell 2000 Index
Name

SPY XLF EEM QQQQ IWM

Large Blend Specialty - Financial Diversified Emerging Mkts Large Growth Small Blend

145,464,147 67,516,870 59,308,524 53,309,182 51,271,919
Daily Return

Australian Dollar British Pound Sterling Canadian Dollar Euro Japanese Yen
Name

FXA FXB FXC FXE FXY

1.02% 0.41% 0.78% 1.26% 0.65%

4.05% -4.77% 2.03% -10.25% 10.98%
YTD Perf

Mexican Peso Swedish Krona Swiss Franc USD Index Bearish USD Index Bullish
Bonds

FXM FXS FXF UDN UUP

0.45% 1.13% 1.20% 1.16% -1.08%

1.36% -0.16% 2.54% -5.27% 2.77%

Prior Day Top Performers
Ticker Category

VIX ETNs
Ticker 1-Day Perf

Fixed Income ETFs
Ticker 1-Day Perf YTD Perf

Direxion Daily Semicondct Bull 3X Shares Direxion Daily China Bull 3X Shares ProShares UltraPro Russell2000 Direxion Daily Emrg Mkts Bull 3X Shares Direxion Daily Latin America Bull 3X Shares

SOXL CZM URTY EDC LBJ

N/A Pacific/Asia ex-Japan Stock Small Blend Diversified Emrg Markets Latin America Stock

9.24% 7.67% 7.53% 7.31% 7.29%

iPath S&P 500 VIX VXX Short-Term Futures ETN iPath S&P 500 VIX VXZ Mid-Term Futures ETN

-5.18%

-48.40%

-2.01%

10.87%

Aggregate Investment Grade High Yield 1-3 Year Treasuries 7-10 Year Treasuries 20+ Year Treasuries
ETF

AGG LQD HYG SHY IEF TLT

0.24% 0.14% 0.52% 0.08% 0.48% 0.49%

4.44% 6.58% 1.08% 1.45% 9.73% 14.39%

Others
ETF Ticker 1-Day Perf YTD Perf Ticker 1-Day Perf YTD Perf

Gold Silver Natural Gas

GLD SLV UNG

-0.09% 0.62% 1.39%

13.34% 18.14% -34.72%

Crude Oil EAFE Index Emerging Markets SPDRs

USO EFA EEM SPY

0.77% 1.82% 2.39% 1.11%

-13.37% -2.73% 4.27% 1.15%

Major Index Changes:
None

ETFs in the Headlines and Blogs:
Silver ETF rallies to close near record high - http://www.marketwatch.com/story/silver-etf-rallies-to-close-near-record-high-2010-09-12 Metal Commodity ETFs in Review (GLD, SLV, PALL, PPLT) - http://etfdailynews.com/blog/2010/09/12/metal-commodity-etfs-in-review-gld-slv-pall-pplt/

8

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

Top Online Social Networking Stories
Latest Popular Digg.com Business Stories Overworked Americans Giving Up Vacation Days - http://www.nileguide.com/blog/2010/09/10/overworked-americans-giving-up-vacation-days/ How Much Does the Government Make Off of Gambling? - http://blog.turbotax.intuit.com/tax-tips/how-much-does-the-government-make-off-of-gambling/ Cash for Clunkers a Year Later: It Was a Wash - http://www.toyotainthenews.com/cash-for-clunkers-a-year-later-it-was-a-wash/ Some say bypassing a higher education is smarter than paying for a degree - http://www.washingtonpost.com/wpdyn/content/article/2010/09/09/AR2010090903350.html Is Your Boss Younger Than You? - http://www.focus.com/fyi/human-resources/your-boss-younger-you/ Calculated Risk House Prices and Foreclosures - http://www.calculatedriskblog.com/2010/09/house-prices-and-foreclosures.html Housing and the Business Cycle - http://www.calculatedriskblog.com/2010/09/paper-housing-and-business-cycle.html Early Review of Byron Wien’s “Ten Surprises” List for 2010 - http://www.calculatedriskblog.com/2010/09/early-review-of-byron-wiens-ten.html The Big Picture It Was the Best of Times. It Was the Worst of Times. Yup. - http://www.ritholtz.com/blog/2010/09/it-was-the-best-of-times-it-was-the-worst-of-times-yup/ Fair Value: Why Should Home Prices Stabilize? - http://www.ritholtz.com/blog/2010/09/fair-value-why-should-home-prices-stabilize/ Only 1 in 3 Americans Favor Keeping Tax Cuts for the Wealthy - http://www.ritholtz.com/blog/2010/09/favor-tax-cuts-to-expire/ The Baseline Scenario The Importance of the 1970s - http://baselinescenario.com/2010/09/13/the-importance-of-the-1970s/ Bespoke Investment Group Using the Past to Predict the Future - http://www.bespokeinvest.com/thinkbig/2010/9/10/using-the-past-to-predict-the-future.html Senate Odds - http://www.bespokeinvest.com/thinkbig/2010/9/10/senate-odds.html A Breakdown in Fixed Income? - http://www.bespokeinvest.com/thinkbig/2010/9/9/a-breakdown-in-fixed-income.html Robert Reich’s Blog The Two Categories of American Corporation – And Their Politics - http://robertreich.org/post/1110659210/the-two-categories-of-american-corporation-andtheir The Becker-Posner Blog Higher Education and Technological Advances as Countries Develop (Becker) - http://www.becker-posner-blog.com/2010/09/higher-education-andtechnological-advances-as-countries-develop-becker.html Education and Innovation in Developing Countries (Posner) - http://www.becker-posner-blog.com/2010/09/education-and-innovation-in-developingcountriesposner.html

9

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

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.

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