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Morning Review - 102910

Morning Review - 102910

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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

Thursday stocks trimmed losses ahead of the close as the market weighed a mixed round of earnings and the central bank’s next actions to stimulate the economy (S&P 500 +10 bps, Dow -15 bps, Nasdaq +16 bps). In the day’s economic news, initial unemployment claims fell last week by a more-thanexpected 21K to 434K, the lowest total since early July. The prior week’s data, however, was upwardly revised for a 40th time this year, to 455K from the initially reported 452K. At 453.25K, the 4-week moving average was also at its lowest level since July. Meanwhile, after the close, MSFT posted earnings and revenue that easily topped estimates. On deck for Friday: GDP, Chicago PMI, Univ. of Michigan consumer sentiment, employment cost index, and before-the-bell earnings from CVX and MRK.

Morning Markets Briefing
Market Commentary: October 29th, 2010 A snapshot of the markets through the lens of ConvergEx.

Tricks and Treats in the U.S. Treasury’s Daily Statement
Summary: Just as soon as we get past the Elections and the Fed meeting next week, the market’s attention will clearly shift to the monthly Employment Situation (a.k.a. the Jobs Report) on Friday. In our regular review of tax withholding data from the U.S. Treasury we find that even the muted expectations for next Friday’s report are probably going to be difficult to reach. October tax/withholding receipts were flat year over year on a run rate basis and the fifth worst month for collections since the financial crisis began in 2007. After all, real job creation should pretty much instantly create incremental tax/withholding receipts. The silver lining in the data is that Federal spending is now “only” 40% sourced from new debt issuance, the majority coming from tax revenue. A long way from self sustaining, of course, but a step in the right direction.

If you are in the mood to look for ghosts this Halloween weekend on the island of Manhattan, look no further than Washington Square Park. Long before it was a park, it was the execution grounds for the island, as well as a potters’ field for over 20,000 people who could not afford a private burial. (Cue scary music here.) When yellow fever epidemics struck the city in the early part of the 19th century, the victims were buried here out of concern for public hygiene, since it was outside of the city limits at the time. If that spooky little vignette of New York life from long ago scares you, then you are probably too sensitive to look at the latest data from the U.S. Treasury when it comes to tax payments. After all, we are fast approaching a time when the macro drivers of market action – elections and the Fed’s impending decision on Quantitative Easing – are going to be a fading memory. Past Wednesday at 2:15pm, the approximate time the Fed releases its decision, we are all going to have to refocus on the fundamentals of the U.S. economy. The two most important factors there – employment and government spending deficits – play a leading role in the U.S. Treasury’s Daily Statement (viewable here: http://www.fms.treas.gov/dts/index.html).

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
©2010 BNY ConvergEx Executi`on Solutions LLC. May not be redistributed without express permission. All rights reserved

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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 look at this data every month for two pieces of information: 1. Is the labor market getting better? After all, if employment is improving, then tax and withholding receipts should be increasing. Most on-the-books workers have their taxes and things like Social Security/Medicare payments automatically taken out of their paychecks. More workers should mean more tax collection, and right away. Is the U.S. Government able to collect enough incremental tax revenue that it can begin to ease the need to issue more debt? As of October 27th there was $13.7 trillion of Federal debt outstanding. Three years ago on this day that number was $8.6 trillion. The difference is purely due to spending more than taxes bring in – $5.1 trillion or $4.6 billion every day.

2.

On the first point, the most recent data is not encouraging. We take all employment-related taxes and withholding collected by Treasury and compare the monthly receipts to prior periods. The accompanying graphs show these progressions. (Cue that scary music again.) The following is a brief summary of the latest data: • October total personal tax/withholding collected is no better than last October, at a run rate of $136 billion for the month. Corporate tax collections are a little better, but they are just $8.9 billion this month versus $7.5 billion last October. The current year is still in a hole versus 2009. The cumulative amount of personal taxes/withholding collected is running $12 billion behind last year-to-date. If you want a bright spot, consider that in May we were $43 billion behind prior year collections. The October run rate of $136 billion I mentioned above is the fifth worst month for collections since the beginning of 2007.

It is hard to be encouraging on the upcoming Jobs Report, even with the current modest expectations of +60,000 payroll growth and an unchanged 9.6% unemployment rate. Moreover, even if the report does “beat’ these numbers, the tax data doesn’t lie: whatever jobs were created are either low paying (and therefore low tax revenue generating) and/or can’t offset the decline in wages seen by the existing working population. For those readers who recall our prior analyses on these numbers, please note that with this edition we have added the taxes received from non-withheld income sources, primarily small businesses and the self-employed. This data makes for a more complete picture, even if it isn’t especially pretty. On the issue of deficit spending, the data is a touch more encouraging. The Daily Treasury Statement also shows how much fresh new Federal debt is issued, and the slope of that increase is slackening somewhat. Don’t break out the champagne just yet, of course. There is still incremental debt issuance – just over $102 billion in October, for example. But total tax receipts have been $143 billion in the same time period. That means that the U.S. is issuing debt for 40% of its total monthly spending needs. Better than the +50% from the debts of the recent crisis, but obviously still a long way to go.

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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

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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

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 In earnings land, XOM (+0.8%) topped estimates in reporting a 55% increase in quarterly profit on higher crude prices and improved refining margins, but revenues fell short of projections. Shares of MMM dropped 6.5% despite earnings and revenue that beat expectations, as the diversified manufacturer raised its full-year outlook due to “anticipated earnings dilution” stemming from several acquisitions during the quarter. Retailer SKX sank 18.2% on weak earnings and a 70% rise in inventory, while it was also downgraded by at least 2 firms. Meanwhile, MOT (+0.5%) swung a profit after posting a loss in the year-ago quarter, and SYMC added 4.1% despite a fall in net income as results were better than forecasted.
Important Earnings Today (with Estimates) From… NDAQ: $0.46 DRC: $0.47 LNT: $1.07 NWL: $0.41 DTE: $0.96 AGP: $0.81 NEE: $1.43 EIX: $1.18 AON: $0.67 OGE: $1.55 EL: $0.77 ACI: $0.37 OHI: $0.45 HLS: $0.40 CPN: $0.39 POM: $0.40 HSIC: $0.87 CVX: $2.14 COL: $0.94 ITT: $0.99 CI: $1.06 SWN: $0.46 LPNT: $0.66 CNX: $0.58 WY: $0.11 MGLN: $0.92 CEG: $0.64 Source: Bloomberg MRK: $0.83 D: $1.07 Important Conferences/Corporate Meetings Today:
None Prior Day SPX (High – 1189.53; Low – 1177.10; Close – 1183.67): Three Day (High – 1187.50; Low – 1167.75):

S&P Futures
One Day (High –1187.50; Low – 1173.50):

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 Thursday 10-year Treasuries snapped their longest losing streak in 2 years, rising for the first time in 7 days, as investors speculated the Fed remains open to large asset purchases to stimulate the economy. Benchmark yields fell 6 bps to 2.66%, while 2-year note yields also dropped 6 bps in their biggest intraday decline since the end of August. Results for the Treasury’s $29 billion 7-year note auction were solid, with coverage of 3.06 times and a high yield of 1.970%, which was 2 bps below the 1:00pm EST bid. Coverage topped last month’s 3.04 times and was the highest since the issue was reinstated in February 2009.

Source: Bloomberg

Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus): GDP (8:30am EST): 2.0% o GDP Price Index: 2.0% Employment Cost Index (8:30am EST): 0.5% Chicago PMI (9:45am EST): 57.6 University of Michigan Consumer Sentiment (9:55am EST): 68.0 Farm Prices (3:00pm EST)
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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 underlying index had another very quiet day ending +0.1%, with a trading range of only -5% to +0.6%. The implied premium as measured by the VIX was also little changed, as the risk assessments seemed to be on hold before the upcoming elections and Fed announcements. There were a few notable large trades in SPX options. In December of 2010 the 995 puts were sold 5,000 times @ $3.00 and the Dec 600 puts were sold 30,000 times @ $0.05. In December of 2012 the 1200 puts were sold 15,000 times @ $181 vs. buying the 850 puts 30,000 times @ $63.00. ETF – After opening in positive territory, the market undulated over the course of the day to close unchanged. Options volume was below expected, and we note mixed trading in the ETF space. In International products we saw an investor expecting a slight rise in EEM (Emerging Markets) as paper sold the Jan 43 / 38 put spread 13,000 times to buy the Jan 46 / 48 call spread 1X2 6,500 times. In EWJ (Japan) we note a three-legged trade with an investor selling the Jan 9 puts as well as the Jan 10 / 11 call spread 10,000 times. In sector flow XLF (Financial) had an investor positioning for upside through the purchase of 50,000 Dec 15 calls.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY 10/25/2010 10/26/2010 10/27/2010 10/28/2010 30-Day Implied Vol
MFE MKC DTV MJN GENZ SYMC MYL CEPH CHRW K VAR TJX SJM ORLY PTV VRSN MDP BMC NRG BBY COH AN PCG FISV DHI HAR HRS HSP Q RSH PNW MFE PTV MKC DTV PNW XEL SYMC GENZ VAR CHRW CEPH MYL MJN K MA ORLY PCG EIX SJM TJX NI VRSN BBY QCOM FSLR DHI FISV AN COH NRG BMC MDP MFE PTV DTV PNW SYMC VAR GENZ CEPH ORLY K MA FSLR MJN EIX PCG TJX VRSN BBY CFN FII SJM BMS DHI GME QCOM MKC CHRW MYL XEL NI MFE PTV DTV VAR GENZ K CEPH VRSN FSLR QCOM EIX TJX PCG MA CFN BBY GME BIG BDX KSS XL HAR NRG DHI IFF BMS SJM FII MJN ORLY SYMC PNW

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

10/22/2010
MFE MKC PNW DTV GENZ MJN RSH MYL SYMC CEPH Q CHRW VAR ORLY MDP VRSN BMC K PTV HSP TJX AN SJM HRS HAR CA EFX CNP NI

5.83 6.75 21.08 28.18 16.73 19.17 33.60 32.49 49.65 30.68 18.51 25.73 20.01 34.60 32.24 31.20 39.29 34.13 18.53 29.15 37.26 49.87 26.93 43.02 26.75

BIGGEST MOVERS
Top 10 ORCL MEE TSN SLM HAL HPQ MOLX IPG CAM SUN 54.02% 16.64% 15.20% 15.18% 14.58% 12.50% 11.83% 11.17% 10.80% 9.52% 30-Day Implied Vol 25.82 49.72 38.63 29.97 50.60 25.04 35.98 42.50 43.23 35.40 Bottom PNW ORLY FMC FLS SYMC LSI AN EK XRAY TER 10 -52.10% -48.75% -46.94% -46.03% -43.91% -41.74% -40.22% -39.26% -34.57% -33.65% 30-Day Implied Vol 17.39 21.53 23.32 34.44 30.07 32.23 31.92 55.92 24.97 44.56

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.

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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

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

0.16% 1.33% 0.63% 0.78% 0.08%
Shares Traded

Energy Health Industrials Utilities Consumer Staples
Currency

XLE XLV XLI XLU XLP

-0.22% 0.58% -0.22% 0.25% 0.35%

3.84% 0.74% 15.62% 2.10% 8.31%
YTD Perf

Telecomm Technology Consumer Discretionary Financials Materials
Currency

IYZ XLK XLY XLF XLB

0.55% 0.00% 0.46% -0.07% 0.06%

9.84% 6.02% 18.47% 1.18% 4.64%

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

Currency ETFs
Ticker 1-Day Perf YTD Perf

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

SPY QQQQ XLF IWM EEM

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

154,142,740 48,990,448 48,811,701 44,975,638 44,654,410
Daily Return

Australian Dollar British Pound Sterling Canadian Dollar Euro Japanese Yen
Name

FXA FXB FXC FXE FXY

0.81% 1.14% 0.72% 1.17% 0.85%

8.99% -1.57% 2.65% -2.90% 14.52%
YTD Perf

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

FXM FXS FXF UDN UUP

0.51% 0.71% 0.82% 0.99% -1.06%

5.28% 6.09% 5.04% -0.18% -2.90%

Prior Day Top Performers
Ticker Category

VIX ETNs
Ticker 1-Day Perf

Fixed Income ETFs
Ticker 1-Day Perf YTD Perf

KEYnotes First Trust Enh 130/30 LgCp ETN iPath DJ-UBS Natural Gas TR Sub-Idx ETN UBS E-TRACS CMCI Silver TR ETN PowerShares Global Gold & Prec Metals United States Natural Gas

JFT GAZ USV PSAU UNG

Large Blend N/A N/A Specialty - Precious Metals N/A

4.82% 4.34% 4.03% 3.63% 3.30%

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

-0.46%

-61.70%

-0.45%

-2.89%

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

AGG LQD HYG SHY IEF TLT

0.25% 0.40% 0.06% 0.13% 0.58% 0.27%

4.97% 7.67% 3.26% 1.82% 10.98% 10.68%

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

Gold Silver Natural Gas

GLD SLV UNG

1.33% 1.57% 3.30%

22.30% 41.67% -44.15%

Crude Oil EAFE Index Emerging Markets SPDRs

USO EFA EEM SPY

-0.08% 0.78% 0.63% 0.16%

-9.90% 3.17% -1.20% 6.40%

Major Index Changes:
None

ETFs in the Headlines and Blogs:
Assets under management at ETFs to continue 10% growth - http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1089933/1/.html Goldman Sachs in ETF Gaffe - http://blogs.wsj.com/source/2010/10/27/goldman-sachs-in-etf-gaffe/

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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

Top Online Social Networking Stories
Latest Popular Digg.com Business News What if Apple bought Sony? - http://www.digitaltrends.com/talk-backs/what-if-apple-bought-sony/ A Historic Look at America’s Grocery Spending Habits - http://www.billshrink.com/blog/10320/america-grocery-spending/ How Do Americans Feel About the Recession? - http://www.mint.com/blog/trends/recession-10262010/ Rupert Murdoch’s Worst Nightmare - http://www.splicetoday.com/sports/rupert-murdoch-s-worst-nightmare Calculated Risk Weekly Initial Unemployment Claims decrease - http://www.calculatedriskblog.com/2010/10/weekly-initial-unemployment-claims_28.html Report: Greece Falling Short of Rescue Package Deficit Goal - http://www.calculatedriskblog.com/2010/10/report-greece-falling-short-of-rescue.html PIMCO’s Gross: 30-year Bull Market in Bonds is Over - http://www.calculatedriskblog.com/2010/10/pimcos-gross-30-year-bull-market-in.html Freddie Mac: 90+ Delinquency Rate Declines Slightly in September - http://www.calculatedriskblog.com/2010/10/freddie-mac-90-day-delinquency-rate.html Home Sales: Distressing Gap Sept 2010 - http://www.calculatedriskblog.com/2010/10/home-sales-distressing-gap-sept-2010.html Robert Reich’s Blog Only $4.2 Billion to Buy This Election? - http://robertreich.org/post/1419481402 The Big Picture Real Growth in US Stocks, 1871-2010 - http://www.ritholtz.com/blog/2010/10/real-growth-in-us-stocks-1871-2010/ Oil’s Well That Ends Well? - http://www.ritholtz.com/blog/2010/10/oil%e2%80%99s-well-that-ends-well/ Disconnect: Main Street – Wall Street - http://www.ritholtz.com/blog/2010/10/disconnect-main-street-wall-street/ Bespoke Investment Group Long Bond Breaks Support - http://www.bespokeinvest.com/thinkbig/2010/10/27/long-bond-breaks-support.html 680 Days and Counting - http://www.bespokeinvest.com/thinkbig/2010/10/27/680-days-and-counting.html S&P/Case-Shiller Home Price Charts and Tables - http://www.bespokeinvest.com/thinkbig/2010/10/27/spcase-shiller-home-price-charts-and-tables.html The Baseline Scenario Who’s in Charge Here? Not the G20 - http://baselinescenario.com/2010/10/28/whos-in-charge-here-not-the-g20/ Zero Hedge Goldman: “The Dollar Needs to Fall a Lot Further from Here” - http://www.zerohedge.com/article/goldman-dollar-needs-fall-lot-further-here Initial Claims 434K on Expectations of 455K, Previous Print Revised as Expected Higher to 455K - http://www.zerohedge.com/article/initial-claims-434kexpectations-455k-previous-print-revised-expected-higher-455k 25th Sequential Stock Fund Outflow, $81 Billion Year to Date - http://www.zerohedge.com/article/25th-sequential-stock-fund-outflow-81-billion-year-date

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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

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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