Thursday, January 21, 2010

Long TBTF/Short Regional Banks Pair Trade Blowing Up

One of the more popular trades - pushed by too big to fail firms like Goldman Sachs -has been to buy money center banks and short regionals due primarily to the TBTF funding advantage and concern about CRE exposure at regional banks. The trade is totally unraveling as we speak. You can be sure this move is creating major P&L dislocations at hedge funds and prop desks that have been piling into this theme. The trade is down 10% in a few hours and the correlation between regionals and TBTF banks has plunged. JPM, JPM, GS and MS have been the favorite longs in this trade while STI, FITB, HBAN, CMA, HBAN, RF, NYB have been among the favorite shorts. Like I said on Tuesday, Wall Street should have been careful what it wished for related to the Mass. Senate race as the death of healthcare made Wall Street an easy target and complicates the political and legislative landscape. A second stimulus package is less likely to pass without a Democratic Supermajority and what congressman is going to want to vote against restricting risk-taking at the major banks? This type of move in a "risk averse" pair trade strategy will dampen the risk appetite on Wall Street trading desks even if you are not exposed to the trade or even on the right side. Significant correlation breakdowns like this usually empower the risk managers.

Wednesday, January 20, 2010

Morning Call: January 20, 2010

January 20, 2010: Morning Call

Fair Value: SP500 – 1146.69; NDX: 1893.84; DOW: 10,676.06

Technical Levels:

SPX: 986, 1003, 1039-1044, 1067-1075, 1098, 1122 support/ 1153 resistance

Detailed Daily Calendar of Events:
Pre-market EPS: BAC (-.52/26.8B); BK (.51/3.2B); EAT (.22/770M); COH(.72/1.0B); HCBK (.28/339M); MTB (.88/847M); MS (.37/7.8B); STT (.99/2.1B); WFC(-.02/21.9B)
02:00: German PPI (Dec): 0.2% MoM; -5.1% YoY
04:30: BOE releases monetary policy committee minutes
07:00: MBA Mortgage Applications
08:00: BK earnings call
08:30: US PPI (Dec): 0.0% MoM; 4.3% YoY; Ex-Food/Energy: 0.1% MoM; 1.1% YoY
08:30: US Housing Starts (Dec): 574,000; Building Permits: 580,000
09:30: BAC earnings call
10:30: WFC earnings call
11:00: MS earnings call
16:30: API Crude Oil Inventories
21:00: Chinese Q4 GDP (Q4): 10.5% YoY; PPI (Dec): 0.7% YoY
21:00: Chinese Retail Sales (Dec): 16.3% YoY; Industrial Production: 19.6% YoY
Post-market EPS: EBAY (.40/2.2B); FFIV (.49/185.5M); SLM (.44/626M); SBUX(.27/2.5B); XLNX (.35/491.5M)

3-Day Outlook of Key Events:

Today: BAC, BK, MS, USB, WFC, STT all report before the open. German PPI. US PPI. US Housing Starts

Thursday: GS, FCX, and PNC report before the open. Jobless Claims, Leading Indicators, Philly Fed. GOOG, AXP report after the close.

Friday: UK Retail Sales, Euro-zone Industrial New Orders, GE and SLB report before the market opens.

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 8 points below fair value and the NASDAQ futures are trading 15 points below fair value at 7:15am ET. European markets are down 0.70% to 0.90% on concerns that China is moving aggressively to reign in monetary stimulus and a sharp break lower in Greek government bonds. China's Chief banking regulator said overnight that Chinese banks have been "asked" to reduce lending. The Euro has also broken the key 1.42-support area this morning and this can be considered a red flag for the commodity fueled reflation trade. Commodities are down 0.80% to 2% on the dollar and yen strength. Healthcare stocks are up 0.50% to 1.0% with financial, industrials, and basic material sectors down 1% to 2.5%. The Euro weakness is being exacerbated by a huge sell-off in Greek government bonds; the Greek two-year note is up 62 bp to 4.38% and the spread between German bunds is the widest since March. Greek equities are down 10% in the last week. BAC is down 1.5%% on their earnings release, which is hitting the tape as I type this. IBM down 1.7% in the pre-market and CSX is down 3% so the "sell the news" theme continues following earnings. Republican Scott Brown won the race in Massachusetts and the market better be careful what is wishes for (market rallied in part on the theme that gridlock is good and the healthcare legislation may be dead) because the loss of the Democratic super-majority in the Senate decreases the odds that a second stimulus package would pass the Congress. Market participants shouldn't need to be reminded that stimulus and monetary driven liquidity has been the key driver of equities so gridlock may not be a bullish development as yesterday's price action seemed to imply. Asian markets closed lower on renewed efforts by China to decrease lending (Japan down 0.25%, Kong Kong down 1.8%, Australia up 0.14%, Shanghai down 3.2%, South Korea up 0.40%, India down 0.07%). Australia gave up early gains although higher commodity prices left materials stocks in positive territory. Resource shares rose in Japan on higher commodity prices but the broader market fell. China and Hong Kong were spooked by newspaper reports suggesting lending may be limited in China. Hong Kong’s fall was exacerbated when the Shanghai government said a report it may allow individuals to invest abroad was a fabrication.

Research Calls/Market Moving News:

IBM (134.14): IBM reports Q4 EPS $3.59 vs Reuters $3.47, guides f10 EPS to at least $11 vs prior guidance of $10-11, expects Q1 rev growth to improve by 4-5 pts from Q4. IBM is trading down 1.8% in the pre-market.

AAPL (215.04): AAPL outperforms on two stories: 1. Increasing speculation that a 4G iPhone will be sold through Verizon starting in June. Canaccord Adams has a note out this morning saying that "We believe there is a good chance that the “One more thing...” part of next week’s presentation may include two iPhone-related announcements: namely, the release of iPhone OS 4.0 and the unveiling of iPhone 4G coming to Verizon in June." This would give a huge boost to domestic iPhone unit shipments in the 2H10. 2. Apple and Microsoft are in talks to replace the Google default browser on iPhone. Bottom line, Google is a bigger threat to Apple than Microsoft so this likely makes business sense right now. Details below.

AAPL (215.04): Apple talking with Microsoft (MSFT) about making Bing iPhone's default search engine - Business Week: People familiar with the matter say talks have been going on for weeks. A move would mean Google (GOOG)'s search engine would be bumped. Microsoft may also want Bing to become an alternative on Apple's Safari web browser, which currently offers a choice between Google and Yahoo (YHOO) search. A source familiar with Apple's thinking says the company is looking at a search function of its own, and says if it arrives at a deal with Microsoft, it would only be to buy it some time.

AAPL (215.04): Canaccord Adams says iPhone 4G likely coming to Verizon (VZ): Firm believes next week's announcement from Apple may include the release of iPhone OS 4.0 and the unveiling of iPhone 4G to Verizon in June. Canaccord sees this as being very positive for Apple, neutral for Research in Motion (RIMM), and negative for Palm (PALM). Recall, Apple Insider suggested an iPhone for Verizon would be available by Q3'10. AAPL is rated buy with a target of $250

GOOG (587.62): Google maintained outperform at Oppenheimer after channel checks: Target is $650. Firm says mixed data points suggest investors will get a better entry point in GOOG shares after the company reports 4Q earnings tomorrow. Oppenheimer says their channel checks indicate pricing remains pressured in some verticals. Firm suggests investors wait for the company to report earnings, and let management discuss implications of its China decision and the risk to its relationship with Apple.

GOOG (587.62): Google would like to retain business unit in China – NYT: It seems unlikely that the company's Chinese-language search engine will remain. But Google would like to keep its Chinese engineers, sales force, and small piece of real estate in mobile phones. Experts say arriving at a solution that allows the company to do so while saving face for the government will be difficult. But the government may actually find a solution desirable, because China's educated class puts a high value on Google. People with knowledge of the company’s finances put GOOG revenues from China at about $150M per quarter.

BAC (16.32): Bank of America reports Q4 EPS ($0.60), ex-items: Reuters is ($0.53); First Call ($0.52). Company reports total revenues of $25.08B vs Reuters $27.04B.

IBM (134.14): IBM upgraded to buy from hold at Canaccord Adams: Target increased to $150 from $130.

QCOM (49.32): Qualcomm target raised to $55 from $50 at ThinkEquity: Checks by the firm indicate good sell through and healthy inventories. The firm believes March quarter consensus estimates are conservative. ThinkEquity sees incremental upside from NOK and a potential 2H pickup with MediaFLO and Google into Verizon. Shares are buy rated.

GOOG (587.62): Computer security researcher finds what he thinks is strong evidence that attacks on Google were authored by Chinese – NYT: Evidence to this point has been circumstantial, but Joe Stewart says the main program used in the attack has a module based on an unusual algorithm from a paper that has been published exclusively on Chinese-language websites. He concedes programmers could have deliberately placed the code there in an effort to implicate the Chinese, but thinks that possibility is unlikely.

FSLR (123.94): Hapoalim Securities sees German solar PV cap in C11: Firm says support of solar by blue chip German companies may be waning, and less expensive alternative energy sources may be sought in the near term. Hapoalim notes that industry demand models assume solar generation in Germany to increase perpetually to appx 6-7GW in 2011, but the firm assumes that a solid cap of ~3GW may emerge in the coming 6-12 months as the economics of subsidized solar become less compelling.

GS (166.86): Goldman Sachs to delay news on bonuses until after earnings reports the WSJ: The firm said it wants to delay the bonus news until after it releases its earnings report because "It is important to have context of earnings" for the bonus numbers. In the past, employees were told about their bonuses in the days leading up to the earnings report

WSJ comments on the win by Republican Scott Brown in Massachusetts: Several papers are all carrying essentially the same commentary, the Brown win has made the passage of a health care bill much more complicated and difficult. But other elements of the current legislative agenda are also now at risk. Senator Dodd will face pressure to negotiate with Republicans over the financial reform measures (Note the weekend report of his possible willingness to drop the Consumer Financial Protection Agency). Several strategists say the Democrats should now focus solely on jobs and the economy.

STT (43.20): State Street reports Q4 EPS $1.00 vs Reuters $0.99: Company reports revenues of $2.28B vs Reuters $2.24B.

Thursday, January 7, 2010

The Technology Sector is Overbought

There appears to be pretty substantial resistance right above current levels given the NDX is the only major index that is at the top of the LEH Waterfall decline; no other major sector is close to capturing all the post-LEH losses. The fundamental story in technology is better than any other sector and this sector is likely to generate the most significant earnings beats during Q4 earnings season. But, I expect to see the technology sector lag through the earnings season and take a pause given the overhead resistance at 1900-1920. Typically, financial stocks see a strong "sell the news" reaction on postive earnings and technology usually has momentum. I think that relationship could reverse in the upcoming quarter. I like PSQ long (NDX Short ETF) and trading banks with a long bias.

Monday, January 4, 2010

Morning Call: Janury 4, 2010

January 4, 2010: Morning Call

Fair Value: SP500 – 1110.79; NDX: 1858.81; DOW: 10,365.37

Technical Levels:

SPX: 986, 1003, 1039-1044, 1067-1075, 1098 support/ 1133 resistance

Detailed Daily Calendar of Events:

***09:00: BAC CEO Moynihan speaks to North Carolina Bankers Association. (timing not certain)
10:00: ISM Manufacturing (Dec): 54.0; Prices Paid: 60
10:00: US Construction Spending (Nov): -0.5%
10:15: Fed’s Lockhart moderates financial crisis panel
13:15: Fed’s Duke speaks on the US economic outlook

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 7 points above fair value and the NASDAQ futures are trading 22 points above fair value at 7:15am ET. European markets started the year on a positive note with gains of between 0.50% and 1.0%, inline with US futures. M&A activity made the headlines early this morning with Novartis (NOVN.VX) announcing it will acquire 52% Alcon (ACL) stake from Nestle (NESN.VX). The London Times reported Kraft Foods (KFT) is preparing to increase bid for Cadbury (CBRY.LN). European PMI data came in better than expected on balance: UK Dec Final Manf PMI 54.1 vs prelim 52.0. Eurozone Dec Final Manf PMI 51.6 vs prelim 51.6. Germany Dec Final Manf PMI 52.7 vs prelim 53.1 . France Dec Final Manf PMI 54.7 vs prelim 54.4. Asian markets closed mostly higher (Japan up 1.03%, Hong Kong down 0.23%, Australia up 0.12%, Shanghai down 0.46%, South Korea up 0.77%, India up 0.54%). Japanese exporters advanced after the yen weakened to the lowest since 7-Sep before recovering. South Korea went up after exports increased. China developers took Hong Kong down slightly after strong manufacturing data from the country raised fears monetary policy might be tightened sooner than expected. Developers declined in China as the country passed new tax and mortgage rules making a tightening of the sector appear more likely. The market was also hurt by profit-taking and concerns about inflation. Banks were weak as people feared pending fundraising. China Dec HSBC Manf PMI 56.1 vs prior 55.7.

Research Calls/Market Moving News:

CBY (51.39): Kraft Foods preparing to increase bid for Cadbury reports the London Times: Without citing sources or by how much the offer will be raised, the paper says the offer will be raised within the next 2 weeks. If it waits until after 19-Jan, it can only make a higher bid if a rival takeover bid is made.

AAPL (210.73): Apple COO Tim Cook rumored to be a target of search firm seeking GM CEO candidates - Silicon Alley Insider: Citing a tip from an unnamed reader, Silicon Alley Insider reported last Thursday afternoon that Apple COO Tim Cook is executive search firm Spencer Stuart's first choice for the open CEO spot at General Motors. The reader claims to have an inside source at Spencer Stuart, and does not know if Cook has been contacted yet. As the article notes, GM recently hired former Microsoft CFO Chris Liddell as its new CFO.

GOOG (619.98): Barron's The Trader reviews the Google Nexus One smartphone: The Google Nexus One smartphone is slim, fast and has a nice big screen. The iPhone has more spit and polish and far more apps but the Nexus One is a fine choice for many users. One problem is it feels very similar to other Android smartphones. The phone is unlikely to move Google's stock or those of rivals. The phone faces a tough fight to differentiate itself among the growing field of competitors.

Barron's Cover says Cloud Computing will be as revolutionary as the internet itself The importance and hyperbole surrounding cloud computing echoes what surrounded the internet just about a decade ago. There are skeptics, such as Oracle's Larry Ellison and HP's Mark Hurd, but each company is still working on cloud stories because of the obvious benefits that include flexibility, cost savings and higher performance. It is much too early to pick winners and losers from the trend. For investors today, there are some areas to focus on. Companies that sell the technology to build clouds include RVBD, PAR and VMW. There are cloud service providers like T, AMZN, SVVS or TMRK. Major names like GOOG, AAPL and MSFT could be winners, or losers, as each is expected to enter one or more aspects of cloud computing (see Apple's recent purchase of Lala Media). The current technology consolidation among the majors is largely in anticipation of cloud computing. Some companies that have already succeeded include (CRM) and NetSuite (N) but they will face increasing competition from names like SAP and Oracle.

MS (29.60): Morgan Stanley upgraded to buy from neutral at UBS:
Target is $37. Firm believes the company is nearing a turning point with EPS/ROE will start to show some improvement.

MS (29.60): Morgan Stanley upgraded to outperform from neutral at Credit Suisse: Target raised to $38 from $32. Shares were also upgraded at UBS this morning

PCLN (218.41): estimates and target raised at Piper: The firm raises their target to $272 given conviction that the company can continue to take share and post upside to consensus estimates. Piper believes the Street continues to underestimate the earnings power of PCLN. F10 EPS is raised to $10.63 vs. Reuters $10.27. F11 EPS is initiated at $13.20.

CHK (25.88): Total (FP.FP) and Chesapeake (CHK) sign JV for Total to purchase 25% stake in Barnett Shale assets: Total and Chesapeake sign agreement for a $2.25B joint venture to acquire a 25% interest in Chesapeake’s upstream Barnett Shale assets. Total will pay $800M in cash and pay an additional $1.45B by funding 60% of Chesapeake’s share of drilling and completion expenditures until the $1.45B obligation has been funded, which Chesapeake expects to occur by year-end 2012.

LVS (14.93): Las Vegas Sands upgraded to buy from neutral at UBS: Target increased to $20 from $19. Firm notes Macau growth and sees a potential upside to its Q4 estimate.

WYNN (58.23): Wynn Resorts upgraded to buy from neutral at UBS: Target is $76. Firm cites valuation.

INTC (20.40): Intel upgraded to outperform from neutral at RW Baird: Target increased to $26 from $24. The firm sees an upcycle for enterprise in 2010 and says its checks indicate tier-one PC OEMs raising procurement forecasts for 1H10.

FSLR (135.40): First Solar reiterated sell at Hapoalim Securities: Firm checks indicate that a significant percentage of solar 'pipeline' projects acquired from Optisolar have been rejected by the Bureau of Land Management, or will not receive U.S. grant funds. Target price, $90.