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Marc Chandler
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| Consolidative Tone to Start Week |
6/29/2009 7:15 AM EDT
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The dollar is starting the week firm but well within recent ranges. An improved EC confidence report helped the euro resurface above the $1.40 level. The risk in New York today is on the upside toward $1.4080-$1.4100. Disappointing industrial production and retail sales in Japan will not dampen expectations for the key Tankan survey (Wednesday in Tokyo), where a recovery in sentiment is expected, but the yen itself has traded in a mixed fashion. Dollar resistance is seen in the JPYT95.60-95.80 today with support near JPY95.00.
Global equities are mixed, with Asia down and Europe up.
Bonds are extending last week's gains.
Position: None
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Adam Feuerstein
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| Biogen Idec/Elan: 10th PML Case Reported in Tysabri Patients |
6/29/2009 7:29 AM EDT
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Biogen Idec (BIIB) reported Friday that a 10th multiple sclerosis patient being treated with Tysabri was diagnosed with a serious brain infection.
The latest case of progressive multifocal leukoencephalopathy (PML) occurred outside the U.S. in a patient on Tysabri therapy for 30 months. Four Tysabri patients on therapy for more than 30 months have now contracted PML, including the last three reported cases.
This is raising concerns that the risk of a multiple sclerosis patient contracting PML increases with longer duration of Tysabri therapy. The overall incident rate of PML is still very small, and Biogen Idec has presented scientific data disputing the notion that PML risk increases with longer Tysabri use.
However, some doctors are beginning to cycle patients off Tysabri after two years or put patients on drug holidays. If this trend continues, Tysabri patient and revenue growth -- already stunted -- could stall further.
Biogen Idec shares Tysabri revenue with Irish drugmaker Elan (ELN).
Position: none
I see we had another five bank failures on Friday. This brings the year-to-date count to 45 failed banks in the U.S. The failures Friday were all smaller banks; the largest of the five had just $456 million in assets.
The continuing weakness in real estate and low levels of economic activity are crushing the small regional and community banks right now. This is one of my all-time favorite groups, but it is still a few ticks too soon to do broad buying in the sector. The number of troubled institutions now stands at 305, the most since 1994, and more are expected.
As weakness and continued failures pressure the group, you need to watch the small banks very closely. There is a large fortune to be made in this group as soon as there is stabilization in real estate prices. Hold your fire until you see the whites of their eyes, and steady balance sheets.
Position: watchful
I am looking for another low and slow day today. I don't see much action this morning, slow news day. ... Its Monday, summertime, holiday shortened week. ... The last few trading days have been "minimal selling and early buying," and I see no reason for that to change. ... I am going to look for a dime in selling and a 50-cent climb on the QQQQ.
Position: NM
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Tom Graff
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| Treasury Market Strong |
6/29/2009 8:58 AM EDT
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Last week's auctions went well, and this week there is no supply, so we seem to be set up for a strong week in the Treasury market. The excuse this morning is China claiming that its reserve policy is "stable," but honestly, we knew that it had few short-term options.The 10-year is currently 3.48%, and 3.40% looks like a reasonable short-term target, although volume will be light, given the holiday. Toward the end of the week, we'll start to set up for the 10-year and 30-year auctions on July 8 and July 9 respectively.AutoZone (AZO) and American Airlines (AMR) bringing new corporate deals today. Corps are flat to slightly tighter.
Position: None
Dish Network (DISH) shows a pattern that's developing across dozens of stocks as we head into summer. The satellite provider recovered from last year's crash with a steady rally that reached the 200-day EMA in May and promptly stalled out. The subsequent pullback has been orderly, with a constructive volume pattern. The decline has generated a trendline that will break on a rally above Friday's high.
A buying spike that tests the May high will complete an eight-month cup-and-handle pattern that should support much higher prices. However, it isn't a good idea to underestimate the magnetic power of the 200-day EMA. Any trade taken on a trendline breakout needs to be closely managed, because that level could trigger a reversal at any time.
More technical comments and annotated chart here.
Position: n.m.
924 = 92.85 S
919 = 92.35 M
917.50 = 92.20 M
913 = 91.75 M
909 = 91.35 S
904.50 = 90.90 M/S
Position: none
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Bob Byrne
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| Morning Trade |
6/29/2009 9:29 AM EDT
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The bulls were able to hold on to their rally from Thursday, and if they want to continue their rebound, they need to push the emini through moderate resistance at 917.50 and 919. The trading above 919 certainly favors the bulls, but the real momentum would likely come from a sustained break above strong resistance at 924 as traders who are afraid of missing out jump on board.
The bears have two choices ... make a stand at 924 or stop this bull train now and target strong support at 909. With the emini trading right at moderate support/resistance at 917.50, the bears need to push us toward moderate support at 913 and hope enough late bulls panic out, driving us back to strong support at 909. The bulls will find further moderate/strong support at 904.50 ... so I would not expect to see panic-like selling at 909.
Position: none
Bloomberg is carrying a story about how China is going to end its manic stockpiling of various industrial metals. On one level, China's purchases in recent months made sense if it had upcoming direct use for the copper, aluminum and zinc it was buying at prices a fraction of where they were a year-ago. On the other hand, the country was just engaged in a self-sustaining state bureaucracy without a "stop" button.
Just as the U.S. Defense Logistics Agency stockpiled "strategic" metals for years and ultimately sold them off in auctions, the Chinese will find their actions pointless.
Its decision will put downward pressure on various metals prices, and I am sure it will pole-ax all those who still confuse a commodity-linked equity with the commodity itself. If you have piled into various miners, watch for a stampede in the other direction.
Position: None
Chinese officials are unlikely to allow the yuan to appreciate very much during the second half of the calendar year. Next month will be the one-year anniversary of the Chinese decision that in essence appears largely tantamount to re-pegging the yuan to the greenback. It has been confined to a little more than a 1% range since. Last July, the pricing of the one-year yuan NDF implied a 6% appreciation.
The Shanghai Composite Index has been among the world's top equity markets in H1 09. The large fiscal stimulus efforts has ensured that the economy will gain new traction, Yet stimulative measures are impacting perhaps in a way different from the conventional narrative. Bank loans in China have surged by CNY5.8 trillion. Part of the lending--some reports suggest as much as 20% or some $170 bln--has found its way into the equity market.
China and Hong Kong should soon allow the settlement of bilateral trade to be conducted in yuan. Often Hong Kong is used by China and its trading partners to conceal trade as goods often get re-exported from HK. China and its trading partners often disagree on how such trade should be counted. More importantly, it takes more than diktat to determine an invoicing currency. China recognizes that the US dollar will continue to dominate global trade.
Position: None.
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Tim Melvin
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| Enterpise Buy Teppco |
6/29/2009 10:27 AM EDT
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I see on the early morning tape that Enterprise (EPD) is buying Teppco Partners (TPP) in an all-stock deal worth about $3.3 billion, creating a pipeline company with over 48,000 miles of pipe. It also gives Enterprise a storage and transportation network that allows it to save about $20 million a year according to the company.
I like the pipeline business and think Enterprise is one of the best operators in the space. I would wait a day or two for the arb community to put on their position, since they will be shorting quite a bit of EPD, but I would probably look to buy some Enterprise in the near future
We are going to see a lot more deals in the energy sector over the next two years. it is one of my favorite sectors to search for cheap stocks right now.
Position: none
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Marc Chandler
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| Debt Revival a Major Surprise of First Half of 2009 |
6/29/2009 10:47 AM EDT
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One of the surprising developments in the first half of 2009 has been explosion of debt issuance. Globally, the financial sector issued about $730 billion of debt while the nonfinancial sector issued about $886 billion. Financial issuance was helped by a number of countries guaranteeing bank bonds and by banks switching to less expensive debt. Bond issuance was also boosted by the impairment of banks.
The high-yield bond market also saw renewed interest. Risk premiums fell, and issuance in the second quarter was around $48.3 billion, nearly four times larger than the first-quarter pace.
Convertible bonds also enjoyed a mini-boom, having activity quadrupled in second quarter over the first quarter.
Flows into U.S.-based bond funds have been positive every month this year.
Position: None
Bernie's headed to the slammer for 150 years -- or more likely the rest of his life. Has justice been served here? Is there more to be done? Tell us what you think.
Position: None
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Howard Simons
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| On the Cover of Rolling Stone |
6/29/2009 11:36 AM EDT
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A reader e-mailed about a Rolling Stone article on Goldman Sachs (GS). I thought I'd share my response with everyone:
"I generally shy away from conspiracy theories as there's usually a simpler explanation. Sometimes, as in the case of various currency deals (July 2008 to let China re-peg the yuan), there is not a better and simpler explanation.
"You hear all sorts of accusations leveled at GS, often by people who've been on the wrong side of trades. As successful traders have a positive asymmetry of information, they look like they've engineered something. And maybe they have.
"I think the federal government made a mistake in allowing the appearance of a conflict of interest to arise during the Paulson Treasury era. No one can be very comfortable with GS' role in the AIG (AIG) bailout, and their motivation to exit TARP, paying themselves huge bonuses, is unseemly.
"But is this peculiar to Goldman or is it a situation where whoever was the top Wall Street firm would have looked like a string-puller?"
Position: None
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Adam Feuerstein
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| AMAG Awaiting FDA Approval of Feraheme |
6/29/2009 11:43 AM EDT
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AMAG Pharmaceuticals (AMAG) is expected to hear by this evening about FDA approval of its intravenous iron replacement therapy, Feraheme.
The Feraheme approval has been delayed for some time, but in April, AMAG signaled that most if not all of the outstanding issues (mainly around Feraheme manufacturing) had been resolved. The final approval decision, of course, rests with the FDA.
As a reminder, AMAG was a long pick in my Biotech Select model portfolio, and it would remain so if the portfolio still existed. I had recommended some profit-taking in the low to mid $50s. I think the stock should head higher on a full approval, assuming a clean drug label. (I don't anticipate a sell-on-the-news reaction.) I'm also bullish about a strong Feraheme launch in July, although there are some issues and concerns about reimbursement that need to be worked through, especially as we move closer to Medicare bundling for dialysis in 2011.
More on all that after we (hopefully) hear from AMAG this evening.
Position: none
The question on justice being served will rest largely on how much money is recovered and how the IRS ends up treating the victims. There are still so many questions of taxes paid on phantom income that should be recoverable and the allocation of losses that the tax courts will be hearing these cases for years to come.
Bernie deserves to spend the rest of his life in jail. There is no question about it. One still wonders about the depth of his children's and associates' involvement and the probability of future prosecutions.
All the jail time in the world will not give back life to the suicides who lost everything or restore the causes of the many foundations who did good deeds in communities across the nation until Madoff stole their money.
Position: none
Ron, I'd sure like to know why the rise in commodity prices is unimportant.
I'm certainly interested in the underlying reasons for the rise in dollar-denominated commodity prices -- not just for a trade but for the information relating to a wide variety of factors that provide insight into the current global business environment.
Position: none mentioned
Dan, two factors contributed to most of the recent rebound in the prices of various commodities. The first was simply a renormalization of markets after the shocks in the fourth quarter of 2008 and first quarter of 2009. The second was a revival of the speculative "commodities as an asset class" trade of recent years; China's commodity stockpiling is included in this category.
Most physical commodities are surprisingly poor reflectors of financial market conditions such as reported and expected inflation, monetary largesse, the yield curve and the exchange value of the dollar against various currencies. We would like to think otherwise, but the data are the data.
This legend was born in the early 1970s and will not die. Let's remember that inflation was a problem in the late 1960s, Nixon imposed price controls in August 1971, the prices of cattle and then grains rose in 1972, and then and only then did the price of crude oil surge higher after October 1973. Yet people continue to believe the commodity price increases "caused" something that happened in the past.
The prices of individual commodities have a much smaller macro impact than we would like to believe. We pay a lot of attention to them because they are visible and provide us with a Rohrschach test for our points of view.
Position: None
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Marc Chandler
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| Gilts, Sterling and European Bonds |
6/29/2009 1:28 PM EDT
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United Kingdom gilts and sterling itself responded positively to earlier news that the Bank of Enlgand's reverse auction to buy GBP3.5 billion was well received. Although the Bank of England could shed fresh light on its intentions at this week's MPC meeting, many observers suggest that the August meeting is more likely to see the program tweaked.
The combination of the reverse auction and news of more third-quarter layoffs and mortgage lending at the lowest levels since '93 sent the yield on the 10-year gilt to the lowest level in six weeks.
European bonds extended last week's rally today, with most 10-year yields off 2-5 basis points in Europe.
Position: None.
Just a heads-up that the index put/call ratio is now, at this latest reading, 85%. That would be quite low and would most definitely not be bullish for the market.
Position: Starting to see confirmation of the upcoming overbought reading.
Here are a few stories and videos from our flagship site you may have missed:
Position: n/a
Brazil's economy has slowed sharply. Although exports now account for less than 10% of GDP, and that should leave Brazil less vulerable, GDP is expected to contract 2% in 2009, vs. 5% growth in 2008.
The country's central bank has responded to the weaker growth outlook, cutting interest rates by 450 basis points so far this year. Its next meeting is July 21-22, when a 50-basis-point cut is expected. The market sees an end-2009 rate of 8.75%, but we think it could fall as low as 8.25%. IPCA inflation eased to 4.9% year over year in mid-June, the first reading below 5% since April 2008, and is likely to slip further to end 2009 close to 4%. Easing inflation will give the central bank leeway to cut rates further, as monetary policy will bear the brunt of providing stimulus, since the budget outlook is deteriorating.
Brazil signaled unhappiness when the real strengthened below 2.0 in 2008, and policy-makers are most likely quite concerned with the exchange rate now below 2.0. While we do not believe any level is being targeted, we expect the central bank to continue intervening to slow BRL strength. We see USD/BRL remaining largely in the 1.8-2.0 range over the course of the second half. The current account deficit was narrowed, and more importantly, FDI has remained strong throughout the crisis. Brazil is benefiting from being the proxy for Latin America; other regional equity markets remain too illiquid for many institutional investors.
Position: None
I find it interesting that distressed investor Wilbur Ross has stepped up with a $75 million dollar loan to the railway equipment manufacturer Greenbrier Companies (GBX). The loan contained no covenants, and Mr. Ross is joining the Greenbrier board. Ross already has interest in one of the largest manufacturers of railcars in Europe, as he believes that rail is far more efficient than highway transportation and shipping. Naturally, Ross got an equity component, receiving warrants worth about 16% of the company. The company used the money to reduce and restructure its credit facility with Bank of America (BAC).
Ross has a long history of being in the right spot at the right time, and I see no reason to think he will be wrong this time. I note that Greenbrier has outstanding senior notes that trade at yields of better than 17%.
Position: none
I see AIG has enlisted the aid of Stuart Spencer to find their fifth chief since 2005. This places them in a league with governments in Bolivia and managers under George Steinbrenner.
Here's a serious question: Why would anyone in their right mind take this job? If you do well, where's your upside? If you do poorly in an impossible situation with a damaged firm, you will be blamed. It's a modern catch-22: Anyone who is willing to take this job should be barred from holding it.
I don't know what Stuart Spencer's cut of the action is going to be here. But AIG shareholders might spend their money posting an ad on Craigslist and taking their chances. Besides, they might find some people there who could provide for some entertaining hearings in front of Barney Frank, Chris Dodd and others.
Position: None
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Tom Graff
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| Mortgage Rates Should Fall |
6/29/2009 4:32 PM EDT
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The so-called current coupon mortgage fell to 4.53% today, the lowest level since June 3. That's down from a high of 5.07% on June 10. The current coupon reflects the theoretical coupon on a par-priced 30-year mortgage-backed security. MBS actually trade in 0.50% coupon increments, so the "current" coupon is usually between two major coupons.In essence, the current coupon plus 50 basis points should reflect what the prevailing borrowing rate would be based solely on MBS trading. As such, it's usually a good forward indicator of actual mortgage rates.I remain bearish on low coupon MBS vs. other bonds. Between May 29 and June 10, the recent high in MBS rates, Fannie Mae 4.5% MBS declined by 4.1%. The 10-year Treasury declined by almost exactly the same amount (-4.0%). However as the market rallied from June 10 to today, the 10-year Treasury rose by 4.0%, where as the MBS rose by only 3.3%. Equal downside, less upside. Not a good trade.
Position: None
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Tom Graff
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| Quarter-End in Bonds |
6/29/2009 4:46 PM EDT
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A lot of talk about quarter-end and stocks, but this quarter looks pretty benign for bonds. The Barclays Aggregate (the S&P 500 of bonds) will probably only extend 0.08 years in duration this month, after extending 0.29 years between May 1 and June 1.Index extension is a function of two items. First is the removal of all bonds that mature in less than one year and replacement with any qualifying new issues. That always results in an extension, since by definition a qualifying new issue must be longer than one year to maturity.The second item is more significant: changes in MBS duration. MBS represent about one-third of the index, and the duration varies with interest rates. At the end of May, the relatively large duration extension resulted in portfolio managers aggressively adding long bonds, resulting in a more than a 2-point rally in the 10-year Treasury the last two days of the month.This month should be more benign.
Position: None
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