Bond traders sat on their hands for most of the week, waiting for two big news releases, the prepayment speeds for Freddie MBS last night, and the jobs report this morning. For the week the curve was slightly flatter, falling 1 bp to 279 basis points 2s to 10s. Credit tightened after being flat last week, mostly on today’s positive news. Markit’s current CDS index stands at 85.6, 9 points higher than the multi-year lows set in January. CDS is quoted as the cost of default insurance, so the lower the better.
The curve actually sat much flatter before the heavy selling on the long end after this morning’s jobs report, which showed business cut 36,000 payroll positions, better than the 68,000 expected. The labor participation rate ticked up slightly from 64.7% to 64.8% and the unemployment rate held steady at 9.687%. The big story leading up to the release was that severe weather was going to put the hurt on the data. The effect of things like this is impossible to accurately measure, but the market was ready to see a terrible number, and ignore it, but instead we saw a better than expected number, and stocks rallied like a Subaru.
Prepayment speeds are usually a non-event, but Freddie Mac purchased every loan that was at least 120 days delinquent from their mortgage pools in February, so March FHLMC speeds were expected to skyrocket. Freddie MBS underperformed Treasurys in early trading, but buyers stepped in to prove the selloff was a little unjustified considering overall speeds may actually slow down going forward due to the cleanup. Fannie Mae is expected to follow Freddie’s lead in the next few months, but will buy only “a substantial portion” of their 120+ delinquent loans. Fannie Mae is considered to have more problems compared to Freddie, but although Thursday’s release gives some insight into what will come, it by no means answers the market’s questions on what is to come with FNMA.
Have a good weekend.
Cliff J. Reynolds Jr., Investment Analyst
Friday, March 5, 2010
Daily Insight
U.S. stocks were able to shake off another very weak home sales report, rallying in the afternoon to propel the broad market’s (S&P 500) winning streak to five sessions. The Dow and NASDAQ Composite posted their fourth gain in the past five days.
A better-than-expected increase in retail sales for stores open at least a year (known as chain-store sales) was really the best news yesterday and probably helped to offset the day’s other economic releases, which weren’t exactly helpful. The latest data on pending home sales suggested that the housing-market weakness of the past couple of months will extend into February and March.
The jobless claims data had to be viewed as a net negative – while initial claims fell, they remain at an elevated level and continuing claims are stuck at unprecedented levels. Nonfarm productivity for the most recent quarter posted a very high reading, but only because firms have kept payrolls and hours worked to a minimum. More on all of these releases after the jump.
Energy and health-care shares were a drag on the market. Financials were the best-performing sector as some members of Congress look to dilute the proposed new regulations on the industry and delay its inception.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
A better-than-expected increase in retail sales for stores open at least a year (known as chain-store sales) was really the best news yesterday and probably helped to offset the day’s other economic releases, which weren’t exactly helpful. The latest data on pending home sales suggested that the housing-market weakness of the past couple of months will extend into February and March.
The jobless claims data had to be viewed as a net negative – while initial claims fell, they remain at an elevated level and continuing claims are stuck at unprecedented levels. Nonfarm productivity for the most recent quarter posted a very high reading, but only because firms have kept payrolls and hours worked to a minimum. More on all of these releases after the jump.
Energy and health-care shares were a drag on the market. Financials were the best-performing sector as some members of Congress look to dilute the proposed new regulations on the industry and delay its inception.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Thursday, March 4, 2010
Pfizer (PFE) bids for generics business
Oh, Pfizer. You just love acquisitions, don’t you?
Pfizer has reportedly bid $4 billion Euros (or roughly $5.4 billion U.S. dollars) for German generic drugmaker, Ratiopharm. This acquisition would thrust PFE into the big leagues of generic drugs with annual sales of roughly $11 billion compared to the biggest player, Teva Pharmaceuticals (TEVA), which had $13.9 billion in 2009 revenue.
I figured Pfizer would want to focus on integrating the massive Wyeth acquisition, which cost them more than $65 billion, before prowling for additional acquisitions to combat patent losses. The price tag doesn’t really concern me because Pfizer has plenty of cash and investing in a generics business makes some sense. In addition, global scale is critical to generics, so buying the top manufacturer in the EU’s largest market (Germany) is wise.
I suppose my main concern is the vastly different economic of generics compared to the Big Pharma model. Integrating a business with intense cost competition will be more complicated than just writing a big check and eliminating overlapping business costs.
Another concern is that annual generic sales totaled just $83 billion, according to IMS, while PFE alone generates more than $60 billion with much more attractive margins. Significant patent cliffs mean $150 billion in annual sales will go generic by 2014, but growth will then slow substantially.
I guess Pfizer is shrinking it research spending for a reason: they are going to purchase future revenues for the foreseeable future. Ok, so PFE is officially no longer a growth stock. That’s no big deal if they keep paying a fat dividend (current yield of 4.17%) and find ways to grow the dividend at a meaningful rate.
While on the topic of PFE, I should acknowledge that earlier this week an experimental Alzheimer’s treatment, Dimebon, failed to show effectiveness in a large late-stage study. This is one of the drugs I mentioned in this post as a catalyst for 2010 performance. In short, the results were very disappointing to investors.
Peter Lazaroff, Investment Analyst
Daily Insight
U.S. stock indices ended mixed on Wednesday as some legislative concerns and a cautious economic report from the Fed offset better-than-expected results from the service sector. The major indices ended the session essentially flat with the Dow Industrials and NASDAQ Composite slipping, while the broad S&P 500 ended fractionally higher.
Things were going pretty well as somewhat upbeat sentiment in pre-market futures trading flowed into the official session. However, the gains evaporated shortly after lunch, right around the time of President Obama’s press conference urging lawmakers to vote on health-care overhaul (which means they’ll choose reconciliation – so the hurdle is just 51 votes in the Senate) and the Fed released its latest Beige Book – that report expressed concerns over the real estate market and wasn’t particularly cheery on the labor market either.
Basic material shares were the best-performing sector for a third-straight session. Health-care was the laggard, leading the three of the 10 major sectors that fell on the session.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Things were going pretty well as somewhat upbeat sentiment in pre-market futures trading flowed into the official session. However, the gains evaporated shortly after lunch, right around the time of President Obama’s press conference urging lawmakers to vote on health-care overhaul (which means they’ll choose reconciliation – so the hurdle is just 51 votes in the Senate) and the Fed released its latest Beige Book – that report expressed concerns over the real estate market and wasn’t particularly cheery on the labor market either.
Basic material shares were the best-performing sector for a third-straight session. Health-care was the laggard, leading the three of the 10 major sectors that fell on the session.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Wednesday, March 3, 2010
Daily Insight
U.S. stocks extended the latest winning streak to four sessions on talk of more acquisitions to come, Qualcomm’s announcement that they’ll begin a $3 billion stock buyback program and increase the dividend, and Indian manufacturing remained in expansion mode for an 11th straight month.
Companies are sitting on record levels of cash, roughly $1.18 trillion for S&P 500 members, and early signs suggest they’ll deploy that cash in a manner that boosts returns for shareholders via buybacks and dividend hikes. (S&P 500 members’ cash levels jumped $518 billion over the past year after slashing capital spending by 43%. Excluding financials, corporate cash stands at $820 billion, up 27% over the past year.)
Firms see the environment as challenging and are not confident profits alone are going to drive share prices higher. Certainly, dividend payouts will need to increase as the coming tax-rate hikes on dividend income will erode after-tax returns. The two plans being pushed: hike the dividend-income tax rate from the current 15% to 22.9% (20% + 2.9% Medicare tax) or drive the rate to the investor’s marginal tax rate – the former having the most support.
Of course, if profit growth does not become durable then this strategy becomes a negative for job growth. Firms will not spend cash on both areas unless the revenue and income is there to support it. They’ll continue to seek profit-enhancing productivity gains via reduced payrolls.
The Dow average was held back by the index’s tech names -- IBM, Microsoft and Hewlett-Packard.
Along with information technology, telecom and consumer discretionary shares were the three of the major 10 sectors to lose ground on the session. Basic material, energy and utility shares handily out-performed the market.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Companies are sitting on record levels of cash, roughly $1.18 trillion for S&P 500 members, and early signs suggest they’ll deploy that cash in a manner that boosts returns for shareholders via buybacks and dividend hikes. (S&P 500 members’ cash levels jumped $518 billion over the past year after slashing capital spending by 43%. Excluding financials, corporate cash stands at $820 billion, up 27% over the past year.)
Firms see the environment as challenging and are not confident profits alone are going to drive share prices higher. Certainly, dividend payouts will need to increase as the coming tax-rate hikes on dividend income will erode after-tax returns. The two plans being pushed: hike the dividend-income tax rate from the current 15% to 22.9% (20% + 2.9% Medicare tax) or drive the rate to the investor’s marginal tax rate – the former having the most support.
Of course, if profit growth does not become durable then this strategy becomes a negative for job growth. Firms will not spend cash on both areas unless the revenue and income is there to support it. They’ll continue to seek profit-enhancing productivity gains via reduced payrolls.
The Dow average was held back by the index’s tech names -- IBM, Microsoft and Hewlett-Packard.
Along with information technology, telecom and consumer discretionary shares were the three of the major 10 sectors to lose ground on the session. Basic material, energy and utility shares handily out-performed the market.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Tuesday, March 2, 2010
Daily Insight
U.S. stocks started the month off on a high note, propelled by a number of acquisitions as Prudential will buy one of AIG’s crown jewels (their Asian life insurance business) and two pharmaceutical/biomedical deals that juiced mid and small-cap stock indices.
Most overseas bourses performed well the night before, which also offered a boost to the U.S. market, on the weekend’s news that the EU is readying a Greek bailout. Finance ministers will continue to state that they’ll hold Greece’s feet to the fire with regard to austere budget constraints, but as the Greek government get closer to the necessary bond sales needed to roll maturing debt the EU will remove this rhetoric even if the German populace is steadfastly against a bailout – Germany being the EU’s stalwart and major force in the bailout.
Consumer discretionary shares led the broad market higher after the latest personal spending data came in a touch better-than-expected. Utilities, which have had an especially hard time since the end of 2009, was the second-best performing S&P 500 sector. Information technology and basic material shares rounded out the best performing groups.
Financials were the day’s relative loser after HSBC, Britain’s largest bank, reported setting aside higher provisions to guard against a rising non-performing loan count.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Most overseas bourses performed well the night before, which also offered a boost to the U.S. market, on the weekend’s news that the EU is readying a Greek bailout. Finance ministers will continue to state that they’ll hold Greece’s feet to the fire with regard to austere budget constraints, but as the Greek government get closer to the necessary bond sales needed to roll maturing debt the EU will remove this rhetoric even if the German populace is steadfastly against a bailout – Germany being the EU’s stalwart and major force in the bailout.
Consumer discretionary shares led the broad market higher after the latest personal spending data came in a touch better-than-expected. Utilities, which have had an especially hard time since the end of 2009, was the second-best performing S&P 500 sector. Information technology and basic material shares rounded out the best performing groups.
Financials were the day’s relative loser after HSBC, Britain’s largest bank, reported setting aside higher provisions to guard against a rising non-performing loan count.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Monday, March 1, 2010
February 2010 Recap
After enduring an 8.03% drop from Jan. 19 to Feb. 8, the S&P 500 posted a solid monthly gain despite concerns about sovereign debt and lackluster economic data.
January retail sales data showed that U.S. consumers are starting to pull more of their weight, but a surprising increase in initial jobless claims and disappointing durable goods report near the end of the month kept investors expectations for the economy tempered. Housing data didn’t help either, with sales of previously owned U.S. homes falling 7.2% in January to a seven month low.
More important to the markets was the Federal Reserve raising the interest rate it charges banks for emergency loans and reaffirming that broad tightening of credit was not imminent. In addition, core consumer prices fell for the first time since 1982, leaving room for the Fed to keep rates relatively low if necessary.
The MSCI EAFE index posted a small loss of 0.65% on weaker-than-expected European Union GDP data and concerns surrounding Greece’s debt problem. The MSCI Emerging Markets Index squeaked out a 0.34% gain in the face of China removing economic stimulus. The bright spot among international areas was the MSCI Pacific Ex-Japan Index, which posted a 3.12% gain on strength in Australia.
Domestic REITs outperformed all other asset classes amid merger and acquisition activity. Multiple bids were made public for General Growth Properties, which filed for the biggest real-estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree. Simon Property Group offered $10 billion and Brookfield Asset Management, which owns roughly $1 billion in General Growth debt, offered $2.63 billion for a 30% stake. General Growth is holding out for a higher bid, which led REITs to advance further.
Rates were barely lower for the month, falling just a few basis points across the curve, while news in bond land was dominated by sovereign credit issues overseas. Corporate spreads domestically were tighter by a few beeps compared to the end of January, despite widening out mid-month to levels not seen since November.
January retail sales data showed that U.S. consumers are starting to pull more of their weight, but a surprising increase in initial jobless claims and disappointing durable goods report near the end of the month kept investors expectations for the economy tempered. Housing data didn’t help either, with sales of previously owned U.S. homes falling 7.2% in January to a seven month low.
More important to the markets was the Federal Reserve raising the interest rate it charges banks for emergency loans and reaffirming that broad tightening of credit was not imminent. In addition, core consumer prices fell for the first time since 1982, leaving room for the Fed to keep rates relatively low if necessary.
The MSCI EAFE index posted a small loss of 0.65% on weaker-than-expected European Union GDP data and concerns surrounding Greece’s debt problem. The MSCI Emerging Markets Index squeaked out a 0.34% gain in the face of China removing economic stimulus. The bright spot among international areas was the MSCI Pacific Ex-Japan Index, which posted a 3.12% gain on strength in Australia.
Domestic REITs outperformed all other asset classes amid merger and acquisition activity. Multiple bids were made public for General Growth Properties, which filed for the biggest real-estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree. Simon Property Group offered $10 billion and Brookfield Asset Management, which owns roughly $1 billion in General Growth debt, offered $2.63 billion for a 30% stake. General Growth is holding out for a higher bid, which led REITs to advance further.
Rates were barely lower for the month, falling just a few basis points across the curve, while news in bond land was dominated by sovereign credit issues overseas. Corporate spreads domestically were tighter by a few beeps compared to the end of January, despite widening out mid-month to levels not seen since November.
Daily Insight
U.S. stocks bounced between gain and loss on a couple different occasions Friday, ending the session slightly higher. For the week, the broad market ended essentially flat, down just 0.4%.
A strong regional manufacturing report offered the greatest boost to the market. a revised GDP reading that came in a bit higher than previously estimated may have helped a little too but the increase was mainly due to a downward revision on the inflation gauge tied to the report – nominal GDP was unchanged from the initial estimate, more on that below the jump.
The January existing home sales report kept the day’s gains to a minimum as sales posted the second-largest monthly decline on record; the largest decline occurred in the previous month.
Financial and industrial shares led the broad market higher. Bank stocks helped propel the financials after Barclays recommended buying shares of JP Morgan. I don’t know, JP Morgan is one of the best-run banks out there but the fourth-quarter FDIC report on the industry didn’t paint a pretty picture for the industry. The coverage ratio among insured banks slipped again last quarter to a level that is less than half where it was a few years ago when loan quality was strong – trouble lurks if loan quality fails to improve markedly, and quick.
Utility and consumer staples were the losers on the session, being the only two of the top 10 sectors to close lower on the session.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
A strong regional manufacturing report offered the greatest boost to the market. a revised GDP reading that came in a bit higher than previously estimated may have helped a little too but the increase was mainly due to a downward revision on the inflation gauge tied to the report – nominal GDP was unchanged from the initial estimate, more on that below the jump.
The January existing home sales report kept the day’s gains to a minimum as sales posted the second-largest monthly decline on record; the largest decline occurred in the previous month.
Financial and industrial shares led the broad market higher. Bank stocks helped propel the financials after Barclays recommended buying shares of JP Morgan. I don’t know, JP Morgan is one of the best-run banks out there but the fourth-quarter FDIC report on the industry didn’t paint a pretty picture for the industry. The coverage ratio among insured banks slipped again last quarter to a level that is less than half where it was a few years ago when loan quality was strong – trouble lurks if loan quality fails to improve markedly, and quick.
Utility and consumer staples were the losers on the session, being the only two of the top 10 sectors to close lower on the session.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
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