Fixed Income Weekly

Treasurys were slightly lower across the curve after a quiet week of trading. The curve was 4 basis points flatter at end the week at +275 bps, 17 bps under the all time record set on Feb 22.

A strong credit market last week was followed up by heavy issuance of corporate debt this week. According to Bloomberg, some $30 billion in corporate bonds were issued by close of business Thursday, bringing the year to date total to just shy of $200 billion. Credit spreads have been steadily moving lower while Treasurys have remained in a tight range. CFOs are definitely aware of this and are taking advantage of the environment to raise cheap capital. And thanks to today’s news that Obama plans to nominate San Francisco Fed President Janet Yellen to Vice Chairman of the Federal Reserve, one of the most dovish of the 12 Fed Presidents, companies will likely see better chances still to borrow cheaply. The term “dovish” is used to describe those who favor easy monetary policy, as opposed to “hawkish” policy makers, who traditionally lean toward tighter monetary policy. The effect of ZIRP on the cost of debt is two-fold. Rates are low, and as investors stretch out to grab more yield in the face of measly low-risk returns, spreads will continue to tighten as long as rates stay here.

The FOMC meets next week and is expected to stand pat on rates, but all eyes will be reading the comments that accompany the rate decision. Namely, “the exceptionally low/extended period” section. Not much is being said one way or another on that, but I expect to hear more speculation early next week. I don’t think the committee is ready to remove them yet, but we are certainly closer than we were in January.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst

Daily Insight: Jobs, Trade Balance, Household net Worth

U.S. stocks closed smack-dab on the 17-month high Thursday (1150 on the S&P 500, initially hit on January 19) to fully erase the 8.1% pullback the market ran into a month back. A late-session surge brought the market out of negative territory, where it had been for virtually the entire day, to match that near-term high.

Jobless claims that remain stuck at high levels and foreclosure filings that continue to rise at a pace of 300K per month couldn’t stop a spate of optimism that banks have put damaging loan quality behind them. That’s a dangerous assumption in this environment. But hey, it sure feels good.

As a result, financials led the market higher with consumer discretionary shares being the next best performing sector. Basic material stocks participated in the advance for the first time in three sessions as the U.S. dollar lost ground.

Nine of the 10 major industry groups rose yesterday. Energy was the sole loser.
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Brent Vondera, Senior Analyst

Daily Insight: Crude Oil, Mortgage Apps, Wholesale Inventories

U.S. stocks gained ground for a second day on Wednesday, and if not for Monday’s fractional decline the broad market’s re-rally would be two weeks in length. As a result, the S&P 500 has inched closer to the 15-month high hit on January 19.

The tech-laden NASDAQ Composite led the way. Mid and small-cap indices also out-performed the broad market. Shares of Travelers, Chevron and 3M weighed on the Dow Industrial Average, which lagged the other major indices -- a big day from Boeing (added 17 Dow points) kept the index in positive territory.

Financials, tech and energy were the leaders for the session – although as mentioned above Chevron didn’t follow other energy names. Telecom, consumer staples and basic material shares were the three of the 10 major sectors that closed lower on the day.

On the sovereign debt problems over in Europe, former European Commission President Romano Prodi stated: “For Greece the problem is completely over. I do not see any other case now in Europe.” I don’t think comment on those remarks is necessary.
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Daily Insight

U.S. stocks gained some ground on Tuesday amid growing optimism an improving economy will justify an extension of the year-long market rally, or so it was written by the financial press. Stocks were considerably higher for most of the session, but slid to negative territory late in the day before bouncing back above the cutline 25 minutes ahead of the closing bell.

As stocks grind higher and attempt to break past the near-term highs hit in January, the latest NFIB small business survey illustrated that small biz owners are not so ebullient about things and the IBD Economic Optimism reading for March suggested that things are not quite right with the world. Both surveys fell. The NFIB survey remains stuck at a level that’s well below the marks hit during the past two economic contractions and the Personal Financial Outlook segment of the IBD survey fell to the lowest level since February 2009 – a period when everything but the safest of assets was getting hammered. More on the NFIB report below the jump.

News from Cisco Systems that they’ll roll out a heavy-duty router capable of 12 times the capacity of rival equipment helped boost information technology and telecom shares. The router will allow internet providers to carry data traffic at speeds 100 times faster than most home connections today and able to direct traffic based on the priority of the data – this thing is all about video.

Basic material, utility and consumer staples stocks were among the session losers.

The dollar rallied after Fitch Ratings warned about deteriorating credit quality In Europe, which prompted traders to seek refuge in the greenback as they sold euros and pounds.

Read the rest of today's Daily Insight on our Website

http://www.acrinv.com/20100310224/blog/daliy-insight-3-10-2010

Is the market fairly valued?

It’s the one year anniversary of the S&P 500 lows, and what a difference a year makes! The S&P 500 is up over 68% in the last 12 months, but clearly the tremendous opportunities that were in place a year ago are no longer there.

There are two market conditions, however, that will allow investors to take advantage of opportunities. The first is that volatility is dramatically lower. As measured by the VIX index, volatility is nearly 80% lower than it was at the time of the Lehman Brothers bankruptcy.

The second favorable condition is that correlations between assets and within markets have come down. When correlations were extremely high, and everything was going down at the same time, the only thing that mattered to investors was to have as little risk exposure as possible.

Lower volatility and lower correlations across different asset classes presents the opportunity for investors that do their homework to generate good returns. That means looking at fundamentals such as earnings, cash flow, and dividend payouts. It also means identifying long-term trends that will cause specific sectors to outperform. For example, the Technology and Industrial sectors are positioned to perform well in 2010.

But are stocks way ahead of the economy? Is the good news already baked into stock prices?

Clearly the stock market is a forward-looking mechanism that moves in advance of the economy, but it hasn’t necessarily moved too far at this point.

Economic data over the past few weeks makes the double-dip scenario seem less likely, with new orders for equipment, retail sales, and even things like hotel stays pointing to a brighter economic climate. The jobs numbers are still bad, but have shown improvement. More importantly, many individuals are feeling less uncertain about their job prospects.

Meanwhile, corporations are reporting strong cash flow and balance sheets look relatively healthy. We are starting to see businesses buy back stock, raise dividends, and increase investment for future growth – all of which are positive signs.

We always hear about historically high P/E ratios (here is a good story in today’s Wall Street Journal), but when the market is measured by cash flow (P/CF) the S&P 500’s valuation is 37% below the 12-year average and half of its valuation in 2007. P/CF has increased from roughly 4.5 in March 2009 to 8.2 today. With data going back 1998, the CF multiple has never fallen below 8.0 prior to 2008.

I believe the S&P 500 will finish 2010 somewhere between 1200 and 1250, 5% to 9% above today’s levels, but I would be concerned around 1300. Notice that I say “in 2010.” There are many uncertainties beyond 2010 that are keeping investors at bay. Because the market is forward-looking, it is affected by how far investors are willing to look into the future, which depends on their level of comfort and safety. One year ago, investors could barely look a week into the future. When a bull market is under way, investors are willing to look 18 to 24 months into the future to discount future earnings.

Some may argue that fair value is 20% below where the market stands today. I agree that buying stocks at prices 20% lower than today's would better compensate for the long-term risks facing the U.S. economy; however, I am not selling stocks because waiting for this event to occur could take several years. Markets are historically "overvalued" for extended periods of time. At the same time, ignoring the significant risks at hand is not prudent behavior either. Expectations must remain reasonable.

One year ago, investor sentiment and psyche was quite low among both individual and institutional investors. One year later, the easy money has been made, so it's important to remember that the recovery will be slow and bumpy as the economy moderates.

- Peter Lazaroff, Investment Analyst

Daily Insight: Dollar Strength on Weakness...and Policy

U.S. stock indices ended mixed on Monday as the Dow and S&P 500 closed technically lower (essentially flat), while shares of Cisco Systems helped drive the NASDAQ Composite into positive territory.

Stocks really need some sort of catalyst at current levels, the broad market has basically recouped the 8% slide that occurred during the three weeks ended February, and we were without an economic release to provide that boost. There were additional comments out of Europe over the weekend that offered the clearest evidence Germany and France would be at the ready to help Greece refinance their debts if needed, but this was already baked into last week’s trading.

(I did found it interesting to read that the Greek Prime Minister excoriated “unprincipled speculators” yesterday for threatening to bring a new global financial crisis. He’s referring to the CDS market – in short, CDS is just insurance against default. This market can be a bit screwy, particularly the naked sort – not to be confused with the naked-Rahm that’s allegedly found loitering in Congressional showers. Naked CDS is when someone is using this derivative to bet for or against default, but has no direct exposure to the underlying debt. But look, speculators wouldn’t be betting against Greece in the first place if the government hadn’t promised benefits they can’t possibly afford. Get your finances in order and you wouldn’t be dealing with this problem, which should be a lesson to all governments.)

Telecom, consumer discretionary, tech and financials were the sectors up on the session. Tech and telecoms were boosted by news that Cisco Systems will unveil new tools to help build systems to increase download speeds. The index that tracks financial shares was most likely helped by news that AIG was able to sell another of its premier units. This must have offset talk that banks are going to have to take much more losses on mortgage loans, which to this point have been valued on the prayer that housing is going to make a sustained comeback sometime in the near future.

Industrial and health-care shares led the six major sectors that declined on the session.

So we’re at the one-year mark of the nefarious intraday low of 666 on S&P 500 and the closing 13-year low of 676 by day’s end on March 9, 2009. The broad market has jumped 68% from that low, which means it’s recouped 52% of the value lost from the October 9, 2007 all-time high. The chart after the jump takes us back to that October 2007 all-time high.
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Brent Vondera, Senior Analyst

Daily Insight: February Jobs Report

U.S. stocks got a boost after the latest jobs report showed less payroll positions were lost than White House economic adviser Larry Summers had set the market up to expect, and more importantly that we’re likely very close to some mild monthly increases in employment. Now, we’re going to need 300K-plus per month for more than a year to bring the jobless rates down substantially (don’t forget among others waiting on the sidelines there are 2-3 million May graduates readying to enter the job market), but additions are additions and it looks like they’re around the corner.

The market also got help from a couple of Fed officials who stated the central bank needs to keep rates low until the recovery picks up (I thought the recovery was gaining steam; that’s what we heard from the last FOMC statement). ). Federal Reserve Bank of Chicago President Charles Evans stated he needs to see “highly sustainable” growth before supporting steps toward tighter monetary policy and St. Louis Fed Bank President James Bullard stated policy makers want to remain “very accommodative.”

Financials led the way on those Fed comments and energy was next in line as the price of crude jumped to $81.50/ barrel – wholesale gasoline rose to $2.27/ gallon, highest since October 2008; it appears that $3 retail is on its way.

For the week, the broad market gained 3.10% and is now within 1% of its 16-month high touched on January 19. The Dow Industrials added 2.33% for the week and the NASDAQ Composite jumped 3.94%. Small-cap stocks led the week’s advance, up 5.96% -- and have led the market during this nearly one-year rally from the March 9, 2009 depths. Mid-cap stocks added 4.35%.
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Brent Vondera, Senior Analyst

Fixed Income Weekly

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

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.
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Brent Vondera, Senior Analyst

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.
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Brent Vondera, Senior Analyst

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.
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Brent Vondera, Senior Analyst

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.
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Brent Vondera, Senior Analyst

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.

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.
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Brent Vondera, Senior Analyst

Fixed Income Weekly

The bond world has been a busy one lately. The situation in Greece has been very volatile, which is understandable considering the conflicting opinions in the market and the “contagion” type effect a Greek default could have within the Eurozone and beyond. Chairman Bernanke’s testimony was as expected, but still meaningful as Big Ben confirmed the need for exceptionally low interest rates for a considerable amount of time, in addition to the importance of the Fed’s role as the primary regulator of the banking system.

Treasuries have been fighting two separate battles. One is Fed policy. The short end has been bouncing around within a tight .7%-1.1% range for 6 months now. The hike in the discount rate last week brought about a kneejerk move higher in short-term yields, but after much nay saying by policy makers they have settled down to just about where they were before the Fed made the change. The Fed remains very unconcerned with current levels of inflation, Q4 PCE was 1.6% annualized versus 1.4% in Q3, but longer term effects of current policy have the market demanding much higher yields on the long-end, which explains the record high spread between 2s and 10s of 291 basis points on Monday.

Secondly, the budget/credit/currency issues in Europe are pushing money into dollars, and in turn Treasurys. It’s the typical safety trade really. It sure helped with the $126 billion the Treasury had to sell this week, which all traded through the “when issued” yield, a sign of better than expected demand.

Next week is full of more Fed speak, which should get the market jumpstarted after closing on a very quiet note (relatively) this week.

Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst

Weekly Roundup: ESRX, MON, RIG

Express Scripts (ESRX) +5.89%
Investors bid up ESRX shares following 2010 guidance that suggested the integration of WellPoint’s NextRx unit is ahead of schedule.

The acquisition of NextRx gave ESRX the scale to compete with its biggest competitors in the pharmacy benefit manager (PBM) industry. PBMs negotiate drug prices with manufacturers and retailers on behalf of clients.

ESRX’s proven track record of successfully integrating acquisitions and the firm’s outlook that suggesting synergies associated with the transaction are likely to come earlier have lifted investor confidence in the firm’s ability to achieve above normal earnings growth over the next few years.

ESRX and other PBMs are positioned to benefit from positive trends such as the aging population, healthcare cost containment efforts, and increasing customer acceptance of mail-order pharmacies. More important, though, is the looming patent cliff in 2011 and 2012 since ESRX earns profit margins when customers use generics over brand-name pharmaceuticals.

ESRX’s fourth quarter income rose 8%, including one-time charges from the NextRx acquisition, helped by an increase in the use of generic drugs to 69.1% from 67.3% helped push margins higher.

Monsanto (MON) -7.10%
MON lowered its second quarter profit outlook as the late 2009 harvest is shifting purchases to the second half of the year.

MON also said the two new products they are counting on to drive earnings this decade may be planted on 20% fewer acres in 2010 than previously forecast. Farmers are trying the new products in the numbers expected, but on fewer acres. MON said the shortfall may reduce earnings by less than 5 cents a share.

The two products of topic are Roundup Ready Yield soybeans, which increase yields 7% to 11% from the original product introduced in 1996, and SmartStax corn seed, which has eight genetic changes (traits) that resist bugs and tolerate herbicides.

MON shares have been crushed this year, but I think sell-off is not justified. The SmartStax corn seed is a true game-changer that can drive margins as well as market share gains for the firm’s corn business in coming years. As for the soybean product, China recently gave import approval to Roundup Ready 2 Yield soybeans, which paves the way for large-scale commercial introduction of the product.

Longer-term, MON’s success comes down to its powerful research and development efforts – the firm plows 10% of sales into R&D – and their elite production and distribution capabilities.

Transocean (RIG) -5.30%
RIG’s earnings trailed consensus amid decreasing demand for rigs. Only 69% of RIG’s fleet was working during the fourth quarter, down from 90% a year earlier.

Utilization declined in six of seven rig categories, more than offsetting the 18% increase in the fleet’s average daily lease rate. Idling rigs, even for a few days, directly hits the bottom line since the day rates (or rental rates) are so substantial.

The market is down on RIG shares after this report, but the company’s superior free-cash-flow generation and above average earnings visibility versus its peers should not be ignored. RIG management has made it clear they plan to return significant cash to shareholders through dividends and buybacks over the next two to three years.

Last week, RIG announced a $3.2 billion share-buyback program as well as the issuance of a $1 billion special dividend. Instituting a buyback program rather than paying out a larger dividend at this juncture gives the company financial flexibility for opportunistic acquisitions.

The potential for a jackup spin-off could also help support shares in the near-term.

--
Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks pared fairly large early-session losses thanks to an afternoon rally that sent the S&P 500 higher by 1.5% from the day’s low. The broad market failed to make it back to the cut line and all 10 major industry groups decline on the session but I think we can call this one a moral victory – for perspective, the Dow was off by as much as 188 points at the day’s worst. Mid and small cap indices managed fractional gains.

Things got started on a bad note as futures were pointing lower due to concerns over growth prospects in Europe and the likelihood that sovereign debt woes would spread throughout the zone. Also putting the hurt on morning trading was the latest report on jobless claims, which showed the uptrend has extended to seven weeks now. Initial claims have just about returned to the 500K mark – peak levels of the last two economic contractions.

But around 1:00CST stocks staged a comeback, which was also right around the time Bloomberg News reported that the Obama Administration may ban all foreclosures until they have been screened and rejected by the government’s Home Affordability Mortgage Program, or HAMP. We discussed this proposal to halt foreclosures in Wednesday’s letter, so I won’t get into it again here.

Telecommunication and financial shares led the decline. Consumer-related and health-care shares were the relative winners, but still down for the session.
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Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks were able to shake off an ugly housing report and snap a two-day losing streak after Fed Chairman Bernanke stated that it’s necessary to keep the fed funds rate “exceptionally low” in an attempt to spur demand.

Bernanke was on Capitol Hill yesterday providing his semi-annual testimony on the economy and monetary policy, an event officially termed Humphrey-Hawkins testimony although few still call it that these days, and that’s when he reiterated the economy still needs a record-low level of fed funds. That comment reversed a market retreat that had followed the release of new homes sales for January, which we’ll get to below.

Nine of the 10 major industry groups gained ground on the session, led by financial, consumer discretionary and technology shares -- the sole loser on the session being basic material shares.

Basic materials have been down for three sessions now, and the fact that they lost ground again on Wednesday when the overall market was up shows that the mid-session rebound in stocks was all due to the easy-monetary policy trade rather than upbeat sentiment on the potential for economic growth.

Normally, when the Fed reiterates they’ll keep rates at record lows for an extended period commodity-related material stocks are among the leading performers. But people are losing faith in a durable expansion (whether we’re talking global or domestic) and that’s invoking some profit taking within this sector, which has pretty much been in play since mid-January.

I’m not even sure traders want to be buying stocks at this level, but they feel this is the only place to deploy money because of the Fed-induced puny yields within the low-risk sphere – which is precisely a major part of the Fed’s agenda.
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Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks ran into some trouble yesterday following the latest consumer confidence report. The market started the session off about flat but once that confidence reading came out and spurred concerns that the global recovery will be lackluster things kind of fell apart.

Market sentiment appears to be increasingly mercurial. We have these weeks in which the market believes the recovery is going to be normal, both in terms of degree and duration, followed by stints of concern.

The former mentality, in my view, is one that’s distorted by ultra-easy monetary policy and unprecedented levels of global government stimuli. A recent viewing of the 1980s classic (ok, maybe not a classic) “Back to School” reminded me of a Dylan Thomas poem, and indeed the equity market doesn’t want to go gently into that good night, but rages against the dying of the light...I paraphrase. Yet we must acknowledge that debt-driven recessions don’t simply fizzle out as the aftermath drags on – its takes time for the de-leveraging process to play out.

Further, the severity of these types of contractions occurs so quickly that the government response is over-bearing and carries with it additional problems, particularly by delaying the inevitable and the misallocation of resources that result – adverse implications follow and they show up in a lack of business confidence and employment.

These are the realities with which the market is currently entangled, mistakenly euphoric by the distortive actions of government only to be occasional reminded by realities on the ground. We need end consumer demand to take over from the inventory cycle and government stimulus, yet this confidence reading was a stark reminder that we’re really nowhere near this scenario.

Troubles in Europe isn’t helping matters as those economies appear to be losing steam. The German economy unexpectedly stalled in the previous quarter and that is weighing on the entire euro-zone, not to mention their sovereign debt issues.

All 10 major industry groups declined on the session, led by financials (yesterday’s best performer), basic material and energy shares.
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Brent Vondera, Senior Analyst