Market Update

Futures are looking down this morning as San Francisco Fed President, Janet Yellen, warned that excessively easy monetary policy could create bubbles in the future. "It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking." Since the Fed has been involved in nearly every US bubble, it is probably a bit more concrete than it is merely 'conceivable' but I'm glad to see someone on the FOMC express concern.

Also weighing on the markets this morning is India's August industrial production miss that came in at 5.6% (a 15 month low.) The number is very volatile due to the lumpy nature of capital goods orders, but certainly a 5.6% print vs. expectations of 10%+ is something to keep an eye on.

China's auto sales slowed in September as tax breaks and subsidies began to roll off. Sales rose 17 percent YoY to 1.56M, down a bit from 18% in August. But July was 16% growth, and June was 21% growth so while the auto industry in China is being described as normalizing, it must be pointed out that a.) they are still selling more cars than we are domestically in the U.S. and b.) the absolute growth in China continues to be tremendous with sales of 13.6M vehicles in 2009 (45% growth) and on pace to do about 17M vehicles in 2010 (30% growth.) Of note, Ford saw sales in China rise 26%, up from 24% in August. Ford sales in China were up 40% in the first nine months of the year at 419,073 units. GM on the contrary rose 15%, down from 19% growth in August. For the first 9 months of the year, GM sold a record 1.78M vehicles.

Goldman Sachs reports that it has heard from bank employees in China who say that the government has told its largest banks that they must increase reserves to 17.5% (up 50 bps) in order to cool inflation and housing prices. There has been no formal announcement from the government in Beijing. Estimates suggest that this latest reserve hike would remove approx 200B yuan or $29B out of the lending pool. Banks will be allowed to lend a total of 7.5T yuan ($1.1T) this year vs. 9.6T yuan ($1.4T) in 2009.

Despite all the bad economic news this morning (summarizing...signs of slowing growth in China and India, INTC reporting after the close today after negatively pre-announcing a few weeks ago, Fed warning that QE2 expectations for November may be a bit premature, etc) there is nothing that will change the fact that until investors are disappointed by either earnings or the Fed fails to announce QE2 on November 3rd, the market will hold its level. That being said, I do expect earnings to be somewhat disappointing especially for the banks and brokers. We have JPM reporting earnings on Thursday. With a bad print possible, I wonder that when the Fed releases its POMO schedule for the coming weeks on Wednesday, if it doesn't include a healthy dose of Thursday and Friday this week???

FOMC minutes are due out at 11 am PST.

NFP Number Tomorrow, QE2 Expectations, AA after the market close

Markets are down somewhat this morning ahead of two very critical events over the next 24 hours.

1. Alcoa reports earnings today after the close.

2. Tomorrow morning we will get the Nonfarm Payroll Number for September.

With virtually the entire market fixated on how soon the Fed will launch QE2, tomorrow's NFP number will be a critical factor for determing the market's direction over the coming weeks. The consensus is for no change in jobs on the aggregate from the prior month, but with jobs coming from the private sector to see an increase of 74K, with the unemployment rate to tick up 0.01% to 9.7%.

What is going to be fascinating however, is seeing how the market reacts to this number. If the report is better than expected, will the market necessarily have to sell-off on good news? Surely a good number must be read as a mitigating factor against the current Goldman Sachs (and therefore market consensus) expectation of a Nov. 3rd launch of QE2.

If the number is bad, we will likely rally through Dow 11,000 as it will be assured that Bernanke will officially declare war on the middle class on election day.

If the number is in-line, then we will likely trade off of Alcoa's numbers from this afternoon.

Alcoa is expected to report EPS of $0.05 on revenue of $4.95B. The consensus ranges are $0.01-$0.12 and $4.52B-$5.36B. The stock has risen from $10 to $12 in September. With the stock already up 20%, investors appear nervous heading into earnings with good news already somewhat priced-in, AA trading down $0.14 or 1.21% at the time of this writing. Also creating anxiety is an article on Bloomberg this morning which notes that Alcoa's profits may drop 20% as the weak dollar offsets the higher realized spot aluminum prices. Alcoa's revenue is in USD but pays costs in its non-US operations in local currencies. The largest source of revenue after the US is Australia, whose currency is up 14% against the USD this quarter alone. Alcoa also has sizable operations in Brazil, and the real has climbed 7% this quarter (Thanks BB!)

S&P Earnings Forecasts Revised Down

Analysts cut 2011 S&P earnings forecasts for the first time since June 09. New estimates for $95.17 vs. August high of $96.16. (Bloomberg). While this doesn't surprise anyone, and doesn't represent a material drop, it shows that those arguing that the market is undervalued based on forward earnings expectations need to remember that as margins may (or may not) have peaked, we will need to see an increase in aggregate demand (not likely while household sector continues to delever and/or remain jobless) to continue to drive higher earnings. Should final demand fail to improve, we will most certainly see deeper revisions to these forward earnings numbers that have always struck us as being a bit optimistic.

Bloomberg quotes Robert Doll, vice chairman of New York-based BlackRock Inc. "You need pretty fancy GDP numbers to get to $95/share in earnings next year. Our view is that they're still a little too high, and that nobody believes them." Well said.

Equity strategists are at $87.34 in 2011, less sanguine than company analysts.