Morning Review - 080410

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.
com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
Stocks faltered Tuesday (S&P 500 –0.5%, Dow –0.4%, Nasdaq –0.5%), as a couple of weak economic Morning Markets Briefing
reports and disappointing earnings from PG, DOW, and DHI weighed on the market. In the day’s
economic news, personal income and consumer spending were both flat in June, compared with
Market Commentary: August 4th, 2010
market expectations for a 0.1% rise in each. Inflation was not an issue, as the core PCE price index
was also unchanged. Pending home sales fell to a record low in June, down 2.6% from the prior A snapshot of the markets through the
month and 18.6% below the year-ago level. Last month motor vehicle sales in the U.S. totaled and lens of ConvergEx.
estimated 11.98 million on an annualized basis, up from June’s 11.08 million. Finally, factory orders
dropped a more-than-expected 1.2% in June, versus with estimates for a 0.5% decline.
Translating ‘Deflation’ into German, French, Italian and Spanish
Summary: In today’s note we examine the composition of inflationary pressures in the Eurozone from 1997 to the present day. Unlike the U.S., European inflation is not
as anchored in real estate price increases as its U.S. counterpart. Rather, prices rise consistently, if slowly, across a large range of goods and services. If you want a great
cultural vignette, just consider that Europeans will still pay more for apparel every year. In the U.S., apparel has not seen structural inflation for over two decades. ‘Pret a
porter’ is, after all, still French – not Mandarin. As a result, the U.S. is more likely to tip into statistical deflation (lower year-on-year CPIs, for example) than the Eurozone.
Interestingly, U.S. 10 year Treasury rates are actually higher than their German counterparts. There’s plenty of reasons for that (flight to safety, perceptions of fiscal
prudence, etc), but perhaps one underappreciated one is the underlying predictability and stability of European inflation versus U.S. price levels.
There is an urban legend that Eskimos have something like 100 words for snow. Falling snow, drifting snow, frozen snow, maybe even yellow snow. It’s a great
thought that a culture that lives around something we all take for granted would take the time to carve up definitions in novel and interesting ways. There’s only one
problem – apparently it is not true. Evidently Eskimo languages are somewhat similar to German in construction – lots of base words that get altered and extended with
modifiers. There’s a Wiki entry on the topic if you want to dig deeper: http://en.wikipedia.org/wiki/Eskimo_words_for_snow.
Market Commentary – Pages 1-5, Equities/Conferences & Earnings – Page 6, Fixed Income – Page 7, Options – Page 8, Exchange-Traded Funds/Indexes – Page 9, Social
Media & Internet Blogs Top Stories – Page 10 1
1
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
I think the word “inflation” in English suffers from the opposite problem of this fictitious plurality – there just are not enough words for all the different
economic phenomena broadly labeled “rising prices.” There’s inflation in asset prices (stocks and bonds), houses (well, once), day to day items (groceries and
household products), and services (college tuition), for example. Strict monetarists will show that the growth in money supply is the root cause of inflation. But, like a
flooding river, all those literal and figurative dollars/euros/yen/whatever find their own level in different asset classes. The U.S. did not experience rampant overall price
inflation in the last decade, but property values skyrocketed beyond all justification. Equity bears will say that the current round of money-printing has gone straight into
financial assets like stocks (a bit) and bonds (a lot). The upshot is that “inflation” may always be about printing more money, but the really important question revolves
around the destination.
In keeping with the multicultural introduction to this piece, let’s look at the experience of inflation in the United States since 1990 versus that of Europe. The
first two charts that follow this note show inflation in both areas from 1990 to 1999, and 2000 to the present day. A few points of interest in this comparison:
• During the 1990s, European and U.S. inflation essentially mirrored one another until 1996. At that point they decoupled and U.S. inflation ran about 1 percentage
point hotter through the end of the decade. Draw your own conclusion as to why, but the timing of the divergence is close to the U.S. tech stock bubble, the
Fed’s response to the Asia crisis, and the flood of liquidity leading up to Y2K. Plenty for the monetarists to crow about and show proof that money printing causes
inflation.
• In the most recent decade, U.S. inflation decoupled from European price changes more quickly. By 2004 the U.S. saw more inflation than Europe, and the spread
only widened as time went on. Again, we have an asset price bubble in the mix, this time in U.S. housing. Yes, the property markets in Spain overheated like a
hot day on the Costa del Sol. But as we will see the magnitude of the European real estate bubble seems to have been far smaller than its U.S. counterpart at
least as far as inflationary pressures go.
This comparison begs the question: how different is the composition of inflation in Europe versus the United States? Pretty different, as it turns out. As we noted
in our report of July 23rd, about half of the inflation in the United States from 1993 - 2008 was driven by increasing prices for housing and food/beverage. From 2009 until
now, U.S. inflationary pressures have been led by new and used car prices, gasoline for those vehicles, and spare parts. That oddball assemblage of price leadership led
me to conclude that deflation is closer than most readers might believe. If all that sits between us and declining prices is a used car salesman getting a little more for
clean 2006 Honda Accord, it is no wonder long dated Treasuries have been on a tear.
As we show in the accompanying graphs, the European components of inflation are more consistent and broad based then what we see in the U.S. Yes, housing
plays a part in the time frames shown – 1997 to 2002, 2003 to 2008, and 2009 to the present – but it is about even with several other categories. Inflation for
transportation (1997-2002), energy/food/hotels (2003-2008) and restaurants/alcohol/tobacco (2009-present) all make essentially equal or greater contributions to
inflation in the Eurozone in these timeframes. Oh, and if you are looking for telling vignettes about European versus American values, you need look no further than this
data. Americans have seen outright deflation in apparel prices, courtesy of Chinese production and big-box retail distribution, since the early 1990s. The Europeans aren’t
buying it. Literally. They continue to pay more for clothes every year. “Pret a porter” is French, not Mandarin…
Most readers here will know that trailing 12 month inflation rates in Europe is 1.4% and 1.1% in the United States. Yet even with this modestly higher rate of
inflation, German 10 year bonds still yield less than U.S. Treasury notes of similar maturity: 2.91% for the U.S. 10-year note versus 2.61% for the German paper. There are
certainly many factors at stake: Germany’s long record of relative fiscal prudence and the flight to quality in Europe from troubled Mediterranean countries’ sovereign debt
are two that stand out.
2
One overlooked factor, however, may well be the relative predictability and generally lower rate of inflation in the Eurozone versus U.S. economy. By our
analysis, the U.S. seems far more likely to slip into statistical deflation (negative Consumer Price Index readings) than the Eurozone. U.S. deflation is just a few months of
weak cars sales – and the inevitable industry-wide discounting - away, everything else equal. Eurozone inflation, while modest, is at least grounded in several sectors
able to raise price.
Deflation, it seems, is good for bond prices – witness the recent rally at the long end of the U.S. Treasury curve. But a history of lower inflation and
steady/predictably low inflation might be just a little bit better – hence the modestly lower rates in Germany versus those in the U.S.
3
Euro Area vs US Inflation: 1990-1999 (Index = 100 in January 1990) Euro Area vs US Inflation: 2000-Present (Index = 100 in January 2000)
135 135
130 130
125 125
120 120
115 115
110 110
105 105
100 100
Feb-02
Oct-98
Oct-08
Feb-92
Feb-97
Jun-05
Feb-07
Jun-95
Apr-01
Dec-02
Apr-91
Dec-92
Oct-93
Oct-03
Dec-07
Mar-99
Mar-09
Dec-97
Jul-02
Apr-06
Mar-04
Jul-92
Apr-96
May-03
Aug-09
Mar-94
Jul-07
Jan-00
May-93
Aug-99
Jul-97
Jan-90
Nov-90
Nov-00
Aug-94
Aug-04
Jun-90
Sep-91
Jun-00
Sep-01
Jan-10
Jan-05
Jun-10
Jan-95
Nov-95
Sep-96
Nov-05
Sep-06
May-08
May-98
Euro area US Euro Area US
Contribution to Overall Euro Area Inflation: 1997-2002 Contribution to Overall Euro Area Inflation: 2003-2008
0.4 0.7
0.4 0.6
0.3 0.5
0.3
0.4
0.2
0.3
0.2
0.1 0.2
0.1 0.1
0.0 0.0
-0.1 -0.1
-0.1
4
Contribution to Overall Euro Area Inflation: 2009-Present

0.2
0.1
0.0
-0.1
5
U.S. EQUITIES
Despite an increase in sales, shares of PG fell 3.4% after the company missed earnings estimates and posted a 12% drop in quarterly net income.
Meanwhile, PFE added 5.6% as it beat both earnings and revenue expectations, aided by cost savings from its merger with Wyeth. Homebuilder DHI
(-5.8%) swung to a profit but missed estimates, while COH (-3.5%) topped estimates, helped by strong demand for a less expensive line and expansion of
its outlet stores. AMZN shares rallied 2.0% following news that several of its Kindle models are currently sold out. Auto makers F (-1.9%) and TM (+1.1%)
reported year-on-year sales growth in July of 0.7% and -6.8%, respectively.
Important Earnings Today (with Estimates) From…

S&P Futures
NDN: $0.19 CLWR: $-0.52 HI: $0.41 ONXX: $-0.03 SD: $0.12
One Day (High –1122.75; Low – 1113.25):
ALL: $0.71 CWH: $0.93 HSNI: $0.33 OC: $0.60 SINA: $0.29
UHAL: $1.70 CNW: $0.30 ICE: $1.41 PRE: $1.75 SIRI: $0.00
AOL: $0.40 DVN: $1.40 IBOC: $0.38 PEGA: $0.17 SPW: $0.71
AINV: $0.25 EQY: $0.25 JACK: $0.53 PCG: $0.90 TWX: $0.45
CAR: $0.17 ESS: $1.29 KFN: $0.34 RL: $0.89 RIG: $1.69
BRS: $0.69 FTR: $0.15 MUR: $1.21 PHM: $-0.01 Source: Bloomberg
XEC: $1.52 GRMN: $0.73 NNN: $0.37 Q: $0.09
CLH: $0.83 HIG: $0.73 NWSA: $0.20 REG: $0.55
Important Conferences/Corporate Meetings Today:

None
Prior Day SPX (High – 1125.44; Low – 1116.76; Close – 1120.46): Three Day (High – 1124.25; Low – 1101.75):
Source: Thomson ONE

6
FIXED INCOME
Treasuries advanced following government reports showing weakness in housing and consumer spending, pushing the 2-year note yield to yet another
record low (0.51 percent) and the 5-year note yield to the lowest level (1.53 percent) since March 2009. Benchmark 10-year debt yields fell 5 basis points
to 2.91 percent. German 10-year bonds also gained in response to the weak U.S. economic data, as the yield on the bunds dropped 9 basis points in its
biggest intraday decline in 3 months.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events:

MBA Purchase Applications
Challenger Job-Cut Report
ADP Employment Report
Treasury Refunding Announcement
ISM Non-Manufacturing Index: 53.0
Treasury Secretary Tim Geithner speech on tax and fiscal policy at 4pm in Washington, DC
7
U.S. EQUITY
OPTIONS
SPX – Although the index traded in a narrow range today (unchanged to -0.8%), there was a bit of uncertainty without a positive follow through to yesterday’s gains
with the index ending -0.5%. The implied volatility measured by the VIX reflected this same small increase ending up 3%. There were two notable trades in SPX
contracts today. A skewed calendar call spread traded were the August and December 1125 calls bought 10,000 times each and the September 1100 calls sold 20,000
times. In a separate trade the December 1100 straddle was bought over 10,000 times vs. selling the September 1100/1150 strangle.
ETF – With the market trending lower and the VIX up on the day, trading was tepid following lackluster earnings and economic news. We highlighted put buyers across
sector flow and bullish sentiment in the international space. In Consumer Discretionary Fund, XLY, paper bought 12,000 Jan 19 puts, while in Materials ETF, XLB, the Jan 32
/ 28 put spread was purchased 10,000 times. Financial fund, XLF, saw a buyer of 25,000 Jan 9 puts and a volatility seller as the Sep 15 straddle traded 5,000 times. In the
international space, investors positioned for upside in FXI as one investor sold 40,000 Jan 45 Calls. Conversely, in EEM an investor bought the Aug 37 Sep 40 put spread
60,000 times likely closing out an existing position.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 7/28/2010 7/29/2010 7/30/2010 8/2/2010 8/3/2010 30-Day Implied Vol
1 MIL MIL MIL MIL FIS 32.69
2 FIS FIS FIS FIS PTV 50.48 BIGGEST MOVERS
3 PTV PTV DF DF ARG 17.17 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
4 DF Q Q PTV Q 20.80
5 MCK DF PTV ARG NOVL 32.75
ARG 21.23% 26.07 AGN -54.50% 14.66
6 MRK MCK ADM NOVL MJN 34.40 NOVL 21.22% 28.89 PNW -49.56% 39.57
7 FLIR FSLR FLIR Q CFN 37.94 PTV 12.77% 51.17 Q -37.97% 23.87
8 AGN FLIR SLE CFN SWN 37.48
9 MJN ADM AGN CLX EL 32.88 V 10.81% 38.68 XOM -28.27% 36.42
10 HUM HUM SAI MJN CLX 17.24 AMGN 8.90% 33.89 MDP -27.83% 33.48
11 Q MFE L SAI SAI 21.99 BSX 6.53% 29.21 ADM -26.06% 32.33
12 LIFE MRK CLX SLE KR 23.88
13 NOVL AGN MCK AIG FLIR 25.54 NEM 6.49% 43.35 TE -26.03% 18.34
14 FSLR SLE MJN SWN AIG 57.35 FMC 5.41% 27.33 FLIR -24.48% 31.29
SLE WFR MRK MCK AMAT 36.02
15
ROST 5.32% 33.92 MKC -24.17% 20.62
16 DPS CLX ARG FRX SLE 22.84
17 SYMC EL HUM PBI ROST 32.20 MA 5.32% 30.93 TDC -24.03% 34.11
18 KG MJN CFN EL BIG 38.56
19 EL CFN CAH PCS PCS 49.03
20 FRX ARG AMAT FLIR MCK 25.07
21 L PCS NOVL AMAT FRX 24.92
We ranked the S&P 500 companies from the highest to lowest 30 day implied to
22 CFN AMGN SWN ROST PBI 25.34 historical volatility ratio. Above we identify the 10 most positive and negative
23 PCS FRX FRX ADM TSN 33.30 movers.
24 VAR SWN PFE CAH CAH 28.85
25 ADM GME PCS SJM PCLN 51.86 The table to the left represents the 25 highest 30 day implied to historical
HSP LIFE GME PFE SJM volatility ratios within the S&P 500 companies. The green represents names
NOVL AMGN HUM ADM new to the list while the red represents names that have fallen out.
DPS EL MRK MIL
SYMC MFE L DF
KG WFR
L FSLR
VAR 8
Exchange-Traded Funds/Indexes
Prior Day Peformance of Largest ETFs by Assets S&P 500 Sector ETFs
Name (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf YTD Perf Sector Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend -0.48% Energy XLE -0.04% -2.30% Telecomm IYZ -0.94% 2.62%
SPDR Gold Shares GLD N/A 0.44% Health XLV 0.82% -5.54% Technology XLK -0.40% -2.79%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts -0.48% Industrials XLI -0.52% 10.60% Consumer Discretionary XLY -1.53% 6.28%
iShares MSCI EAFE Index EFA Foreign Large Blend -0.20% Utilities XLU -0.48% -0.52% Financials XLF -1.13% 3.54%
iShares S&P 500 Index IVV Large Blend -0.49% Consumer Staples XLP -0.88% 2.19% Materials XLB -1.83% -2.09%
Prior Day Top Volume ETFs Currency ETFs
Name Ticker Category Shares Traded Currency Ticker 1-Day Perf YTD Perf Currency Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 137,857,453 Australian Dollar FXA -0.01% 1.34% Mexican Peso FXM -0.09% 3.43%
Financial Select SPDR XLF Specialty - Financial 57,765,529 British Pound Sterling FXB 0.37% -1.50% Swedish Krona FXS 0.09% 0.70%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 56,356,479 Canadian Dollar FXC -0.03% 2.40% Swiss Franc FXF 0.05% -0.56%
PowerShares QQQ QQQQ Large Growth 52,736,612 Euro FXE 0.45% -7.74% USD Index Bearish UDN 0.34% -4.18%
iShares Russell 2000 Index IWM Small Blend 46,533,826 Japanese Yen FXY 0.78% 8.24% USD Index Bullish UUP -0.43% 1.47%
Prior Day Top Performers VIX ETNs Fixed Income ETFs
Name Ticker Category Daily Return Name Ticker 1-Day Perf YTD Perf Bonds Ticker 1-Day Perf YTD Perf
UBS E-TRACS CMCI Energy ETN UBN N/A 6.61% iPath S&P 500 VIX VXX 1.37% -36.84% Aggregate AGG 0.07% 4.16%
iShares MSCI Far East Financials Index FEFN N/A 5.06% Short-Term Futures ETN Investment Grade LQD 0.25% 5.52%
Claymore/Zacks Country Rotation CRO Foreign Large Blend 3.61% High Yield HYG 0.00% 0.73%
ELEMENTS SPECTRUM Lg Cap U.S. Sector ETN EEH Large Blend 3.17% iPath S&P 500 VIX VXZ 0.79% 8.33% 1-3 Year Treasuries SHY 0.07% 1.47%
RP Technology ETF RPQ N/A 3.10% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.47% 8.57%
20+ Year Treasuries TLT 0.58% 10.49%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.44% 8.13% Crude Oil USO 1.18% -6.03%
Silver SLV 0.33% 8.95% EAFE Index EFA -0.20% -3.13%
Natural Gas UNG -0.76% -21.95% Emerging Markets EEM -0.48% 1.86%
SPDRs SPY -0.48% 0.70%
Major Index Changes:

FIRE will replace ADPT in the S&P SmallCap 600 after the close of trading. ADPT no longer meets listing requirements.
ETFs in the Headlines and Blogs:

Commodity ETFs: Toxic, deadly, evil - http://www.marketwatch.com/story/commodity-etfs-toxic-deadly-evil-2010-08-03
New Emerging Market Bond ETF - http://www.benzinga.com/10/08/408007/new-emerging-market-bond-etf
9
Top Online Social Networking Stories
Latest Popular Digg.com Business Stories:

Minority Report-style advertising billboards to target consumers - http://www.telegraph.co.uk/technology/news/7920057/Minority-Report-style-
advertising-billboards-to-target-consumers.html
Goldman defends its collateral calls to AIG - http://www.newsdaily.com/stories/tre6710r2-us-goldmansachs-aig/
Greenspan: End Bush tax cuts - http://rawstory.com/rs/2010/0801/greenspan-end-bush-tax-cuts/
Calculated Risk
General Motors: Sales up sharply compared to July 2009 - http://www.calculatedriskblog.com/2010/08/general-motors-sales-up-sharply.html
Pending Home Sales Index falls to record series low in June - http://www.calculatedriskblog.com/2010/08/pending-home-fall-to-record-series-low.html
Personal Income, Spending flat in June - http://www.calculatedriskblog.com/2010/08/personal-income-spending-flat-in-june.html
The Big Picture

Welcome to My Job Security - http://www.ritholtz.com/blog/2010/08/welcome-to-my-job-security/
Punishing Shareholders? Nonsense - http://www.ritholtz.com/blog/2010/08/punishing-shareholders-nonsense/
Rorschach Chart - http://www.ritholtz.com/blog/2010/08/rorschach-chart/
The New York Times

Why is Deflation Bad? - http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/
Bespoke Investment Group

Platinum/Gold Ratio - http://www.bespokeinvest.com/thinkbig/2010/8/3/platinumgold-ratio.html
Most Overbought S&P 500 Stocks - http://www.bespokeinvest.com/thinkbig/2010/8/3/most-overbought-sp-500-stocks.html
Best Starts to August - http://www.bespokeinvest.com/thinkbig/2010/8/2/best-starts-to-august.html
S&P 500 2%+ One Day Rallies - http://www.bespokeinvest.com/thinkbig/2010/8/2/sp-500-2-one-day-rallies.html
Best Performing Stocks Since the 4/23 Market Peak - http://www.bespokeinvest.com/thinkbig/2010/8/2/best-performing-stocks-since-the-423-market-
peak.html
A New Leg Higher for Emerging Markets? - http://www.bespokeinvest.com/thinkbig/2010/8/2/a-new-leg-higher-for-emerging-markets.html
Robert Reich’s Blog

The Origins of the Enthusiasm Gap - http://robertreich.org/post/898317710/the-origins-of-the-enthusiasm-gap
Why We Really Shouldn’t Keep the Bush Tax Cut for the Wealthy - http://robertreich.org/post/894152905/why-we-really-shouldnt-keep-the-bush-tax-cut-
for-the
10
GENERAL DISCLOSURES
This presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is
provided for general informational purposes only and should not be relied on for any other purpose. It is not, and is not intended to be, research, a
recommendation or investment advice, nor an offer to sell or the solicitation of offers to buy any BNY ConvergEx Execution Solutions LLC (“ConvergEx”)
product or service in any jurisdiction. It does not take into account the particular investment objectives, restrictions, tax and financial situations or other
needs of any specific client or potential client. Please consult with your financial and other advisors before buying or selling any securities or other
assets. This presentation is for qualified investors and NOT for retail investors.
Please be advised that options carry a high level of risk and are not suitable for all investors. To receive a copy of the Options Disclosure Document
please contact the ConvergEx Compliance Department at (800) 367-8998.
The opinions and information herein are current only as of the date appearing on the cover. ConvergEx has no obligation to provide any updates or
changes to such opinions or information. The economic and market assumptions and forecasts are subject to high levels of uncertainty that may affect
actual performance. Such assumptions and forecasts may prove untrue or inaccurate and should be viewed as merely representative of a broad range
of possibilities. They are subject to significant revision and may change materially as market, economic, political and other conditions change.
Past performance is not indicative of future results, which may vary significantly. The value of investments and the income derived from investments
can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur. The information and statements provided herein do
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The opinions expressed in this presentation are those of various authors, and do not necessarily represent the opinions of ConvergEx or its affiliates.
This material has been prepared by ConvergEx and is not a product, nor does it express the views, of other departments or divisions of BNY ConvergEx
Group, LLC and its affiliates.
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Translating ‘Deflation’ into German, French, Italian and Spanish

Contribution to Overall Euro Area Inflation: 2009-Present

Important Earnings Today (with Estimates) From…

Important Conferences/Corporate Meetings Today:

Source: Thomson ONE

Source: Bloomberg Source: Bloomberg

Today’s Important Economic Indicators/Events:

CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Major Index Changes:

ETFs in the Headlines and Blogs:

Top Online Social Networking Stories

Latest Popular Digg.com Business Stories:

The Big Picture

The New York Times

Bespoke Investment Group

Robert Reich’s Blog

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