Morning Review - 080910

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
Friday stocks pared losses ahead of the bell but still finished lower amid a disappointing jobs report Morning Markets Briefing
(S&P 500 -0.4%, Dow -0.2%, Nasdaq -0.2%). Overall payroll jobs unexpectedly sank 131K in July
(market expectations were for a 70K drop) with the government sector losing 202K jobs, 143K of which
were temporary census positions, after shedding 252K in June. Private nonfarm employment Market Commentary: August 9th, 2010
accelerated slightly to a 71K increase, following a 31K gain in June. The unemployment rate was A snapshot of the markets through the
unchanged at 9.5%. Average hourly earnings improved 0.2%, while the average workweek ticked up
lens of ConvergEx.
to 34.2 hours from 34.1 hours. Consumer credit contracted by $1.3 billion in June, less than the $5.0
billion that was forecast. May’s contraction was revised much lower to $5.3 billion from the previously
reported $14.9 billion.
The Paradox of Corporate Thrift
Summary: Mark Twain famously noted that everyone talks about the weather, but no one ever seems to do anything about it. The same could be said about the oft-
mentioned bullish talisman of the “13x P/E” valuation on U.S. stocks. The hard truth is markets are not just paying for further cuts in corporate cost structures. Companies
need to execute on plans for growth, but that is a hard row to hoe in the current economy. In fact, today we argue that the “cheap” equity market and structurally high
levels of unemployment are tied at the hip. Only large, publicly owned U.S. companies have the cash on hand to hire – small businesses have turned turtle and the
government complex is strapped. Pushing this equation in the right direction for economic expansion will take time, regulatory stability, and more time. Plus a side dish
of time.
It has been a long while – the better part of 2 decades - since the large cap companies of the U.S. stock market have been as central to the domestic economy
as they are today. They may receive a lot of the attention in a myriad of settings, from cocktail party chatter to academic literature, but the “big stories” of the last 15
years or so have been elsewhere. Consider where the real action has been:
• For much of the last decade, for example, product innovation in the debt capital markets – securitized mortgages and insurance on sovereign and
corporate debt defaults – have been the front-page drivers of both the real economy and the financial services industry. They pushed the mortgage
market first into growth, then bubble, and then implosion, and allowed savvy market participants to profit handsomely from the entire trip.
• Small business, driven by the builders, lawyers and other services needed to feed the housing bubble, were the dominant source of job growth in the
early 2000s.
Market Commentary – Pages 1-3, Equities/Conferences & Earnings – Page 4, Fixed Income – Page 5, Options – Page 6, Exchange-Traded Funds/Indexes – Page 7, Social
Media & Internet Blogs Top Stories – Page 8
1 1
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
• Even when equities were the hottest game in town, back in the 1990s, the market’s enthusiasm was largely limited to the technology sector. If it didn’t
have a “dot com” on the end of its name, most companies saw their equities underperform the broader market. Market cap weighted indices such as the S&P
500 became increasingly tech-heavy, peaking out at +30% allocations. Committee-created indices, primarily the Dow Jones Industrial Average, shifted
representation to technology as well.
• More recently, it has not helped that those same indices – S&P and Dow - have essentially stood still since for over a decade. Or that lower volatility
investment options such as U.S. Government debt, has outperformed domestic equities.
This stagnancy has resulted in a disaffected shareholder base that is essentially distrustful of corporate growth initiatives, especially those focused on the
domestic U.S. economy. Building a new plant in China? OK. Adding new capacity in the US? Better think twice. Even the hottest teen retailers have stock prices that
resemble their levels back at the turn of the millennium, when most of their current customers were barely out of diapers. Of course, large, mature and overcapacitized
industries like the auto sector have gone through their own corporate version of Dante’s seven circles of hell. Yes, corporate earnings have rebounded, but we’ll show in
a minute that even this positive development yields only lackluster impact on valuations.
And yet… and yet… these larger, publicly listed companies are the very enterprises that will have to provide the spark of job growth in a moribund economic
recovery. Who else is left to carry that water, after all?
• Small companies are not hiring due to sluggish demand and lack of access to capital.
• Governments – Federal, state and local – are seeing declines in revenue from sales and real estate taxes. They also suffer, in many cases, from the
crushing requirements of service employee pensions and benefits.
In spite of the obvious need for large companies to come to the rescue of the U.S. economy, markets treat the stocks of these businesses more like Rodney
Dangerfield than the Lone Ranger. The low valuations equity bulls point to – 13.2x current year estimates for the S&P 500 – have created a real challenge for sustained
job growth because of the way corporations are trying to earn their way out of them.
Consider the four key drivers of equity valuation and the market’s perceived prospects for each:
• Return on Capital. No probems here. Corporate earnings among public companies have been surprisingly robust. One can argue – and we have – that reported
“operating earnings” overstate actual economic results because most analysts stubbornly refuse to incorporate write-offs into earnings power calculations. But
we will put that aside and say that cash flow generation has been generally excellent among large U.S. companies. This is proof enough that companies are
earnings reasonable returns on their capital, even during sluggish economic times.
• Cost of Capital. Ditto from the prior point. Debt cost of capital is historically cheap, with interest rates bumping along generational lows. Corporate bond
spreads have narrowed from the crisis highs, and corporate access to debt markets is reasonably good.
2
• Competitive Advantage. Still pretty good for large U.S. companies. As a wise old trader once told me, its not what you make, its how long you can make it
that matters to creating wealth. The same is true for companies – reliable earnings growth tends to generate better valuations. The financial markets use that
earnings growth as a proxy for a company’s competitive advantage versus its peers. After all, only a company with some competitive “edge” should be able to
generate earnings and cash flow growth in excess of inflation and population growth.
• Growth Rate of Capital. The nub of the problem. A company, or a industry, or even a whole stock market can enjoy all the characteristics we have outlined
here and still suffer from a low valuation. Price/earnings, price/book, EBITDA/Market Value - all these valuation measurements will have trouble lifting
themselves off the floor if there is little perceived growth. Thus far into the recovery off the Q4 2008 bottom, markets have judged corporate revenue growth as
being largely sourced from cyclical recovery, not secular expansion.
There’s a chicken-and-egg conundrum here, of course. Large companies and their boards/managements see their current valuations and understand that growth is the
only way to a better multiple. Yet both companies and investors are leery of the investments required to generate that growth. The myriad reasons for that caution are
well known and center on uncertainty about the economy, regulation, and the health of the banking sector. So instead of growth initiatives, many companies push on the
first lever we outlined – return on capital. Doing more with less, maintaining a lean workforce, and limiting expansion can generate a higher ROIC, but current equity
valuations simply do not think these efforts are worth very much.
So we get a market at 13x earnings. And 10% unemployment. And +16% underemployment. Everything we do not want. The solution – growth – requires
confidence on the part of consumers, companies, and shareholders. At this point it is clear that this will only come with time and incremental certainty on issues like
regulatory initiatives. Lower interest rates won’t accomplish this goal in isolation and no matter what the Fed announces tomorrow the table is already set. No, the recipe
for success is going to take time, and confidence, and more time.
3
U.S. EQUITIES
KFT (+2.4%) rose the most in the Dow after reporting second quarter earnings excluding some items of 60 cents a share, compared with estimates of 52
cents. Newspaper publisher WPO sank 7.9% as it said the Department of Education’s potential new rules could have a “material affect” on its Kaplan unit.
For-profit schools declined on a BMO Capital Markets downgrade of the sector to “Market Perform” from “Outperform,” citing the likelihood of increased
oversight. APEI, operator of American Military University, tumbled 32.1% after eliminating its 2010 forecast, saying it will cease to provide annual
projections.
Important Earnings Today (with Estimates) From…

BBBB: $0.29 GLG: $0.05 PEGA: $0.17 S&P Futures
CCO: $0.02 HR: $0.32 KWK: $0.16 One Day (High –1127.00; Low – 1103.75):
CVG: $0.22 KG: $0.16 RGNC: $0.11
DISH: $0.53 LCAPA: $0.00 SNI: $0.58
EPE: $0.49 MDR: $0.42 TSN: $0.59
IT: $0.22 MKL: $03.95 WCG: $0.54
Source: Bloomberg
Important Conferences/Corporate Meetings Today:

JP Morgan Auto Conference – Detroit, MI
Needham & Company Clean Technology Conference – New York, NY
Pacific Crest Securities Technology Leadership Forum – Vail, CO
Prior Day SPX (High – 1123.06; Low – 1101.17; Close – 1121.64): Three Day (High – 1127.75; Low – 1103.75):
Source: Thomson ONE

4
FIXED INCOME
Treasury 2-year yields dropped to another record low of 0.4977 percent intraday, dipping below 0.50 percent for the first time, after the July payrolls
report showed the economy lost more jobs than forecast. The benchmark 10-year note yield fell 8 basis points to 2.82 percent, while the spread between
2- and 10-year debt yields dropped 5 basis points to 232 basis points.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events:

None
5
U.S. EQUITY
OPTIONS
SPX – Although the range of trading for the index was significantly wider today than recently, (-0.2% to -1.7%) and the trading was negative throughout the day, implied volatility in the
options premium actually came in slightly (VIX -1.6%). This was due to the market recovering from its’ lows to end only a little down, and a decent amount of net options selling
throughout the day. There were outright sellers in early trading of the August 1025 puts and the August 900/1000 put spread. Later the August 1025 puts were sold outright several
thousand times. There were also several trades where over 5,000 contracts on the day were sold in the September 1030/840 put spread and the September 1180/1230 call spread. There
also a sizable(8,000 + contracts) buyer of September 1110 calls, which occurred as the market was recovering mid afternoon.
ETF- Following a steep selloff, the market rallied causing premium levels to contract reversing earlier gains to close down on the day. In early trading we noticed premium sellers across
index specific ETFs. In SPYs , for example we saw one investor roll short puts as paper bought 23,000 SPY Aug 100 Puts (closing) and sold 23,000 SPY Oct 110 Puts, while in IWM we noted a
seller of 6,000 Sep 62 Puts. In the VIX, we saw a seller on the Sep 25 / 27.5 Call spread 5,000 times. A multi-legged spread in IWM September quarterly’s traded as one investor bought
10,000 Sep 55 Puts, bought 20,000 Sep 65 Puts, and Sold 43,000 Sep 60 Puts. Lastly, one investor rolled a long position in GLD through selling the Aug 120 Calls and buying the Oct 120 Calls
5,000x positioning for further upside.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 7/30/2010 8/2/2010 8/3/2010 8/4/2010 8/5/2010 30-Day Implied Vol
1 MIL MIL FIS MIL Q 19.14 BIGGEST MOVERS
2 FIS FIS PTV XTO ARG 10.66 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
DF DF ARG Q PTV 37.63
3
KFT 26.64% 21.28 PCS -30.18% 39.87
4 Q PTV Q PTV NOVL 28.43
5 PTV ARG NOVL ARG CFN 34.91 CPB 18.52% 18.11 TE -21.97% 17.05
6 ADM NOVL MJN NOVL EL 31.24 DRI 17.86% 26.23 CL -20.55% 29.94
7 FLIR Q CFN BIG KR 21.51
8 SLE CFN SWN MJN SWN 36.78
NKE 16.03% 21.80 IFF -20.31% 21.39
9 AGN CLX EL EL MJN 32.38 K 15.89% 18.94 DTV -17.47% 21.86
10 SAI MJN CLX CFN FLIR 24.88 CF 15.69% 45.41 MKC -16.94% 13.25
11 L SAI SAI SAI AMAT 32.50
12 CLX SLE KR FLIR SAI 18.20 NOVL 15.24% 35.33 PPL -15.22% 21.95
13 MCK AIG FLIR PCS SJM 21.45 DELL 15.21% 37.16 AEE -14.33% 19.71
14 MJN SWN AIG SWN PLL 30.63
ORCL 13.17% 26.34 TDC -14.29% 29.67
15 MRK MCK AMAT KR INTU 25.05
16 ARG FRX SLE AMAT AIG 51.45 CAG 12.05% 18.67 BIG -14.07% 40.97
17 HUM PBI ROST SLE MRK 21.88
18 CFN EL BIG TSN CLX 15.23
19 CAH PCS PCS FRX TGT 25.39
20 AMAT FLIR MCK CPB 14.59
21 NOVL AMAT FRX AIG FRX 23.15 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
22 SWN ROST PBI ROST NSM 30.13 historical volatility ratio. Above we identify the 10 most positive and negative
23 FRX ADM TSN SJM MCK 24.41 movers.
24 PFE CAH CAH MRK SLE 20.95
25 PCS SJM PCLN CLX AZO 17.54 The table to the left represents the 25 highest 30 day implied to historical
GME PFE SJM PCLN CLX volatility ratios within the S&P 500 companies. The green represents names
AMGN HUM ADM CAH MRK new to the list while the red represents names that have fallen out.
EL MRK MIL PBI ROST
MFE L DF MCK PPL
WFR FIS TSN
FSLR BIG
MIL
6
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 -0.41% Energy XLE -1.19% -2.40% Telecomm IYZ -0.92% 2.30%
SPDR Gold Shares GLD N/A 0.74% Health XLV 0.20% -4.38% Technology XLK -0.31% -2.88%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts -0.14% Industrials XLI -0.55% 11.01% Consumer Discretionary XLY -0.68% 7.59%
iShares MSCI EAFE Index EFA Foreign Large Blend 0.32% Utilities XLU 0.10% 0.32% Financials XLF -0.87% 2.64%
iShares S&P 500 Index IVV Large Blend -0.41% Consumer Staples XLP 0.22% 2.34% Materials XLB -0.37% -1.42%
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 213,350,146 Australian Dollar FXA 0.46% 2.12% Mexican Peso FXM -1.21% 2.67%
Financial Select SPDR XLF Specialty - Financial 75,592,375 British Pound Sterling FXB 0.49% -1.35% Swedish Krona FXS 0.66% 0.27%
PowerShares QQQ QQQQ Large Growth 65,974,188 Canadian Dollar FXC -1.03% 2.05% Swiss Franc FXF 0.78% -0.43%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 59,733,733 Euro FXE 0.75% -7.31% USD Index Bearish UDN 0.46% -3.89%
iShares Russell 2000 Index IWM Small Blend 55,975,532 Japanese Yen FXY 0.51% 8.77% USD Index Bullish UUP -0.51% 1.17%
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
B2B Internet HOLDRs BHH Specialty - Technology 4.96% iPath S&P 500 VIX VXX -0.93% -37.19% Aggregate AGG 0.20% 4.30%
PowerShares DB Commodity Dble Short ETN DEE Bear Market 4.11% Short-Term Futures ETN Investment Grade LQD 0.57% 5.99%
GlobalShares FTSE Devlpd Countries ex US GSD N/A 3.82% High Yield HYG -0.02% 0.58%
Direxion Daily 30 Yr Trs Bull 3X Shares TMF Long Government 3.44% iPath S&P 500 VIX VXZ 0.72% 9.58% 1-3 Year Treasuries SHY 0.06% 1.54%
PowerShares DB Agriculture Dble Short ETN DTO Bear Market 3.17% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.65% 9.32%
20+ Year Treasuries TLT 1.09% 11.38%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.74% 9.81% Crude Oil USO -1.31% -7.76%
Silver SLV 0.61% 9.26% EAFE Index EFA 0.32% -2.75%
Natural Gas UNG -2.45% -24.90% Emerging Markets EEM -0.14% 1.40%
SPDRs SPY -0.41% 0.85%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

5 New ETFs You’ve Never Heard Of - http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/08/05/investopedia46120.DTL
Solar ETFs Rebound - http://blogs.forbes.com/investor/2010/08/05/solar-etfs-rebound/
7
Top Online Social Networking Stories
Latest Popular Digg.com Business Stories:

Nearly half of those nearing retirement lack adequate savings - http://articles.chicagotribune.com/2010-07-13/business/sc-biz-0714-retirement-gail-
20100713_1_retirement-baby-boomers-social-security
Is President Obama Good for Business? - http://smallbusiness.aol.com/2010/08/04/is-president-obama-good-for-business/
AIG’s profitable again, but what about taxpayers? - http://money.cnn.com/2010/08/05/news/companies/AIG_earnings_preview/index.htm
Telling Swiss secrets: A banker’s betrayal - http://www.globalpost.com/dispatch/europe/100724/swiss-banking-secrecy
T-Mobile Continues to Flounder, Loses 93,000 Customers - http://www.digitaltrends.com/mobile/t-mobile-continues-to-flounder-loses-93000-customers/
Calculated Risk
Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - http://www.calculatedriskblog.com/2010/08/employment-population-
ratio-part-time.html
July Employment Report: 12K Jobs ex-Census, 9.5% Unemployment Rate - http://www.calculatedriskblog.com/2010/08/july-employment-report-12k-jobs-
ex.html
Fannie Mae: REO Inventory doubles, expected to increase “significantly” - http://www.calculatedriskblog.com/2010/08/fannie-mae-reo-inventory-
doubles.html
Hotel Occupancy Rate at 71% last week - http://www.calculatedriskblog.com/2010/08/hotel-occupancy-rate-at-71-last-week.html
The Big Picture

Origins of the Flash Crash - http://www.ritholtz.com/blog/2010/08/origins-of-the-flash-crash/
Where is Your Money? - http://www.ritholtz.com/blog/2010/08/where-is-your-money/
Do Capital Markets Create Their Own Fuel? - http://www.ritholtz.com/blog/2010/08/do-capital-markets-create-their-own-fuel/
The Baseline Scenario

Health Care Non-Solutions - http://baselinescenario.com/2010/08/04/health-care-non-solutions/
The Treasury Position – On the Volcker Rule - http://baselinescenario.com/2010/08/05/the-treasury-position-on-the-volcker-rule/
Bespoke Investment Group

Best and Worst Performing S&P 500 Stocks on Earnings Days - http://www.bespokeinvest.com/thinkbig/2010/8/6/best-and-worst-performing-sp-500-
stocks-on-earnings-days.html
The Most Loved Stock in the S&P 500 -- A Construction Company? - http://www.bespokeinvest.com/thinkbig/2010/8/5/the-most-loved-stock-in-the-sp-
500-a-newspaper-company.html
Robert Reich’s Blog

We’re Even Deeper in the Hole - http://robertreich.org/post/912893890/were-even-deeper-in-the-hole
8
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
not provide any assurance or guarantee as to returns that may be realized from investments in any securities or other assets.
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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Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.

The Paradox of Corporate Thrift

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 Baseline Scenario

Bespoke Investment Group

Robert Reich’s Blog

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