Morning Review - 082710

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
After an early session rally, stocks lost ground Thursday (S&P 500 –0.7%, Dow –0.7%, Nasdaq –1.1%) Morning Markets Briefing
ahead of the 2nd quarter GDP reading on Friday. Initial jobless claims fell 31K last week, coming in
better than expected at 473K versus expectations for 490-495K. However, the 4-week moving average
Market Commentary: August 27th, 2010
climbed to its highest level (486,750) since November 2009. The prior week was revised to 504K from
500K, also the highest since November. For the 9th time in 10 weeks, mortgage rates fell to the lowest A snapshot of the markets through the
level in almost 40 years of records. The average 30-year fixed loan rate was 4.36% last week, down lens of ConvergEx.
from 4.42% the previous week. In addition to the latest GDP reading, earnings from TIF and the
University of Michigan’s consumer sentiment reading are on deck for Friday.
I Can’t Drive 55
Summary: With capital markets worried about a U.S. “double dip” back into recession, today we examine what sectors/assets classes reflect the greatest amount of
concern over this potential outcome. There are now scores of exchange traded funds (ETFs) – and related option chains - tracking everything from tech stocks to gold to
high yield bonds. It is therefore a straightforward exercise to look at the “VIX” (the widely known measurement of “fear” related to the S&P 500) for these asset classes
and industry sectors. At the top of heap in terms of “double dip” worries: tech stocks and high yield bonds. Their “VIX’s” have jumped +30% in the past month. In the
middle of the pack: both emerging and developed economies outside the U.S. And not sweating the chance of a second U.S. recession: gold. The yellow metal was the
only asset class to see lower implied volatility (the technical term that “VIX” actually tracks) over the last 30 days.
What are the odds of being caught speeding twice in one day? One in five? One in ten? Pretty remote, one would think, given that the ratio of police to motorists on
most roads is 1,000:1 or greater. I can tell you from direct and personal experience, however, that the odds of that event are much, much higher than you think. I had
my driver’s license suspended for 30 days in 1997 for two tickets, issued on the same day and only a few miles apart.
Here’s the thing: most people, after receiving one ticket, will drive more carefully immediately thereafter. But I, working through the math I referenced above,
thought “No… The odds are actually in my favor now. I can, in fact, speed with impunity.” This proved to be an error. As it turns out, going substantially faster than the
general flow of traffic will gather the attention of the law. This offsets the theoretical odds against discovery, and then some. Oh, and driving a bright yellow car. I
should have mentioned that, too.
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
11
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
That is an admittedly embarrassing – but hopefully useful – allegory for the whole “recessionary double dips never happen” discussion that dominates market
attention at the moment. Economic historians will (rightly) point out that two recessions back to back are relatively rare occurrences. The only one in the modern era
occurred in the early 1980s, as then-Fed Chairman Paul Volker raised interest rates to cool rampant inflation. It was effectively a medically-induced coma for the U.S.
economy, squashing inflation through a self-inflicted, sharp economic downturn. The first recession, just 2 years before, had been caused by the spike in energy prices
created by the Iranian revolution. Aside from that doubleheader, recessions do tend to be solitary events.
However, as my bone-headed speeding story highlights, circumstances matter a lot when it comes to “unusual” events. Customarily, we don’t have double dips
because consumers and businesses have some ability, and desire, to start spending again after a period of recession. They usually just need a little nudge, in the form of
lower interest rates, to start buying large durable goods or perhaps take out a mortgage for a new house. That spurs employers to start hiring, and the virtuous circle of
economic growth kicks into gear. The challenges to that upbeat trajectory at this point in the cycle are manifold:
• Still low consumer confidence

• Ditto for corporations
• Regulatory uncertainties that undermine hiring plans
• An unpopular President, and a doubly unpopular Congress
• A central bank that seems to have been overtaken by events. By the way, there is good fun to be had checking out Paul Volker’s old testimonies in front on
Congress from the “double dip” period of the early 1980s. This was long before smoking was banned on the Hill, and Chairman Volker regularly ran through a full
Churchill sized cigar while opining on monetary policy. Google Video has some of the clips online.
The last month has seen much of the “double dip” debate come to the fore, with a worsening labor market picture headlining other data reflective of a
weakening economy.
In the graph that follows this note we take a look at what sectors and asset classes seem most “worried” about the chance for another recession. We take the
measure of this seemingly “emotional” assessment by looking at the 30 day forward implied volatilities for the exchange traded funds associated with different industrial
sectors, asset types, and U.S./foreign stock markets. Don’t be scared off – that’s just the same concept as the CBOE Volatility Index, or VIX. A higher VIX usually means
more near term worries about the market. A declining VIX means investors are generally more confident that stocks will rise in the near future. A few observations:
• U.S. stocks as a whole have seen increasing IV in the past month, to the tune of 22% higher than the same time in July. That’s a sign of concern over the
near term, of course, but it also serves as a useful baseline for other asset classes.
• The most notable increase in IV is actually in the option chain for the most popular High Yield Bond ETF (symbol HYG). Here, IV has actually spiked by 31%
over the last 30 days, more than stocks. We hear a lot about investor complacency as it related to bond investments, but it does seem that options traders, at
least, understand that a double dip might be just as bad for non-investment grade credits as it would be for stocks.
2
• At the other end of the spectrum, and sitting in splendid isolation, is gold. The precious metal has had a pretty good month, up almost 5%. What might be
more impressive, however, are the lower levels of apprehension about gold’s next move. The IVs related to the GLD ETF actually fell over the past 30 days,
indicating some sentiment that gold is not heading for a fall in the near future. We see that kind of contraction in IVs when assets rise (VIX tends to go down
when stocks rise, for example). But given that every single other asset class we looked at saw rising IVs versus last month, we can only look at the ‘Gold VIX” as
a real sign of confidence in the metal. Or, of course, a real skepticism in everything else.
• Among the major industrial sectors, technology seems to be bearing the brunt of the double dip fears. It’s IV is up 23% over the past month, more than
U.S. stocks overall. Telecomm as a sector was up more, but it’s coming off a low base, and there are not many stocks in that index to begin with. No, the move
higher in the “Tech VIX” really catches the eye. I confess to liking tech as a leveraged play on not getting a double dip, but my enthusiasm seem to be counter to
the market’s perception that there is a lot of risk in the sector.
• Interestingly, worries about overseas markets – in both emerging and developed economies – seem pretty middle-of-the-pack as far as asset classes go. The
EAFE developed market ETF (symbol EFA) and the emerging market fund (symbol EEM), have seen their “VIX’s” rise by only 11% and 13%, respectively.
Percentage Change in IV from 1 Month Ago
40% 36.3%
35% 31.2%
30%
23.0% 22.4%
25%
20.4% 19.6%
19.2% 19.1%
20%
15.0% 14.2%
13.7%
15% 11.1%
9.8% 9.7% 9.5%
10% 7.7%
5.8% 5.6%
5%
0%
-5%
-5.6%
-10%
Source: ivolatility.com
3
U.S. EQUITIES
DELL (0.0%) raised its bid for PAR (-2.7%) to $24.30 a share or $1.6 billion, which was 30 cents a share above HPQ’s (-0.1%) original offer and much higher
than Dell’s initial bid of $18. After the close, HPQ boosted its offer to $27 a share in cash to top Dell. Shares of BA advanced 0.9% after Goldman Sachs
raised its 4th quarter earnings estimate to $1.15 a share from $1.12, citing chances for improved profit margins amid higher volume and lower research
expenses. Online recruiter MWW added 4.7% as SunTrust Robinson Humphrey said it could benefit from employers’ increasing reliance on staffing
companies, and teen retailer ANF dropped 1.0% after its CEO announced the company plans to sell up to 1.79 million shares.
Important Earnings Today (with Estimates) From…

TIF: $0.53 S&P Futures
ZLC: $-1.30 One Day (High –1061.75; Low – 1043.00):
Source: Bloomberg
Important Conferences/Corporate Meetings Today:

Macquarie Securities North Asia Corporate Day - HK
Prior Day SPX (High – 1061.45; Low – 1045.40; Close – 1047.24): Three Day (High – 1064.00; Low – 1037.00):
Source: Thomson ONE

4
FIXED INCOME
Longer-term Treasuries advanced Thursday after the government’s $29 billion sale of 7-year notes drew a record low yield of 1.989%, compared with
expectations for 2.002%. Demand was higher than usual, with coverage at 2.98 times versus an average of 2.81 over the past 10 offerings. Foreign
interest was the highest since April’s auction, as indirect bidders purchased 56.7% of the securities. Friday morning Fed Chairman Ben Bernanke will
discuss the economy at a conference in Jackson Hole, though it is widely expected that he will not give any indication as to the central bank’s next move.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with Consensus):

GDP (8:30am EST): 1.3% SAAR
GDP Price Index: 1.8% SAAR
Corporate Profits (8:30am EST)
Univ of Michigan Consumer Sentiment (9:55am EST): 69.6
Fed Chairman Ben Bernanke speaks on the economic outlook at the Kansas City Fed’s annual Jackson Hole conference (10:00am EST)
5
U.S. EQUITY OPTIONS
SPX – After an early morning spike, the market consistently sold off over the course day finishing down 0.77%. We continued to see bullish flow in Sep as we
did in yesterday’s session. The activity indicates some players may be looking for a short term pop in the overall market. For example, there was a seller of the
1000/1075/1150 call fly, maximizing exposure to the upside with the index @ 1075. In other bullish activity we saw buyers of the Sep 1050/1100 call spread as
well as a late buyer emerge in Sep 1070 calls roughly 10,000 times.
ETF – After opening in positive territory, the market declined as cautious sellers returned; total trading volume was temperate and less than expected. We
highlight trading in GLD as investors positioned for a surge through selling downside and buying upside call spreads. For example paper bought 4500 Jan 121/131
call spreads and sold Jan 113 puts 9,000 times. In sector flow, XOP saw a buyer of the Dec 37 / 27 1X4 put spread 2500 times, while in XLK one investor bought
volatility through the Jan 21 straddle 5,000 times. The financial ETF, XLF, saw a large print as one player was likely closing out an existing position through
purchasing the Sep 15 calls and selling the Sep 13/14 put spread 114,000 times. Lastly in the VIX, one investor sold 2,500 Jan 45 calls and bought 7,500 Jan 65
calls.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY
Rank 8/20/2010 8/23/2010 8/24/2010 8/25/2010 8/26/2010 30-Day Implied Vol
1 Q Q Q Q Q 34.82
2 ARG SCG ARG ARG ARG 20.82
3 NOVL ARG NOVL NOVL NOVL 48.82 BIGGEST MOVERS
4 HSY MKC FDO FDO FDO 31.41
5 NRG NOVL CTL CTL FRX 35.46
Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
6 FDO FDO AAPL FRX CTL 14.64 MAT 36.19% 31.80 FTR -20.71% 22.47
7 KR AMAT SBUX AAPL PX 24.52 PNW 32.76% 29.37 LSI -15.85% 40.80
8 WIN SBUX MO STZ LM 42.66
9 HRB AAPL WIN PX C 39.16 BAC 31.74% 36.52 JDSU -15.47% 48.58
10 MO WIN FRX MO LMT 21.54 GILD 30.85% 31.56 PDCO -12.56% 32.23
AMAT FRX STZ WIN CB 19.73
11
GOOG 23.25% 31.22 TDC -10.87% 34.18
12 FTR PLL AMAT DIS TIF 43.02
13 CPB KR KR LM MO 17.34 GCI 23.08% 53.62 MFE -9.69% 5.24
14 SAI MO PX KR DIS 30.29 CMA 22.28% 36.71 EFX -9.53% 23.95
15 FRX LM PLL LUV BBT 34.59
16 NTRS WHR NSM STR BMY 25.08
NU 19.76% 23.30 HRL -7.98% 17.86
17 LM NRG LM AMAT NKE 25.92 C 18.97% 39.16 PKI -7.94% 32.36
18 RDC HRB WHR GS STZ 27.60 USB 18.84% 32.74 APOL -5.80% 50.16
19 MRK L NKE CPB HRB 37.00
20 WMB AMZN MRK VLO PLL 36.84
21 APOL NTRS VLO PM WIN 22.05
22 CTL PX LMT NSM PNW 29.37
23 SBUX MOLX PM NKE PM 21.82
We ranked the S&P 500 companies from the highest to lowest 30 day implied to
24 STZ LMT DIS CAM BAC 36.52 historical volatility ratio. Above we identify the 10 most positive and negative
25 LO CPB LUV TIF MRK 25.38 movers.
NSM LO CPB MRK CAM
PX STZ MOLX WHR NSM The table to the left represents the 25 highest 30 day implied to historical
LQ CTL NTRS PLL VLO volatility ratios within the S&P 500 companies. The green represents names
KO APOL AMZN SBUX CPB new to the list while the red represents names that have fallen out.
L WMB L GS
DELL MRK HRB AMAT
INTU RDC NRG STR
SJM SAI MKC LUV
CRM FTR SCG KR
HSY AAPL 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 -0.67% Energy XLE -0.90% -10.93% Telecomm IYZ -0.15% -0.50%
SPDR Gold Shares GLD N/A -0.33% Health XLV -0.63% -8.98% Technology XLK -1.00% -9.33%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts -0.63% Industrials XLI -0.14% 1.37% Consumer Discretionary XLY -0.69% 1.44%
iShares MSCI EAFE Index EFA Foreign Large Blend -0.04% Utilities XLU -0.46% -1.48% Financials XLF -0.81% -6.67%
iShares S&P 500 Index IVV Large Blend -0.65% Consumer Staples XLP -0.75% 0.19% Materials XLB -0.13% -7.64%
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 217,250,772 Australian Dollar FXA 0.58% -1.17% Mexican Peso FXM -0.36% -0.01%
PowerShares QQQ QQQQ Large Growth 75,445,950 British Pound Sterling FXB 0.59% -4.03% Swedish Krona FXS 1.04% -3.37%
iShares Russell 2000 Index IWM Small Blend 71,359,242 Canadian Dollar FXC 0.37% -0.77% Swiss Franc FXF 0.72% 0.95%
Financial Select SPDR XLF Specialty - Financial 65,465,048 Euro FXE 0.60% -11.24% USD Index Bearish UDN 0.59% -6.35%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 54,550,151 Japanese Yen FXY 0.36% 10.01% USD Index Bullish UUP -0.62% 4.12%
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
ELEMENTS CS Global Warming ETN GWO N/A 9.79% iPath S&P 500 VIX VXX 1.00% -32.79% Aggregate AGG 0.13% 5.37%
ELEMENTS MLCX Biofuels Index TR ETN FUE N/A 8.92% Short-Term Futures ETN Investment Grade LQD 0.09% 8.41%
iShares S&P Target Date 2010 TZD N/A 8.42% High Yield HYG -0.14% -0.92%
iPath DJ-UBS Tin TR Sub-Idx ETN JJT N/A 4.55% iPath S&P 500 VIX VXZ 1.37% 21.38% 1-3 Year Treasuries SHY 0.00% 1.58%
PowerShares DB Base Metals Dble Long ETN BDD N/A 3.87% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.42% 11.98%
20+ Year Treasuries TLT 0.94% 20.61%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD -0.33% 12.72% Crude Oil USO 0.83% -16.90%
Silver SLV 0.27% 12.40% EAFE Index EFA -0.04% -10.37%
Natural Gas UNG -1.68% -36.11% Emerging Markets EEM -0.63% -4.53%
SPDRs SPY -0.67% -5.57%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

Lap of Luxury is a Tough Place to Sit in ETFs - http://www.forbes.com/2010/08/25/etf-consumer-cyclical-markets-wynn-resorts.html?boxes=Homepagechannels
Energy Partnerships Get Their Own ETF - http://online.wsj.com/article/SB10001424052748704125604575449912487468660.html
7
Top Online Social Networking Stories
Latest Popular Digg.com Business Stories:

Graduating from IOU: Student Loans in America - http://www.mint.com/blog/trends/student-loans-08242010/
Low prices and rates can’t slow fall in home sales - http://finance.yahoo.com/news/Low-prices-and-rates-cant-apf-2949326144.html?x=0&.v=10
Calculated Risk
Weekly initial unemployment claims decline, 4-week average highest since Nov 2009 - http://www.calculatedriskblog.com/2010/08/weekly-initial-
unemployment-claims_26.html
ATA: “Truck freight tonnage has essentially gone sideways since April 2010” - http://www.calculatedriskblog.com/2010/08/ata-truck-freight-tonnage-
has.html
Regional Fed Manufacturing Surveys and the ISM PMI - http://www.calculatedriskblog.com/2010/08/regional-fed-manufacturing-surveys-and.html
The Big Picture

Classic Cars Beat S&P500 - http://www.ritholtz.com/blog/2010/08/classic-cars-beat-sp500/
Seeking Alpha
Contained Depression - http://seekingalpha.com/article/222204-contained-depression
Bespoke Investment Group

S&P 1500 Short Interest: Unchanged Since April - http://www.bespokeinvest.com/thinkbig/2010/8/25/sp-1500-short-interest-unchanged-since-april.html
Housing: The Lost Half Decade - http://www.bespokeinvest.com/thinkbig/2010/8/25/housing-the-lost-half-decade.html
Zero Hedge
Rosenberg Explains Why Not One New Home Priced Over $750,000 Sold in July - http://www.zerohedge.com/article/rosenberg-explains-why-not-one-new-
home-priced-over-750000-sold-july
Goldman on Claims: Surge in People Receiving Extended or Emergency Benefits Offsets Positive News - http://www.zerohedge.com/article/goldman-
claims-surge-people-receiving-extended-or-emergency-benefits-offsets-positive-news
16th Sequential equity Fund Outflow Takes Total to Over $50 Billion YTD; Retail Boycott of Stocks Continues - http://www.zerohedge.com/article/16th-
sequential-equity-fund-outflow-takes-total-over-50-billion-ytd-retail-boycott-stocks-co
The Baseline Scenario

Fiscal Austerity and “Third World America” - http://baselinescenario.com/2010/08/26/fiscal-austerity-and-%e2%80%9cthird-world-america%e2%80%9d-2/
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,
as it does not constitute substantive research or analysis, 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. In addition, the information is not intended to provide sufficient basis on which to make an investment decision. 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. This material does not purport to contain all of the information that an
interested party may desire and, in fact, provides only a limited view of a particular market.
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
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• Still low consumer confidence

Percentage Change in IV from 1 Month Ago

Important Earnings Today (with Estimates) From…

Important Conferences/Corporate Meetings Today:

Source: Thomson ONE

Source: Bloomberg Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus):

U.S. EQUITY OPTIONS

Major Index Changes:

ETFs in the Headlines and Blogs:

Top Online Social Networking Stories

Latest Popular Digg.com Business Stories:

The Big Picture

Bespoke Investment Group

The Baseline Scenario

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