Morning Review - 102910

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
Thursday stocks trimmed losses ahead of the close as the market weighed a mixed round of earnings Morning Markets Briefing
and the central bank’s next actions to stimulate the economy (S&P 500 +10 bps, Dow -15 bps, Nasdaq
+16 bps). In the day’s economic news, initial unemployment claims fell last week by a more-than-
expected 21K to 434K, the lowest total since early July. The prior week’s data, however, was upwardly Market Commentary: October 29th, 2010
revised for a 40th time this year, to 455K from the initially reported 452K. At 453.25K, the 4-week A snapshot of the markets through the
moving average was also at its lowest level since July. Meanwhile, after the close, MSFT posted
lens of ConvergEx.
earnings and revenue that easily topped estimates. On deck for Friday: GDP, Chicago PMI, Univ. of
Michigan consumer sentiment, employment cost index, and before-the-bell earnings from CVX and
MRK.
Tricks and Treats in the U.S. Treasury’s Daily Statement
Summary: Just as soon as we get past the Elections and the Fed meeting next week, the market’s attention will clearly shift to the monthly Employment Situation (a.k.a.
the Jobs Report) on Friday. In our regular review of tax withholding data from the U.S. Treasury we find that even the muted expectations for next Friday’s report are
probably going to be difficult to reach. October tax/withholding receipts were flat year over year on a run rate basis and the fifth worst month for collections since the
financial crisis began in 2007. After all, real job creation should pretty much instantly create incremental tax/withholding receipts. The silver lining in the data is that
Federal spending is now “only” 40% sourced from new debt issuance, the majority coming from tax revenue. A long way from self sustaining, of course, but a step in the
right direction.
If you are in the mood to look for ghosts this Halloween weekend on the island of Manhattan, look no further than Washington Square Park. Long before it was a
park, it was the execution grounds for the island, as well as a potters’ field for over 20,000 people who could not afford a private burial. (Cue scary music here.) When
yellow fever epidemics struck the city in the early part of the 19th century, the victims were buried here out of concern for public hygiene, since it was outside of the city
limits at the time.
If that spooky little vignette of New York life from long ago scares you, then you are probably too sensitive to look at the latest data from the U.S. Treasury
when it comes to tax payments. After all, we are fast approaching a time when the macro drivers of market action – elections and the Fed’s impending decision on
Quantitative Easing – are going to be a fading memory. Past Wednesday at 2:15pm, the approximate time the Fed releases its decision, we are all going to have to
refocus on the fundamentals of the U.S. economy. The two most important factors there – employment and government spending deficits – play a leading role in the U.S.
Treasury’s Daily Statement (viewable here: http://www.fms.treas.gov/dts/index.html).
Market Commentary – Pages 1-4, Equities/Conferences & Earnings – Page 5, Fixed Income – Page 6, Options – Page 7, Exchange-Traded Funds/Indexes – Page 8, Social
Media & Internet Blogs Top Stories – Page 9
11
©2010 BNY ConvergEx Executi`on Solutions LLC. May not be redistributed without express permission. All rights reserved
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
We look at this data every month for two pieces of information:
1. Is the labor market getting better? After all, if employment is improving, then tax and withholding receipts should be increasing. Most on-the-books workers
have their taxes and things like Social Security/Medicare payments automatically taken out of their paychecks. More workers should mean more tax collection,
and right away.
2. Is the U.S. Government able to collect enough incremental tax revenue that it can begin to ease the need to issue more debt? As of October 27th there
was $13.7 trillion of Federal debt outstanding. Three years ago on this day that number was $8.6 trillion. The difference is purely due to spending more than
taxes bring in – $5.1 trillion or $4.6 billion every day.
On the first point, the most recent data is not encouraging. We take all employment-related taxes and withholding collected by Treasury and compare the monthly
receipts to prior periods. The accompanying graphs show these progressions. (Cue that scary music again.) The following is a brief summary of the latest data:
• October total personal tax/withholding collected is no better than last October, at a run rate of $136 billion for the month. Corporate tax collections are a
little better, but they are just $8.9 billion this month versus $7.5 billion last October.
• The current year is still in a hole versus 2009. The cumulative amount of personal taxes/withholding collected is running $12 billion behind last year-to-date.
If you want a bright spot, consider that in May we were $43 billion behind prior year collections.
• The October run rate of $136 billion I mentioned above is the fifth worst month for collections since the beginning of 2007.
It is hard to be encouraging on the upcoming Jobs Report, even with the current modest expectations of +60,000 payroll growth and an unchanged 9.6%
unemployment rate. Moreover, even if the report does “beat’ these numbers, the tax data doesn’t lie: whatever jobs were created are either low paying (and therefore
low tax revenue generating) and/or can’t offset the decline in wages seen by the existing working population. For those readers who recall our prior analyses on these
numbers, please note that with this edition we have added the taxes received from non-withheld income sources, primarily small businesses and the self-employed. This
data makes for a more complete picture, even if it isn’t especially pretty.
On the issue of deficit spending, the data is a touch more encouraging. The Daily Treasury Statement also shows how much fresh new Federal debt is issued, and the
slope of that increase is slackening somewhat. Don’t break out the champagne just yet, of course. There is still incremental debt issuance – just over $102 billion in
October, for example. But total tax receipts have been $143 billion in the same time period. That means that the U.S. is issuing debt for 40% of its total monthly spending
needs. Better than the +50% from the debts of the recent crisis, but obviously still a long way to go.
2
3
4
U.S. EQUITIES
In earnings land, XOM (+0.8%) topped estimates in reporting a 55% increase in quarterly profit on higher crude prices and improved refining margins, but
revenues fell short of projections. Shares of MMM dropped 6.5% despite earnings and revenue that beat expectations, as the diversified manufacturer
raised its full-year outlook due to “anticipated earnings dilution” stemming from several acquisitions during the quarter. Retailer SKX sank 18.2% on
weak earnings and a 70% rise in inventory, while it was also downgraded by at least 2 firms. Meanwhile, MOT (+0.5%) swung a profit after posting a
loss in the year-ago quarter, and SYMC added 4.1% despite a fall in net income as results were better than forecasted.
Important Earnings Today (with Estimates) From… S&P Futures

LNT: $1.07 DRC: $0.47 NDAQ: $0.46 One Day (High –1187.50; Low – 1173.50):
AGP: $0.81 DTE: $0.96 NWL: $0.41
AON: $0.67 EIX: $1.18 NEE: $1.43
ACI: $0.37 EL: $0.77 OGE: $1.55
CPN: $0.39 HLS: $0.40 OHI: $0.45
CVX: $2.14 HSIC: $0.87 POM: $0.40
CI: $1.06 ITT: $0.99 COL: $0.94
CNX: $0.58 LPNT: $0.66 SWN: $0.46
CEG: $0.64 MGLN: $0.92 WY: $0.11
D: $1.07 MRK: $0.83 Source: Bloomberg
Important Conferences/Corporate Meetings Today:

None
Prior Day SPX (High – 1189.53; Low – 1177.10; Close – 1183.67): Three Day (High – 1187.50; Low – 1167.75):
Source: Thomson ONE

5
FIXED INCOME
Thursday 10-year Treasuries snapped their longest losing streak in 2 years, rising for the first time in 7 days, as investors speculated the Fed remains open
to large asset purchases to stimulate the economy. Benchmark yields fell 6 bps to 2.66%, while 2-year note yields also dropped 6 bps in their biggest
intraday decline since the end of August. Results for the Treasury’s $29 billion 7-year note auction were solid, with coverage of 3.06 times and a high
yield of 1.970%, which was 2 bps below the 1:00pm EST bid. Coverage topped last month’s 3.04 times and was the highest since the issue was reinstated
in February 2009.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with Consensus):

GDP (8:30am EST): 2.0%
o GDP Price Index: 2.0%
Employment Cost Index (8:30am EST): 0.5%
Chicago PMI (9:45am EST): 57.6
University of Michigan Consumer Sentiment (9:55am EST): 68.0
Farm Prices (3:00pm EST)
6
U.S. EQUITY
OPTIONS
SPX – The underlying index had another very quiet day ending +0.1%, with a trading range of only -5% to +0.6%. The implied premium as measured by
the VIX was also little changed, as the risk assessments seemed to be on hold before the upcoming elections and Fed announcements. There were a few
notable large trades in SPX options. In December of 2010 the 995 puts were sold 5,000 times @ $3.00 and the Dec 600 puts were sold 30,000 times @
$0.05. In December of 2012 the 1200 puts were sold 15,000 times @ $181 vs. buying the 850 puts 30,000 times @ $63.00.
ETF – After opening in positive territory, the market undulated over the course of the day to close unchanged. Options volume was below expected, and
we note mixed trading in the ETF space. In International products we saw an investor expecting a slight rise in EEM (Emerging Markets) as paper sold the
Jan 43 / 38 put spread 13,000 times to buy the Jan 46 / 48 call spread 1X2 6,500 times. In EWJ (Japan) we note a three-legged trade with an investor
selling the Jan 9 puts as well as the Jan 10 / 11 call spread 10,000 times. In sector flow XLF (Financial) had an investor positioning for upside through the
purchase of 50,000 Dec 15 calls.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 10/22/2010 10/25/2010 10/26/2010 10/27/2010 10/28/2010 30-Day Implied Vol
1 MFE MFE MFE MFE MFE 5.83
2 MKC MKC PTV PTV PTV 6.75
3 PNW DTV MKC DTV DTV 21.08 BIGGEST MOVERS
4 DTV MJN DTV PNW VAR 28.18 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
5 GENZ GENZ PNW SYMC GENZ 16.73 ORCL 54.02% 25.82 PNW -52.10% 17.39
6 MJN SYMC XEL VAR K 19.17 MEE 16.64% 49.72 ORLY -48.75% 21.53
7 RSH MYL SYMC GENZ CEPH 33.60 TSN 15.20% 38.63 FMC -46.94% 23.32
8 MYL CEPH GENZ CEPH VRSN 32.49 SLM 15.18% 29.97 FLS -46.03% 34.44
9 SYMC CHRW VAR ORLY FSLR 49.65 HAL 14.58% 50.60 SYMC -43.91% 30.07
10 CEPH K CHRW K QCOM 30.68 HPQ 12.50% 25.04 LSI -41.74% 32.23
11 Q VAR CEPH MA EIX 18.51 MOLX 11.83% 35.98 AN -40.22% 31.92
12 CHRW TJX MYL FSLR TJX 25.73 IPG 11.17% 42.50 EK -39.26% 55.92
13 VAR SJM MJN MJN PCG 20.01 CAM 10.80% 43.23 XRAY -34.57% 24.97
14 ORLY ORLY K EIX MA 34.60 SUN 9.52% 35.40 TER -33.65% 44.56
15 MDP PTV MA PCG CFN 32.24
16 VRSN VRSN ORLY TJX BBY 31.20
17 BMC MDP PCG VRSN GME 39.29
18 K BMC EIX BBY BIG 34.13
19 PTV NRG SJM CFN BDX 18.53 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
20 HSP BBY TJX FII KSS 29.15 historical volatility ratio. Above we identify the 10 most positive and negative
21 TJX COH NI SJM XL 37.26 movers.
22 AN AN VRSN BMS HAR 49.87
23 SJM PCG BBY DHI NRG 26.93 The table to the left represents the 25 highest 30 day implied to historical
24 HRS FISV QCOM GME DHI 43.02 volatility ratios within the S&P 500 companies. The green represents names
25 HAR DHI FSLR QCOM IFF 26.75 new to the list while the red represents names that have fallen out.
CA HAR DHI MKC BMS
EFX HRS FISV CHRW SJM
CNP HSP AN MYL FII
NI Q COH XEL MJN
RSH NRG NI ORLY
PNW BMC SYMC
MDP PNW
7
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 0.16% Energy XLE -0.22% 3.84% Telecomm IYZ 0.55% 9.84%
SPDR Gold Shares GLD N/A 1.33% Health XLV 0.58% 0.74% Technology XLK 0.00% 6.02%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 0.63% Industrials XLI -0.22% 15.62% Consumer Discretionary XLY 0.46% 18.47%
iShares MSCI EAFE Index EFA Foreign Large Blend 0.78% Utilities XLU 0.25% 2.10% Financials XLF -0.07% 1.18%
iShares S&P 500 Index IVV Large Blend 0.08% Consumer Staples XLP 0.35% 8.31% Materials XLB 0.06% 4.64%
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 154,142,740 Australian Dollar FXA 0.81% 8.99% Mexican Peso FXM 0.51% 5.28%
PowerShares QQQ QQQQ Large Growth 48,990,448 British Pound Sterling FXB 1.14% -1.57% Swedish Krona FXS 0.71% 6.09%
Financial Select SPDR XLF Specialty - Financial 48,811,701 Canadian Dollar FXC 0.72% 2.65% Swiss Franc FXF 0.82% 5.04%
iShares Russell 2000 Index IWM Small Blend 44,975,638 Euro FXE 1.17% -2.90% USD Index Bearish UDN 0.99% -0.18%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 44,654,410 Japanese Yen FXY 0.85% 14.52% USD Index Bullish UUP -1.06% -2.90%
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
KEYnotes First Trust Enh 130/30 LgCp ETN JFT Large Blend 4.82% iPath S&P 500 VIX VXX -0.46% -61.70% Aggregate AGG 0.25% 4.97%
iPath DJ-UBS Natural Gas TR Sub-Idx ETN GAZ N/A 4.34% Short-Term Futures ETN Investment Grade LQD 0.40% 7.67%
UBS E-TRACS CMCI Silver TR ETN USV N/A 4.03% High Yield HYG 0.06% 3.26%
PowerShares Global Gold & Prec Metals PSAU Specialty - Precious Metals 3.63% iPath S&P 500 VIX VXZ -0.45% -2.89% 1-3 Year Treasuries SHY 0.13% 1.82%
United States Natural Gas UNG N/A 3.30% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.58% 10.98%
20+ Year Treasuries TLT 0.27% 10.68%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 1.33% 22.30% Crude Oil USO -0.08% -9.90%
Silver SLV 1.57% 41.67% EAFE Index EFA 0.78% 3.17%
Natural Gas UNG 3.30% -44.15% Emerging Markets EEM 0.63% -1.20%
SPDRs SPY 0.16% 6.40%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

Assets under management at ETFs to continue 10% growth - http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1089933/1/.html
Goldman Sachs in ETF Gaffe - http://blogs.wsj.com/source/2010/10/27/goldman-sachs-in-etf-gaffe/
8
Top Online Social Networking Stories
Latest Popular Digg.com Business News

What if Apple bought Sony? - http://www.digitaltrends.com/talk-backs/what-if-apple-bought-sony/
A Historic Look at America’s Grocery Spending Habits - http://www.billshrink.com/blog/10320/america-grocery-spending/
How Do Americans Feel About the Recession? - http://www.mint.com/blog/trends/recession-10262010/
Rupert Murdoch’s Worst Nightmare - http://www.splicetoday.com/sports/rupert-murdoch-s-worst-nightmare
Calculated Risk
Weekly Initial Unemployment Claims decrease - http://www.calculatedriskblog.com/2010/10/weekly-initial-unemployment-claims_28.html
Report: Greece Falling Short of Rescue Package Deficit Goal - http://www.calculatedriskblog.com/2010/10/report-greece-falling-short-of-rescue.html
PIMCO’s Gross: 30-year Bull Market in Bonds is Over - http://www.calculatedriskblog.com/2010/10/pimcos-gross-30-year-bull-market-in.html
Freddie Mac: 90+ Delinquency Rate Declines Slightly in September - http://www.calculatedriskblog.com/2010/10/freddie-mac-90-day-delinquency-rate.html
Home Sales: Distressing Gap Sept 2010 - http://www.calculatedriskblog.com/2010/10/home-sales-distressing-gap-sept-2010.html
Robert Reich’s Blog

Only $4.2 Billion to Buy This Election? - http://robertreich.org/post/1419481402
The Big Picture

Real Growth in US Stocks, 1871-2010 - http://www.ritholtz.com/blog/2010/10/real-growth-in-us-stocks-1871-2010/
Oil’s Well That Ends Well? - http://www.ritholtz.com/blog/2010/10/oil%e2%80%99s-well-that-ends-well/
Disconnect: Main Street – Wall Street - http://www.ritholtz.com/blog/2010/10/disconnect-main-street-wall-street/
Bespoke Investment Group

Long Bond Breaks Support - http://www.bespokeinvest.com/thinkbig/2010/10/27/long-bond-breaks-support.html
680 Days and Counting - http://www.bespokeinvest.com/thinkbig/2010/10/27/680-days-and-counting.html
S&P/Case-Shiller Home Price Charts and Tables - http://www.bespokeinvest.com/thinkbig/2010/10/27/spcase-shiller-home-price-charts-and-tables.html
The Baseline Scenario

Who’s in Charge Here? Not the G20 - http://baselinescenario.com/2010/10/28/whos-in-charge-here-not-the-g20/
Zero Hedge
Goldman: “The Dollar Needs to Fall a Lot Further from Here” - http://www.zerohedge.com/article/goldman-dollar-needs-fall-lot-further-here
Initial Claims 434K on Expectations of 455K, Previous Print Revised as Expected Higher to 455K - http://www.zerohedge.com/article/initial-claims-434k-
expectations-455k-previous-print-revised-expected-higher-455k
25th Sequential Stock Fund Outflow, $81 Billion Year to Date - http://www.zerohedge.com/article/25th-sequential-stock-fund-outflow-81-billion-year-date
9
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
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.

Tricks and Treats in the U.S. Treasury’s Daily Statement

We look at this data every month for two pieces of information:

Important Earnings Today (with Estimates) From… S&P Futures

Important Conferences/Corporate Meetings Today:

Source: Thomson ONE

Source: Bloomberg Source: Bloomberg

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

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 News

Robert Reich’s Blog

The Big Picture

Bespoke Investment Group

The Baseline Scenario

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