Morning Review - 102710

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 ended little changed Tuesday after trading lower early in the session due to a few weak Morning Markets Briefing
earnings reports and disappointing housing data (S&P 500: flat, Dow: + 5 bps, Nasdaq: +26 bps). Case-
Shiller revealed home prices fell 0.3% in August following a 0.6% gain in July, as 17 of the index’s 20
cities showed price deceleration. Year-on-year prices rose 1.7%, the smallest increase since February Market Commentary: October 27th, 2010
and lower than expectations for +2.1%. In other housing news, the FHFA’s measure of home prices A snapshot of the markets through the
advanced 0.4% in August versus projections for a 0.5% setback, while showing a year-on-year decline
lens of ConvergEx.
of 2.4%. Consumer confidence ticked up in October, according to the Conference Board, whose index
climbed to 50.2 from last month’s 48.5 (which was a 2010 low). The market had expected a reading of
50.0.
Cracking Lobsters, QE II and the Elections
Summary: Two highly anticipated positive catalysts for equities will occur next week, over a span of less than 24 hours: midterm elections and the latest round of
Quantitative Easing from the Federal Reserve. Don’t let anyone fool you – it is impossible to know how much of these events are baked into stock prices. You can,
however, look at recent leadership sectors and themes to diagnose the market action going into these events. Sectors to watch over the next week are Technology (up
17.1% since early September) and Consumer Discretionary (+17.0 in the same timeframe). Dollar weakening has been the fuel of the equity fire, and Australian
dollar/Euro strength are the currencies to watch in this area. The weak dollar pushes gold/silver prices higher, of course, but oil as well. Lastly, implied volatility in
options is worth watching through the CBOE VIX index, now stumbling around recent lows.
Here’s a tough problem to crack if you happen to be in the seafood business: how do you get all the meat out of a lobster? Yes, you could hire a lot of seasonal
help, hand out nutcrackers and rubber gloves and hope for the best. One Maine lobster processing company has come up with a technologically innovative solution,
however. They use a large compression chamber that can apply 40,000 pounds per square inch of water pressure to 150 pounds of live lobster. This not only kills the
lobster instantly, but the meat separates from the shell with no further work. Another shot of pressure – double the original treatment – kills all bacteria. The result is
100% yield of lobster meat that can last up to 30 days in a fridge. If you are curious to try a little Shucks Maine Lobster, go here:
http://www.shucksmaine.com/2010/01/were_revolutionizing_the_way_t_1.htm.
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
1 1
©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
I bring this up because the capital markets seem to have their own version of the “Lobster meat challenge” going at the moment. Investors have welcomed the
September-October rally as if they won a free cooked lobster at a Maine State Fair. But after chomping away for a while and getting the easy parts (tail and claws) out
and eaten, everyone seems to be wondering just how much more meat is left in this particular crustacean/rally. Yes, we have two big events to look forward to in the
coming week – a seemingly assured Republican win on Tuesday and a new Quantitative Easing program from the Federal Reserve on Wednesday. But how much of that
“meat” is left inside the market’s shell?
We don’t have a “Big Mother Shucker” (the name of the pressure chamber used at Shucks) to apply to the markets and see what’s left; the best we can do is
look for the leadership groups and themes from the recent rally and keep taking their pulse in the days ahead. If there is further market follow-though after
Tuesday/Wednesday, it makes sense that it will be in the same general form as the rally we have seen in recent weeks. Conversely, any weakness in these leadership
names and themes would be a sign that all the “meat” is really out of this lobster, and it is time to start looking for the fried Oreo stand at the Fair.
The following observations are all supported by data included in 5 bar charts at the end of this note.
The S&P 500 is up 12.7% from the beginning of September, but three industry sectors have really lead the rally – Technology (+17.1%), Consumer Discretionary
(+17.0%) and Energy (+16.4%). The first two sectors are clearly plays on a recovering economy. The last, Energy, plays into a weak dollar theme that I will touch on in a
moment. A continuation of the recent rally should feature cyclical groups, just as the precursor move ahead of elections/QE II has done. Weakness in these sectors is a
sure sign that the rally is getting tired.
The big story of this 2H2010 rally, however, has been the decline of the dollar. Using single currency ETFs you can get a sense of this move. Since early September
the dollar is down 10.5% versus the Australian currency, (9.3%) against the Euro, and (4.2%) versus the Canadian dollar. Big moves, largely caused by the Federal
Reserve’s anticipated dollar printing exercise of QE II. That has helped precious metals (silver up a whopping 23.0% since September 1), oil and foreign markets largely
beat the return of U.S. stocks.
Now here’s the thing: it is hard/flat-out-impossible to make the argument for a lasting dollar rally. That is pretty much the textbook definition of why asset prices
rise; no one expects them to. And since the dollar decline is essentially the “lobster” in our story – stocks, precious metals, commodities, currencies and such are all pretty
much just side dishes like corn and butter – it makes sense to think the unthinkable. Those two catalysts next week – elections and Fed meeting – could cause a snapback
rally in the dollar and leave risk assets in a precarious position.
What if:
• The Fed announced a $100 billion QE round (expected) but left it there for now. That would sound hawkish at this point (as amazing as that sounds) and
signal that the conservative wing of the FOMC had managed to have their worries heard at the two day meeting next week. With so much chatter about $500
billion program (or more), this announcement could rally the dollar and hurt risk assets.
• Newly reelected – and presumed next Speaker of the House – John Boehner announces a dramatic new era of fiscal restraint in Washington, on the back
of a blowout win in the House for the Republicans. Tighter fiscal policy may be Paul Krugman’s worst nightmare, but it will be welcome by those bullish on
the dollar.
2
I think it is impossible to say that the current rally has run its course, primarily because these two scenarios don’t feel especially probable. The Fed has
telegraphed its moves so a surprise there seems remote. And even if the Republicans come through on their expected wins next Tuesday, the fights over spending in D.C.
will not be much easier in the next Congress. Will the Tea Partiers migrate to mocha frapps once they get used to life in DC? Hard to say at the moment.
But regardless of whether you think the “long risk/short dollar” trade is over, or just beginning, you will do well to track the dollar, tech and consumer stocks,
and precious metals closely over the next week.
3
4
U.S. EQUITIES
On the earnings front, F added 1.5% as it posted a 6th consecutive quarterly profit (which was up 68% from a year ago), marking its best 3rd quarter in
roughly 2 decades. Despite topping estimates, raising its full-year outlook and posting revenue increases in all 6 business units, DD fell 1.0% on the day.
Meanwhile, BMY (-1.1%) saw profits decline slightly on flat drug sales, UBS (-5.3%) announced an unexpected investment banking loss, and COH (+11.9%)
and RCL (+14.5%) soared on better-than-expected earnings. In other news, many steelmakers faltered after MT (-5.3%) and X (-3.4%) cautioned that they
were experiencing a slowdown in demand, falling prices and rising costs. Also, AKS (-4.0%) posted soft quarterly results.
Important Earnings Today (with Estimates) From… S&P Futures

ACE: $1.84 EAT: $0.15 HBI: $0.62 MORN: $0.47 PG: $1.00 One Day (High –1184.25; Low – 1174.00):
ACXM: $0.16 CDNS: $-0.02 HMA: $0.12 NYB: $0.31 RRC: $0.04
ADP: $0.53 CHH: $0.57 HES: $1.05 NSC: $1.09 RNR: $2.20
AYE: $0.53 CMCSA: $0.30 IACI: $0.06 NOC: $1.76 ROL: $0.26
ARLP: $1.69 CYH: $0.72 IP: $0.78 ORLY: $0.74 SLAB: $0.33
AB: $0.42 COP: $1.45 ICO: $0.08 ODP: $-0.02 SKX: $1.02
ALL: $0.95 DPS: $0.60 ITC: $0.71 ODFL: $0.41 S: $-0.28
AMP: $1.07 EFX: $0.58 LAZ: $0.42 OC: $0.37 SRCL: $0.63
AIZ: $1.20 ESRX: $0.65 LM: $0.36 OI: $0.87 TER: $0.78
ATLS: $0.07 FMC: $1.11 LSI: $0.08 PLXS: $0.60 V: $0.94
BYI: $0.46 GD: $1.64 MANT: $0.88 PX: $1.20 VMED: $-0.08
Source: Bloomberg
Important Conferences/Corporate Meetings Today:
America’s Growth Capital East Coast Emerging Growth Conference – Boston, MA
Prior Day SPX (High – 1187.11; Low – 1177.72; Close – 1185.64): Three Day (High – 1193.00; Low – 1174.00):
Source: Thomson ONE

5
FIXED INCOME
Demand was strong at the government’s monthly 2-year note auction, with coverage coming in at 3.43 times, the 3rd highest this year (trailing last
month’s 3.78 times and 3.45 times in June). The $35 billion offering drew a yield of 0.400%, which was ½ a basis point below the 1:00pm EST bid.
Treasury prices declined on the day, boosting 10-year yields +8 bps to 2.64% and 30-year yields +8 bps to 3.99%. The yield on the 2-year added 3 bps,
rising to 0.39%. Five-year and 7-year debt sales are expected on Wednesday and Thursday, respectively.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with Consensus):

MBA Purchase Applications (7:00am EST)
Durable Goods Orders (8:30am EST): 1.6%
New Home Sales (10:00am EST): 300K
EIA Petroleum Status Report (10:30am EST)
6
U.S. EQUITY
OPTIONS
SPX – The underlying index had another quiet day with a slight downside bias: trading range -0.7% to +0.1%, ending almost unchanged. Despite the quiet day in the
underlying index, the implied volatility as measured by the VIX, again spent the entire day in positive territory (2% to +6%, ending +2%). There were some buyers of
options, but the increasing uncertainty surrounding the potential market reaction to upcoming elections and Fed actions is more likely the explanation for the expansion
in option premium. The December 1150 puts were bought outright over 10,000 times @ $24.30 and the November 1170/1125 put spread was bought about 5,000 times
@ $10.20.
ETF- After opening in negative territory the market trended higher following a positive data release; options traded typical volume. We highlight trading in financial
name KBE (KBW Banking) as paper bought 14,200 Dec 24 calls vs. selling 14,200 Dec 21 puts. In the international space, we note investors buying downside in FXI (China)
through 20,000 Nov 44 puts and in EEM (Emerging Markets) through the purchase of 7,500 Dec 37 puts. In GLD a buyer of the Dec 140 / 150 call spread emerged 6,500
times. Lastly in XLB (Materials) paper sold the Dec 35 calls vs. buying the Jan 37 calls 7,500 times.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 10/20/2010 10/21/2010 10/22/2010 10/25/2010 10/26/2010 30-Day Implied Vol
1 PTV MFE MFE MFE MFE 5.84
2 MFE DTV MKC MKC PTV 7.29
3 MKC RSH PNW DTV MKC 35.66
4 DTV MYL DTV MJN DTV 20.40 BIGGEST MOVERS
5 EFX MJN GENZ GENZ PNW 33.75 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
6 RSH EFX MJN SYMC XEL 31.50 PTV 89.75% 7.29 LXK -60.55% 45.51
7 BMC SYMC RSH MYL SYMC 46.14 XEL 81.14% 31.50 COH -54.25% 29.92
8 MYL PTV MYL CEPH GENZ 16.70
PNW 61.12% 33.75 KMB -48.07% 16.62
9 MJN CHRW SYMC CHRW VAR 27.72
PLL 40.72% 30.06 TLAB -41.57% 34.36
10 EBAY BMC CEPH K CHRW 28.14
11 TSS VAR Q VAR CEPH 34.43 MCK 35.84% 31.37 NOV -27.77% 31.27
12 HSP CA CHRW TJX MYL 34.63 CAH 34.27% 33.90 SHW -27.68% 23.39
13 K CEPH VAR SJM MJN 35.64 ARG 34.23% 10.50 RF -24.93% 40.94
14 CHRW MDP ORLY ORLY K 19.14 TWC 29.24% 32.00 HRS -24.39% 26.58
15 SYMC K MDP PTV MA 33.35 MA 27.41% 33.35 MDP -22.82% 30.44
16 CA GENZ VRSN VRSN ORLY 29.81 NOVL 25.09% 42.81 CMI -21.42% 36.77
17 MDP Q BMC MDP PCG 20.48
18 VAR SJM K BMC EIX 18.16
19 SJM VRSN PTV NRG SJM 22.41 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
20 VRSN AN HSP BBY TJX 25.65
22.38
historical volatility ratio. Above we identify the 10 most positive and negative
21 NI ORLY TJX COH NI
22 AN CNP AN AN VRSN 30.48 movers.
23 GENZ TJX SJM PCG BBY 31.05
24 PPL NI HRS FISV QCOM 28.99 The table to the left represents the 25 highest 30 day implied to historical
25 HRS HRS HAR DHI FSLR 48.44 volatility ratios within the S&P 500 companies. The green represents names
FIS PPL CA HAR DHI new to the list while the red represents names that have fallen out.
CEPH TSS EFX HRS FISV
HD EBAY CNP HSP AN
ORLY MKC NI Q COH
XEL HSP RSH NRG
PNW PNW BMC
MDP MDP
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 0.02% Energy XLE 0.20% 4.51% Telecomm IYZ 0.11% 10.19%
SPDR Gold Shares GLD N/A 0.02% Health XLV -0.29% 0.77% Technology XLK 0.25% 5.71%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts -0.09% Industrials XLI -0.46% 16.73% Consumer Discretionary XLY 0.43% 18.68%
iShares MSCI EAFE Index EFA Foreign Large Blend -0.64% Utilities XLU -0.25% 2.26% Financials XLF 0.14% 1.18%
iShares S&P 500 Index IVV Large Blend 0.07% Consumer Staples XLP -0.55% 8.50% Materials XLB -0.60% 5.55%
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 154,095,685 Australian Dollar FXA -0.59% 9.56% Mexican Peso FXM -0.73% 4.97%
PowerShares QQQ QQQQ Large Growth 51,825,538 British Pound Sterling FXB 0.70% -2.22% Swedish Krona FXS -2.26% 6.09%
Financial Select SPDR XLF Specialty - Financial 47,187,594 Canadian Dollar FXC -0.35% 2.38% Swiss Franc FXF -1.50% 4.76%
iShares Russell 2000 Index IWM Small Blend 34,080,987 Euro FXE -0.83% -3.41% USD Index Bearish UDN -0.65% -0.65%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 31,806,509 Japanese Yen FXY -0.89% 13.85% USD Index Bullish UUP 0.67% -2.43%
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
Direxion Daily 30 Yr Trsy Bear 3X Shares TMV Bear Market 4.59% iPath S&P 500 VIX VXX 2.13% -62.08% Aggregate AGG -0.23% 4.91%
PowerShares DB 3x Short 25+ Year Treasury Bond ETN SBND N/A 4.07% Short-Term Futures ETN Investment Grade LQD -0.53% 7.52%
ProShares UltraShort MSCI Pacific ex-Jpn JPX Bear Market 3.12% High Yield HYG 0.15% 3.31%
ProShares UltraShort 20+ Yr Treasury TBT Bear Market 3.04% iPath S&P 500 VIX VXZ -0.03% -2.54% 1-3 Year Treasuries SHY -0.09% 1.74%
iPath US Treasury Long Bond DLBS N/A 2.91% Mid-Term Futures ETN 7-10 Year Treasuries IEF -0.67% 10.98%
20+ Year Treasuries TLT -1.54% 11.36%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.02% 21.96% Crude Oil USO 0.31% -9.16%
Silver SLV 0.78% 40.76% EAFE Index EFA -0.64% 3.36%
Natural Gas UNG 1.31% -46.33% Emerging Markets EEM -0.09% 12.02%
SPDRs SPY 0.02% 6.53%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

High yield ETFs winning favor with investors - http://www.ft.com/cms/s/0/bb2684e0-e04c-11df-99a3-00144feabdc0.html
Tech ETF Attracts Most New Money in Past Week - http://blogs.barrons.com/focusonfunds/2010/10/25/tech-etf-attracts-most-new-money-in-past-week/
8
Top Online Social Networking Stories
Latest Popular Digg.com Business News

Study: Ford Vehicles Industry’s Most Heavily Discounted - http://www.leftlanenews.com/study-ford-vehicles-industrys-most-heavily-discounted.html
Calculated Risk
Case-Shiller: Home Price declines widespread in August - http://www.calculatedriskblog.com/2010/10/case-shiller-home-prices-declines.html
WSJ Survey: Housing Inventories up in 19 of 28 Markets Year-over-Year - http://www.calculatedriskblog.com/2010/10/wsj-survey-housing-inventories-up-in-
19.html
CoreLogic: House Prices Declined 1.2% in August - http://www.calculatedriskblog.com/2010/10/corelogic-house-prices-declined-12-in.html
Robert Reich’s Blog

After the Midterms: Why Democrats Move to the Center, and Republicans Don’t - http://robertreich.org/post/1398873669
The Big Picture

SIGTARP Report: Treasury Hid AIG Losses - http://www.ritholtz.com/blog/2010/10/sigtarp-report-treasury-hid-aig-losses/
What Is MERS and What Role Does It Have in the Foreclosure Mess? (Hint: It Holds 60% of All Mortgages but Has ZERO Employees) -
http://www.ritholtz.com/blog/2010/10/what-is-mers-and-what-role-does-it-have-in-the-foreclosure-mess-hint-it-holds-60-of-all-mortgages-but-has-zero-
employees/
Bespoke Investment Group

Recommended Equity Allocation Ticks Lower - http://www.bespokeinvest.com/thinkbig/2010/10/25/recommended-equity-allocation-ticks-lower.html
Earnings Season Stats by Sector - http://www.bespokeinvest.com/thinkbig/2010/10/25/earnings-season-stats-by-sector.html
The New York Times

The X Factor of Economics: People - http://www.nytimes.com/2010/10/17/weekinreview/17segal.html?_r=1
Zero Hedge
Bill Black on Foreclosuregate: Calls for the Immediate Termination of Bernanke, Geithner and Holder - http://www.zerohedge.com/article/bill-black-
foreclosuregate-calls-immediate-termination-bernanke-geithner-and-holder
No Gold or Silver Bubble Says Sprott’s John Embry - http://www.zerohedge.com/article/no-gold-or-silver-bubble-says-sprotts-john-embry
Treasury Announces September HAMP Permanent Mod Starts of 27,840, Lowest Since November 2009 - http://www.zerohedge.com/article/treasury-
announces-september-hamp-permanent-mod-starts-27840-lowest-november-2009
The Conscience of a Liberal

Do Investors Expect Too Much From Bernanke? - http://krugman.blogs.nytimes.com/2010/10/26/do-investors-expect-too-much-from-bernanke/
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.
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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.

Cracking Lobsters, QE II and the Elections

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

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 New York Times

The Conscience of a Liberal

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