Morning Review - 102610

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
Equities gained Monday after a weak dollar lifted shares of materials companies, though bank stocks
Morning Markets Briefing
remained under pressure as the foreclosure crisis continues (S&P 500 +0.21%, Dow +0.28%, Nasdaq
+0.46%). The dollar index was down 0.5% on the day, falling near its 2010 low, after the G20 agreed
Market Commentary: October 26th, 2010
over the weekend to put an end to competitive currency devaluation practices. On the economic front,
existing home sales rose more than predicted in September – climbing to an annual pace of 4.53 A snapshot of the markets through the
million units – in a 2nd consecutive month of improvement. Though a double-dip recession is not lens of ConvergEx.
expected, a survey from the National Association for Business Economics, showed that economists’
outlook for the remainder of 2010 has become increasingly pessimistic.
Bank Stocks & Financials ETFs – Stockholders Sell, ETF Buyers Wait
Summary: One common way to think about equity prices is as a measure of supply/demand for a given security. Bank stocks, for example, have recently seen a flood of
supply on the back of investors’ concern over sloppy foreclosure practices. Over the past two weeks four of the five largest weights in the S&P Large Cap Financials group
have traded anywhere from 20% (Citibank) to 100% increased volume (Bank of America). Now here’s the strange part: the largest ETF that tracks this index (symbol XLF)
is actually down 6% in terms of daily average volume over the past 2 weeks. In past financial sector meltdowns, the XLF had a front seat to the show, trading large slugs
of its entire share count daily and altering its share count frequently – and occasionally dramatically – to keep its shares in supply/demand balance. We believe that the
disparity between trading volumes in underlying stocks and ETFs shows that the selling is coming from large owners of specific names, rather than “macro” players
negative on the group. Indeed, it is those “macro” buyers that may be the first to show up on the buy side.
Bank stocks have been the “Bad News Bears” of the recent – and continuing – U.S. equity market rally. Investors were aware for much of the year that this group
would be held back by nagging concerns over real estate values and the health of the consumer. That much was in the stocks. The new problems – sloppy and
seemingly fraudulent practices in the “plumbing” of the foreclosure machine – were clearly a surprise even to investors familiar with the intricacies of this arcane process
long before the 2008 financial crisis hit.
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
In the simplest terms, the foreclosure mess has pushed a lot of investors to reconsider their positions on both money center and regional banks. That comes
through in recent volatility around these names, of course. But if you look at the first slide attached to this note, you will see that the trading in this group is higher than
historical norms as well. In a world where overall stock market volumes continue to decline, seven of the 10 largest money centers/large regionals have seen their 2
week average trading volume rise above their six month averages. This has been especially pronounced in the larger names, with Bank of America seeing 2x normal
volumes and Wells Fargo up 58% in terms of incremental shares traded.
In contrast, trading in the largest exchange traded fund (ETF) dedicated to large cap financial stocks (Select Sector SPRD – Financials, symbol XLF) has been
downright sluggish (down 6% in the last two weeks versus the last 6 months). That’s no fault of the XLF – it is still the “Big Dog” in the Financials ETF space with $5.6
billion in assets and a 42% market share of all dedicated financials sector ETFs listed in the U.S. It’s year-to-date performance is 1.4%, which may not match ETFs linked to
other financials indices, but isn’t bad considering how tough the sector has been. Its top ten holdings, which include many of the names that have been recently hit – JP
Morgan, Berkshire, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, US Bancorp, American Express, MetLife, and Morgan Stanley - are 54% of the total weightings
in the fund.
The XLF used to be the front row seat when the financials heated up (or should we say “melted down”), and its sideline status in the recent upheaval means
there is a different game afoot. Here’s the backdrop to that assessment:
• ETFs are different from stocks from many perspectives, but one of the most important ones is that their daily share counts regularly vary. For larger ETFs,
such as the XLF, the number of shares in the fund changes every day, and often over the course of the day. The reason for this is the creation/redemption
process, where select brokers trading these securities can fulfill client buy/sell orders by working with the ETF provider to make/redeem new shares. It is what
mutual funds have done for years as money comes into/out of the their funds, but in the case of ETFs it happens on the fly over the course of the day.
• Back in the “Bad old days” of the 2007/2008/2009 financial crisis, the creation/redemption process for the XLF had to work extremely hard to balance
supply/demand for shares. The accompanying chart shows an overlay of the 2007/2008/2009/2010 historical change in shares outstanding for the fund. In
2007, the shares out for XLF could vary 10-20% from one week to the next. In 2008, that variation began to shrink down to 5-10% volatility.
Now, the change in the XLF share count is effectively zero. Incremental demand is essentially entirely satisfied with organic supply. That has not changed in the
past two weeks.
• The same trend occurs when you look at daily shares traded versus shares outstanding. As amazing as this may seem now, at the peak of the 2007-2008
crisis the XLF saw daily share volumes that equaled the shares outstanding. It is as if every share found a new owner every day, and sometimes even more.
Now, the trading in XLF is down to 20-30% daily turnover – a big drop from essentially 100% just a few years ago. Every share is held for an average of 3-5 days.
That is still a lot of turnover, but it is important to note that this product has a lot of uses for the institutional investment community. It is a hedge against an
individual stock position in the sector, for example. Long your favorite financial and short the XLF against it. High frequency traders constantly arbitrage ETFs and
their underlying assets, and that is also a source of trading volume for this (and pretty much all other) exchange traded funds. So 20% turnover may well
represent some kind of lower bound for ETF trading in a popular fund.
2
In summary, if you just looked at the XLF you would be forgiven for thinking that absolutely nothing is going on in the financials. It is as if the XLF can’t read the
newspaper. Well, it can’t, but you get the idea. To the ETF world, the foreclosure mess is simply not an interesting – or investible – event.
This leads to two closing points:
• The big bank stocks are being sold by large institutional owners. There seems to be little-to-no pressure from ETF-based “fast money” traders. Volumes for
the XLF are down, and supply/demand looks to be well harmonized. Such has not been the case during past periods of financial turmoil.
• Macro players don’t think the selling is over. One reason for the still-growing popularity of ETFs is their ability to let investors pinpoint macro themes and
leave actual stock selection to an index. The big investment wins in 2010 have, after all, had a strong macro flair to them: long industrials for a weak dollar play,
long gold (same reason), long Treasuries, etc. The lack of any pickup in volume for the XLF is a signal that this constituency doesn’t yet see a bottom in financial
stocks.
So we’ll keep track of the trading volumes and share creation/redemption in the XLF as a sign that a new buyer base is warming up to the bank stocks.
3
4
U.S. EQUITIES
In earnings news, RSH sank 8.8% after reporting an unexpected drop in quarterly gross margin thank to weakness in electronics accessories and higher
demand for lower-margin mobile handsets. AMGN (+0.7%) and TXN (+1.1%) advanced ahead of after-the-bell earnings announcements. Meanwhile,
shares of cable and satellite companies strengthened after Barclays raised price targets on CMCSA (+1.6%), DTV (+1.2%), CVC (-0.2%) and TWC (+0.9%),
while in financial land BAC fell 2.5% as a WSJ report revealed the bank admitted to some mistakes in foreclosure files while beginning the process of
resubmitting documents in more than 100K cases.
Important Earnings Today (with Estimates) From… S&P Futures

AFL: $1.39 BRCM: $0.56 COH: $0.55 FISV: $1.00 PNRA: $0.74 TLAB: $0.14 One Day (High –1193.00; Low – 1180.50):
ARG: $0.81 CBT: $0.66 CMP: $0.77 F: $0.37 QEP: $0.33 UA: $0.60
AKS: $-0.34 CSL: $0.68 DV: $0.95 IBKC: $0.54 STR: $0.14 UIS: $0.86
ATI: $0.15 CATY: $0.05 DWA: $0.35 ILMN: $0.24 RYN: $0.58 X: $0.22
ANAT: $1.24 CBG: $0.17 DEP: $0.37 JCI: $0.57 RF: $-0.10 VLO: $0.47
AVX: $0.34 CE: $0.74 DD: $0.34 JLL: $0.95 RFMD: $0.14 WLT: $2.59
BIIB: $1.20 CNC: $0.47 EQIX: $0.27 LII: $ 0.83 RCL: $1.56 WU: $0.34
BXP: $1.02 CHRW: $0.61 FFIV: $0.55 LIFE: $0.78 SHW: $1.68 WYN: $0.63
BMY: $0.53 CIT: $0.50 FIS: $0.51 MEE: $-0.14 SKT: $0.65 Source: Bloomberg
MHP: $1.09 MDP: $0.50 NBR: $0.23 NOV: $0.90 AMTD: $0.23
MCK: $1.08 MYL: $0.42 NLC: $0.39 NVLS: $0.84 TFX: $0.97
Important Conferences/Corporate Meetings Today:

Security Research Associates Fall Growth Stock Conference – San Francisco, CA
Prior Day SPX (High – 1196.14; Low – 1184.74; Close – 1185.62): Three Day (High – 1193.00; Low – 1173.25):
Source: Thomson ONE

5
FIXED INCOME
The Treasury’s $10 billion sale of 5-year TIPS drew a negative yield (-0.55%) for the first time, suggesting investors anticipate the central bank’s presumed
QE2 strategy will spark inflation in the economy. Coverage at the auction was solid at 2.84 times, while indirect bidders accounted for 39.4% of the
purchases versus an average of 38.5%. Benchmark yields were little changed at 2.56% and the yield on the long bond closed 2 bps lower after trading
down as much as 7 bps intraday. The Fed next meets November 2-3 after which it is widely expected to provide details about a second round of
monetary easing.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with Consensus):

Case-Shiller HPI (9:00am EST)
Conference Board Consumer Confidence (10:00am EST): 50.0
FHFA House Price Index
State Street Investor Confidence Index
6
U.S. EQUITY
OPTIONS
SPX – A day spent entirely in positive territory for the underlying index (+0.1% to +1.1%, ending + 0.2 %). Despite the positive, quiet day in the underlying index, the
implied volatility as measured by the VIX also spent the entire day in positive territory (0.1% to +6%, ending +6%). 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. We did note several sizable SPX option trades. The November 1100 puts were bought outright over 10,000 times @ $3.00 and the December 995 puts were
sold outright 5,000 times at $2.50. There were also several trades which were designed to limit the risk of a significant upside or downside move. On the upside, the
November 1260/1275 call spread was bought 3,000 time @ $0.60. On the downside, the December 850/1000 put spread was bought 4,000 times @ $ 1.35.
ETF – The market managed to close in positive territory after selling off the day’s highs, and options volume was below expected. In International ETF, EEM (Emerging
Markets), we highlight a large 1X2 put spread as paper bought 12,000 Jan 36 puts vs. selling 24,000 Jan 30 puts. In sector flow, we note cautious trading in XRT (Retail) as
paper bought the 43 / 39 / 35 put fly 5,600 times on the wings. We also saw investors buying volatility in XLB (Materials) through the purchase of 10,000 Dec 32 puts
delta neutral and in XME (Metals and Mining) paper bought the Dec 61 calls 10,000 times delta neutral.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 10/19/2010 10/20/2010 10/21/2010 10/22/2010 10/25/2010 30-Day Implied Vol
1 MFE PTV MFE MFE MFE 7.05
2 DTV MFE DTV MKC MKC 35.03
3 RSH MKC RSH PNW DTV 20.55
4 PNW DTV MYL DTV MJN 37.74
5 PTV EFX MJN GENZ GENZ 16.83 BIGGEST MOVERS
6 BMC RSH EFX MJN SYMC 43.13 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
7 MYL BMC SYMC RSH MYL 35.50 BBY 43.71% 29.73 RSH -55.90% 34.89
8 VRSN MYL PTV MYL CEPH 35.35 SLM 27.61% 30.80 PNW -42.36% 21.03
9 HSP MJN CHRW SYMC CHRW 25.81 BF/B 22.25% 19.73 Q -12.54% 28.16
10 SYMC EBAY BMC CEPH K 18.85 WEC 20.79% 18.78 EMN -12.02% 31.77
11 CHRW TSS VAR Q VAR 26.82 KG 20.30% 8.21 AVP -11.84% 38.29
12 EBAY HSP CA CHRW TJX 26.25 FTR 18.94% 24.51 ROP -10.83% 22.33
13 MJN K CEPH VAR SJM 22.42 KSS 17.53% 28.09 LO -10.04% 15.66
14 SJM CHRW MDP ORLY ORLY 28.43 CLF 14.72% 46.76 DOW -9.31% 34.38
15 GENZ SYMC K MDP PTV 3.95 DF 14.00% 46.73 HCBK -8.02% 19.30
16 TSS CA GENZ VRSN VRSN 30.15 CFN 13.74% 32.00 VTR -7.68% 26.89
17 MDP MDP Q BMC MDP 36.63
18 CA VAR SJM K BMC 48.50
19 XEL SJM VRSN PTV NRG 27.77
20 ORLY VRSN AN HSP BBY 29.73 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
21 HD NI ORLY TJX COH 34.18 historical volatility ratio. Above we identify the 10 most positive and negative
22 CEPH AN CNP AN AN 33.89 movers.
23 FIS GENZ TJX SJM PCG 19.76
24 K PPL NI HRS FISV 23.45 The table to the left represents the 25 highest 30 day implied to historical
25 STJ HRS HRS HAR DHI 45.81 volatility ratios within the S&P 500 companies. The green represents names
VAR FIS PPL CA HAR new to the list while the red represents names that have fallen out.
IFF CEPH TSS EFX HRS
CLX HD EBAY CNP HSP
TJX ORLY MKC NI Q
AAPL XEL HSP RSH
IBM PNW PNW
M MDP
FRX
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 0.54% Energy XLE 0.27% 4.30% Telecomm IYZ 0.48% 10.06%
SPDR Gold Shares GLD N/A 0.86% Health XLV 0.61% 1.13% Technology XLK 0.50% 5.67%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 1.09% Industrials XLI 0.34% 17.27% Consumer Discretionary XLY 0.66% 18.21%
iShares MSCI EAFE Index EFA Foreign Large Blend 0.35% Utilities XLU -0.22% 2.51% Financials XLF -0.35% 1.04%
iShares S&P 500 Index IVV Large Blend 0.23% Consumer Staples XLP 0.24% 9.10% Materials XLB 2.16% 6.18%
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 122,862,048 Australian Dollar FXA 0.97% 10.21% Mexican Peso FXM 0.17% 5.79%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 54,021,521 British Pound Sterling FXB 0.30% -2.89% Swedish Krona FXS 0.77% 8.55%
PowerShares QQQ QQQQ Large Growth 42,300,395 Canadian Dollar FXC 0.66% 2.74% Swiss Franc FXF 0.94% 6.36%
Financial Select SPDR XLF Specialty - Financial 36,230,429 Euro FXE 0.29% -2.61% USD Index Bearish UDN 0.44% 0.00%
iShares Russell 2000 Index IWM Small Blend 35,813,596 Japanese Yen FXY 0.73% 14.88% USD Index Bullish UUP -0.45% -3.08%
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
IQ South Korea Small Cap ETF SKOR N/A 32.37% iPath S&P 500 VIX VXX -1.40% -62.87% Aggregate AGG 0.04% 5.16%
ELEMENTS MLCX Biofuels Index TR ETN FUE N/A 8.50% Short-Term Futures ETN Investment Grade LQD 0.36% 8.09%
Direxion Daily China Bull 3X Shares CZM Pacific/Asia ex-Japan Stk 6.09% High Yield HYG 0.39% 3.15%
iPath DJ-UBS Cotton TR Sub-Idx ETN BAL N/A 6.09% iPath S&P 500 VIX VXZ -1.21% -2.51% 1-3 Year Treasuries SHY 0.02% 1.82%
ProShares Ultra MSCI Pacific ex-Japan UXJ N/A 4.12% Mid-Term Futures ETN 7-10 Year Treasuries IEF -0.03% 11.73%
20+ Year Treasuries TLT 0.29% 13.10%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.86% 21.94% Crude Oil USO 0.23% -9.45%
Silver SLV 1.49% 39.67% EAFE Index EFA 0.35% 4.00%
Natural Gas UNG 0.21% -47.02% Emerging Markets EEM 1.09% 12.12%
SPDRs SPY 0.54% 6.55%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

GLTR: A Precious Metals ETF Basket with Fixed Ounce Weightings - http://seekingalpha.com/article/231838-gltr-a-precious-metals-etf-basket-with-fixed-ounce-
weightings
Copper Exchange-Traded Fund Is Planned by JPMorgan - http://www.businessweek.com/news/2010-10-25/copper-exchange-traded-fund-is-planned-by-
jpmorgan.html
8
Top Online Social Networking Stories
Latest Popular Digg.com Business News

Mobile Ad Spend to Pass $1 Bil - http://www.brandweek.com/bw/content_display/news-and-features/digital/e3i493aa786b5893edce8343b1db1631572
Nokia Outdoes iPhone in Smartphone Sales 2 to 1 - http://www.brandweek.com/bw/content_display/news-and-
features/digital/e3i493aa786b5893edce8343b1db1631572
Customer Relations Fiascos - http://blog.getsatisfaction.com/2010/10/11/customer-relations-fiascos/
Calculated Risk
Chicago Fed: Economic activity slowed further in September - http://www.calculatedriskblog.com/2010/10/chicago-fed-economic-activity-slowed.html
Short Sales vs. Foreclosures - http://www.calculatedriskblog.com/2010/10/short-sales-vs-foreclosures.html
Number of Bank Failures: 2010 about to surpass 2009 - http://www.calculatedriskblog.com/2010/10/number-of-bank-failures-2010-about-to.html
Impact of BofA Foreclosure Moratorium on North San Diego County - http://www.calculatedriskblog.com/2010/10/impact-of-bofa-foreclosure-
moratorium.html
The Becker-Posner Blog

Will the Earnings of Women Overtake Those of Men? (Becker) - http://www.becker-posner-blog.com/2010/10/will-the-earnings-of-women-overtake-those-
of-men-becker.html
Male and Female Earnings Trends (Posner) - http://www.becker-posner-blog.com/2010/10/male-and-female-earnings-trendsposner.html
The Big Picture

TBP Guide to Earnings Calls & Town Halls - http://www.ritholtz.com/blog/2010/10/guide-to-earnings-calls/
15 Inviolable Rules for Dealing with Wall Street - http://www.ritholtz.com/blog/2010/10/15-inviolable-rules-for-dealing-with-wall-street/
Housing Cartons - http://www.ritholtz.com/blog/2010/10/housing-cartoons/
Big Money on Wall Street - http://www.ritholtz.com/blog/2010/10/big-money-on-wall-street/
‘Should have paid the extra $2 an hour…’ - http://www.ritholtz.com/blog/2010/10/extra-2-an-hour/
Chamber of Commerce to Buy US Elections - http://www.ritholtz.com/blog/2010/10/chamber-of-commerce-to-buy-us-elections/
Bespoke Investment Group

What Lack of Innovation? - http://www.bespokeinvest.com/thinkbig/2010/10/22/what-lack-of-innovation.html
The Baseline Scenario

Food and Finance - http://baselinescenario.com/2010/10/24/food-and-finance/
Zero Hedge
Goldman: The Fed Needs to Print $4 Trillion in New Money - http://www.zerohedge.com/article/goldman-fed-needs-print-4-trillion-new-money
An Interactive Look at America’s Poor - http://www.zerohedge.com/article/interactive-look-americas-poor
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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This leads to two closing points:

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

The Becker-Posner Blog

The Big Picture

Bespoke Investment Group

The Baseline Scenario

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