Morning Review - 082510

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 extended their losing streak for a 4th consecutive day (S&P 500: -1.5%, Dow: -1.3%, Nasdaq: Morning Markets Briefing
-1.7%), ending at 7-week lows. A report showed that existing home sales fell a whopping 27.2% in
July to an annual pace of 3.83 million, the lowest in 15 years. Year-over-year sales of existing homes
are down 25.5% below the annualized 5.14 million unit level in July 2009. Total inventory increased to Market Commentary: August 25th, 2010
a 12.5 month supply, up from an 8.9 month supply the prior month. On the other hand, some housing A snapshot of the markets through the
stocks got a boost after several brokerages suggested now could be an ideal time to get into the lens of ConvergEx.
sector. Still to come on the housing front this week are new homes sales and earnings from Toll
Brothers on Wednesday.
The Low Spark of High Heeled Boys
Summary: Sitting in traffic on busy summer weekends feels a lot like trading the capital markets at the moment. The HOV lane (bonds) seems to be moving, but there
are quite a few folks in Ferraris and Bentleys (the smart money?) crawling along, not sure which lane to pick. There is a growing library of academic work on traffic jams
and these studies seem oddly applicable to the life of an investor at the moment. As it turns out, traffic jams pop up for reasons other than crashes. Sometimes it is just
one or two vehicles that stop short, setting off a cadence of slowdowns behind them. Other times it is a group of tailgating cars that can set off a serious slowdown by
stopping short and setting off a chain reaction behind them. And even after a crash is cleared, traffic can stay snarled for a while, as drivers struggle with the stop-start
aftermath of a temporary tie up. Any way you cut it, equity markets – and the domestic economy - feel a lot like a clogged freeway. Only time will get the traffic moving
again.
If you need any more proof that capital markets are not efficient, visit NY State Route 27 in the Hamptons between now and Labor Day weekend. You will see a
slow moving parade of the some of the finest cars in the world, crawling their way to restaurants and nightclubs. The occupants of these Ferraris, Porsches and
Lamborghinis will wait for tables, service, food, and drinks before saddling up and slowly driving back to their rental houses along the same clogged one lane highway
that connects all the towns of the East End from the Shinnecock Canal to Montauk.
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
The ironic thing about all this is that these “Masters of the Universe” (if that term still applies) don’t need to be stuck in traffic – there are free flowing back
roads that cut through some of the most beautiful landscapes in the Hamptons. There are horse farms, apple and peach orchards, roadside stands with fresh-off-the-
stalk corn roasted over coals for sale, and the last wide open vistas the area has to offer. But no, Rte 27 is the most straightforward way, and the back roads need a bit of
learning before you can avoid getting lost at night on their unlit blacktop. And since most folks just go out for 10- - 15 weeks during the summer they don’t bother to
learn them. So they sit still in Watermill or Bridgehampton, letting the hours pass by, occasionally chirping the otherwise dull rumble of their Italian V-12 or turbocharged
German flat-6.
Those are the folks you are competing with for incremental information – the people who don’t seem to want to go off the beaten track, even though the
alternative path is faster and more pleasant. So despair not – there is still information advantage to be had over the V-12 set.
Learn the back roads.
That little rant aside, the topic of traffic generally and traffic jams specifically have been getting more attention in academic circles in recent years. That makes
sense – road congestion got progressively worse in the last decade as commute times rose for workers who moved further and further away from their jobs because
escalating property values pushed them away from population centers. And, as it turns out, the study of traffic has some striking similarities to how capital markets
behave. Not such a stretch, when you think about it. Humans try to make time maximizing choices while driving – what lane to pick, how fast to drive, how close to get
to the car in front, how many times to change lanes. Those choices can affect others driving alongside and either advance or retard the overall flow of traffic.
Of course, the precondition for a traffic tie-up is, well, lots of vehicles on the road, all wanting to go in the same direction. We have that in spades in the capital
markets at the moment. Correlations are at record highs across industry sectors as well as asset classes. It is such an overarching problem that it does not have one fixed
reason. Low interest rates and easy money are one – these push capital out on the risk spectrum in a very uniform manner, heightening the linkage between previously
less correlated assets. Then of course there are macro concerns like taxation, government policy, and a still moribund economy that impact asset classes like bonds (for
the good) and stocks (for the not-so-good). So the stage is set for traffic jams. We’ll use that as a euphemism for a market drop, not the stasis that accompanies an
actual wall-to-wall collection of cars on the highway.
The catalyst for a traffic jam isn’t always a rubbernecking delay from an accident; it can, and often is, just a spot where everything inexplicably slows down.
There is even a name – a “jamiton” – for this kind of disruption. They are caused when one, or a handful, of drivers slows down unexpectedly. This forces everyone
behind this cluster to slow down, and before you know it things are flat-out stopped. As it turns out the effect is similar to the shock waves of an explosive detonation. A
more full description of the effect is included here, with some color from the MIT scientists that coined the term “jamiton”:
http://www.sciencedaily.com/releases/2009/06/090608151550.htm.
Just like in the markets, amateurs have their points of view about what causes traffic jams/market declines. In this non-scientific description, a traffic science
“layman” outlines how jams take time to resolve themselves even when the cause – an accident – has been cleared. It is a version of the same crowded lane/sudden
slowdown effect outlined above: http://amasci.com/amateur/traffic/traffic1.html. The author calls the jam a “pressure wave,” created by the temporary slowdown of
cars in front and the subsequent delay as the whole system just stops as a result.
2
So what do you do to help avoid jams? Keep your distance from the car or truck in front of you. That gives you time to slow down deliberately, rather than
mashing the brakes and causing the cars behind you to stop short and create that “pressure wave/jamiton.” An impassioned appeal from another amateur follows:
http://www.skaggmo.com/newsletter3a.htm.
We’ll finish off this note with a few observations about what this stocks-are-like-traffic-jams comparison means to investors and traders. The most important
point is that jams – or market drops – seem to happen when everyone wants to go in the same direction (high correlations between asset classes). Jams occur once that
stage is set because a relatively small number of participants do something unexpected. They can, in short, have a disproportionately large effect on the entire system.
And – worse still - if a lot of people slow down at once, the system grinds to a halt. That feels a lot like what we have right now. Mutual fund outflows from domestic
stock funds are effectively the retail investor putting their foot on the brakes – something they have been doing for 15 weeks straight. Combine that with plenty of
distracting scenery in the form of lousy economic data and the jam gets worse.
One thing all traffic jam experts seem to agree on: when the chain reaction that starts a jam really kicks in, only time will unwind it. And that seems like the
most accurate comparison point to stocks.
3
U.S. EQUITIES
DELL declined 3.0% on media speculation the computer maker is sweetening its bid for PAR (+3.6%) after HPQ (-1.7%) bested its earlier offer. FMC lost
2.0% as HSBC downgraded it to “Neutral” from “Overweight,” while homebuilders LEN (+1.4%) and KBH (+2.5%) advanced after Citigroup highlighted that
housing data will no longer be skewed by the homebuyer tax credits. Shares of solar companies (including SPWRA: -4.1% and STP: -5.6%) were down in
response to the extremely weak existing home sales data. Despite reporting weaker-than-expected revenue and warning that business condition would
remain under pressure, BKC added 1.7%.
Important Earnings Today (with Estimates) From…

AEO: $0.12 S&P Futures
GES: $0.69 One Day (High –1065.75; Low – 1044.00):
JAS: $0.02
Source: Bloomberg
Important Conferences/Corporate Meetings Today:

Barrington Research Healthcare Conference – Chicago, IL
EnerCom Incorporated Oil & Gas Conference – Denver, CO
Morgan Stanley Semi and Semi Cap Equipment Investor Day
Prior Day SPX (High – 1063.20; Low – 1046.68; Close – 1051.88): Three Day (High – 1080.25; Low – 1044.00):
Source: Thomson ONE

4
FIXED INCOME
Treasuries rallied Tuesday, sending 2-year note yields to another record low and those on the 10-year note under 2.5 percent for the first time since March
2009, after a report showed existing single-family home sales tumbled to the lowest since May 1995. The Treasury’s $37 billion offering of 2-year notes
drew a record low yield of 0.498 percent. Coverage was 3.12 times, compared with an average of 3.19 over the past 10 auctions. Foreign interest, as
measured by indirect bidders, was lighter than the recent average by about 10 percentage points.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with Consensus):

Durable Goods Orders (8:30am EST): 2.5%
New Home Sales (10:00am EST): 340K SAAR
FHFA House Price Index
5
U.S. EQUITY
OPTIONS
SPX- After disappointing economic news (existing home sales) the market hit its low of the day down -1.8% but did pop back slightly before drifting sideways
throughout the afternoon finishing down -1.45% . VIX traded up for the second consecutive day (+7.01%). We noticed buyers of ATM strikes and sellers of OTM strikes in
SPX. Buyers of the 1050 puts were present as various put spreads were quoted throughout the day. For example there was a size seller of the 1070/1050 put spread. Also
notable were a seller of the 1140/ 1150 calls spreads over 15,000 and buyers of the 1100 calls.
ETF – Following disappointing housing numbers and selling overseas, the market was down roughly 1.5%. This selloff pushed premium levels higher as evidenced by the
7% rally in the VIX. A large part of today’s activity seemed protective in nature. In EEM we saw a buyer of 21,000 Sep 37 puts while another player sold the Dec /Sep 42
call spread 10,000 times. In XLF an investor bought 20,000 Sep 12 puts and sold 7,500 Sep 14 puts. A separate player in XLF bought the Oct 13/12 put spread 10,000
times. In SLV we saw a buyer of roughly 50,000 SLV Oct 15 puts. In XHB the Jan 16 calls were sold 10,000 times, and in similar activity we saw a seller of 10,000 EWJ Dec
10 calls.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY
Rank 8/18/2010 8/19/2010 8/20/2010 8/23/2010 8/24/2010 30-Day Implied Vol
1 Q Q Q Q Q 32.80
2 NOVL ARG ARG SCG ARG 18.95
3 ARG NOVL NOVL ARG NOVL 47.53
4 CRM CRM HSY MKC FDO 29.21 BIGGEST MOVERS
5 AMAT SJM NRG NOVL CTL 14.56 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
6 KR WIN FDO FDO AAPL 32.04
7 FRX INTU KR AMAT SBUX 32.80
AEE 27.52% 26.53 SCG -64.99% 18.50
8 SJM MO WIN SBUX MO 16.22 NU 22.04% 19.13 MKC -49.02% 17.72
9 INTU AMAT HRB AAPL WIN 21.95 EXPD 21.83% 32.15 MDT -30.70% 33.43
10 MO FRX MO WIN FRX 30.87
11 CTL KR AMAT FRX STZ 26.59 CNP 21.70% 22.49 BIG -14.23% 35.59
12 NRG MRK FTR PLL AMAT 34.36 CTL 20.23% 14.56 MDP -7.98% 38.83
13 HSY FDO CPB KR KR 27.76
14 RDC CPB SAI MO PX 23.93
LNC 18.77% 47.94 LSI -6.34% 41.14
15 CPB HRB FRX LM PLL 36.23 TEG 17.58% 24.51 PTV -5.90% 10.40
16 FDO RDC NTRS WHR NSM 35.46 MRK 16.86% 24.92 AYE -3.98% 21.55
17 KO DELL LM NRG LM 39.61
18 HRB L RDC HRB WHR 45.71 MSFT 14.43% 26.10 GENZ -3.71% 36.74
19 NSM KO MRK L NKE 25.93 RHI 14.27% 39.19 NRG -3.64% 31.38
20 LUV HSY WMB AMZN MRK 24.92
21 STZ LQ APOL NTRS VLO 37.41
22 NTRS CTL CTL PX LMT 21.86
23 APOL PX SBUX MOLX PM 20.80
24 NU NSM STZ LMT DIS 29.75
We ranked the S&P 500 companies from the highest to lowest 30 day implied to
25 LO SBUX LO CPB LUV 34.00 historical volatility ratio. Above we identify the 10 most positive and negative
AAPL LO NSM LO CPB movers.
JDSU NU PX STZ MOLX
DVN APOL LQ CTL NTRS The table to the left represents the 25 highest 30 day implied to historical
DE NTRS KO APOL AMZN volatility ratios within the S&P 500 companies. The green represents names
LMT STZ L WMB L
new to the list while the red represents names that have fallen out.
GME LUV DELL MRK HRB
SHLD NRG INTU RDC NRG
ADI SJM SAI MKC
CRM FTR SCG
HSY
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 -1.49% Energy XLE -1.53% -9.82% Telecomm IYZ -0.60% -1.10%
SPDR Gold Shares GLD N/A 0.48% Health XLV -2.15% -9.27% Technology XLK -1.37% -8.98%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts -1.28% Industrials XLI -2.05% 1.69% Consumer Discretionary XLY -1.70% 1.11%
iShares MSCI EAFE Index EFA Foreign Large Blend -1.37% Utilities XLU 0.17% -0.96% Financials XLF -1.67% -6.18%
iShares S&P 500 Index IVV Large Blend -1.44% Consumer Staples XLP -0.49% 0.72% Materials XLB -2.31% -7.79%
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 233,285,082 Australian Dollar FXA -0.82% -1.59% Mexican Peso FXM -0.27% 0.70%
Financial Select SPDR XLF Specialty - Financial 81,514,511 British Pound Sterling FXB -0.58% -4.70% Swedish Krona FXS -0.74% -4.36%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 69,701,848 Canadian Dollar FXC -0.80% -1.15% Swiss Franc FXF 0.96% 0.18%
iShares Russell 2000 Index IWM Small Blend 63,294,494 Euro FXE 0.06% -11.64% USD Index Bearish UDN 0.16% -6.75%
PowerShares QQQ QQQQ Large Growth 60,733,982 Japanese Yen FXY 1.26% 10.34% USD Index Bullish UUP -0.17% 4.59%
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 BRIC Bear 2X Shares BRIS N/A 5.58% iPath S&P 500 VIX VXX 2.97% -31.79% Aggregate AGG 0.40% 5.48%
ProShares UltraPro Short QQQ SQQQ N/A 5.56% Short-Term Futures ETN Investment Grade LQD 0.23% 8.11%
UltraShort Basic Materials ProShares SMN Bear Market 5.40% High Yield HYG -0.52% -0.63%
UltraShort MSCI Mexico InvstMt ProShares SMK Bear Market 5.38% iPath S&P 500 VIX VXZ 2.23% 21.99% 1-3 Year Treasuries SHY 0.07% 1.68%
ProShares UltraPro Short MidCap400 SMDD N/A 4.98% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.79% 11.98%
20+ Year Treasuries TLT 1.60% 19.88%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.48% 12.16% Crude Oil USO -2.04% -19.12%
Silver SLV 2.16% 8.77% EAFE Index EFA -1.37% -10.42%
Natural Gas UNG -0.73% -32.34% Emerging Markets EEM -1.28% -3.30%
SPDRs SPY -1.49% -5.30%
Major Index Changes:

None
ETFs in the Headlines and Blogs:

Investment Case for the China Infrastructure ETF…In Four Words - http://etfdb.com/2010/making-the-case-for-the-china-infrastructure-etf-in-four-words/
Everybody Loves Gold. That May Be Too Many. - http://www.thestreet.com/story/10840829/1/everybody-loves-gold-that-may-be-too-
many.html?cm_ven=GOOGLEFI
Beware Leveraged ETF Slippage - http://www.ritholtz.com/blog/2010/08/beware-leveraged-etf-slippage/
7
Top Online Social Networking Stories
Latest Popular Digg.com Business Stories:

5 investing bubbles - http://money.cnn.com/galleries/2010/fortune/1008/gallery.five_investing_bubbles.fortune/index.html
Why Coffee Is Getting More Expensive - http://www.npr.org/blogs/money/2010/08/23/129378313/why-coffee-is-getting-more-expensive?sc=nl&cc=pmb-
20100823
U.K. Office Workers ‘Addicted’ to Paper - http://www.greenbiz.com/news/2010/08/23/uk-office-workers-addicted-paper
10 Prep Schools That Cost More Than Elite Universities - http://www.businesspundit.com/10-prep-schools-that-cost-more-than-elite-universities/
Calculated Risk
Existing Home Sales lowest since 1996, 12.5 months of supply - http://www.calculatedriskblog.com/2010/08/existing-home-sales-lowest-since-1996.html
WSJ: The FOMC Debate on Monetary Policy - http://www.calculatedriskblog.com/2010/08/wsj-fomc-debate-on-monetary-policy.html
Lawler: Existing Home Sales: “Consensus” vs. Likely - http://www.calculatedriskblog.com/2010/08/lawler-existing-home-sales-consensus-vs.html
The Big Picture

Existing Home Sales Plummet 27.2% - http://www.ritholtz.com/blog/2010/08/exisiting-home-sales-plummet-27/
Celebs’ & Billionaires’ Economic Warnings? - http://www.ritholtz.com/blog/2010/08/celebs-billionaires-economic-warnings/
15 Facts About Net Neutrality - http://www.ritholtz.com/blog/2010/08/net-neutrality/
Is the Fed Pushing on a String? - http://www.ritholtz.com/blog/2010/08/is-the-fed-pushing-on-a-string/
The Baseline Scenario

Housing in Ten Words - http://baselinescenario.com/2010/08/23/housing-in-ten-words/
Management Consulting Myths - http://baselinescenario.com/2010/08/21/management-consulting-myths/
Bespoke Investment Group

An Awfully Bad Number - http://www.bespokeinvest.com/thinkbig/2010/8/24/an-awfully-bad-number.html
Asia’s Daily Impact on US Markets - http://www.bespokeinvest.com/thinkbig/2010/8/23/asias-daily-impact-on-us-markets.html
Q2 Earnings Growth Beats Expectations - http://www.bespokeinvest.com/thinkbig/2010/8/23/q2-earnings-growth-beats-expectations.html
A Long Row to Hoe - http://www.bespokeinvest.com/thinkbig/2010/8/23/a-long-row-to-hoe.html
Zero Hedge
Marc Faber and Peter Schiff Take On the Bond Bulls; The Rosenberg-Faber Gentlemen’s Bet - http://www.zerohedge.com/article/marc-faber-and-peter-
schiff-take-bond-bulls-rosenberg-faber-gentlemens-bet
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 Low Spark of High Heeled Boys

Learn the back roads.

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):

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

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