Friday, July 18, 2008

Friday Watch

Late-Night Headlines
- Speculative-grade bonds, with yields an average of 801 basis points more than similar-maturity Treasuries, now offer a favorable risk-reward ratio, according to Martin Fridson, CEO of Fridson Investment Advisors. “It probably makes sense to at least be scaling into high yield at these levels,” he said. Fridson led Merrill’s(MER) high-yield strategy group until he left in 2003 and formed his own research firm. He was the top-ranked high-yield analyst in Institutional Investor magazine’s annual poll for nine years in a row.
- Pacific Investment Management Co., which runs the world’s largest bond fund, is increasing its holdings of Fannie Mae(FNM) and Freddie Mac(FRE) debt. The two biggest US mortgage lenders “remain fundamentally sound” even after the government proposed a plan this week to shore up the companies, said Jennifer Bridwell, a mortgage strategist and senior vp at Pimco. The fund manager told nearly 800 clients during a call that the company’s portfolio held more of the bonds than in the index that it uses to measure performance. The $128 billion Pimco Total Return Fund, run by Co-Chief Investment Officer Bill Gross, had 61% of its assets in mortgage securities as of June 30, compared with 53% a year earlier.
- U.S. Treasury Secretary Henry Paulson said he expects to reach ``a very acceptable result'' by next week in negotiations with lawmakers on his plan to aid mortgage buyers Fannie Mae and Freddie Mac.
- The US dollar gained, headed for a weekly advance against the euro, on signs Wall Street investment banks can weather credit-market losses following the U.S. subprime mortgage collapse
- Soybeans fell the most in more than a week after legislators in Argentina, the third-biggest exporter of the oilseed, rejected a tax on international sales that had curbed shipments. Corn dropped the most in six months.
- Merrill Lynch & Co.(MER), the third- biggest U.S. securities firm, reported a wider-than-forecast quarterly loss as the credit contraction saddled the company with $9.7 billion of writedowns.
- Microsoft Corp.(MSFT), the world's biggest software maker, posted fourth-quarter profit that trailed analyst estimates and gave a disappointing forecast after a sluggish U.S. economy crimped sales, sending the shares down 6.4 percent.
- Google Inc.(GOOG) fell 7.6% in late trading after reporting earnings that missed analysts' estimates on a surge in spending on new projects and costs to defend YouTube in a copyright lawsuit. Google reported revenues of $5.37 billion for the quarter ended June 30, 2008, an increase of 39% compared to the second quarter of 2007 and an increase of 3% compared to the first quarter of 2008.
- International Business Machines Corp.(IBM), the world's largest computer-services provider, reported a 22 percent increase in second-quarter profit and boosted its full-year forecast as sales climbed in emerging markets.
- China’s Economic Fortunes Swing Toward Recession. Global developments may prove dangerous for a nation that needs to create millions of jobs to keep people from protesting on Tiananmen Square. The breakdown of China's GDP data may be a harbinger of a difficult year ahead.
- Tomatoes sold in the U.S. are safe to eat again, according to the Food and Drug Administration, which lifted its warning about the risk of salmonella contamination

Wall Street Journal:
- Earnings reports from four technology giants suggest the tech sector is weathering the economic slowdown better than other industries -- though not always as well as Wall Street has hoped.
- Former Vice President Al Gore urged Congress not to overturn a federal ban on offshore drilling and complained that lawmakers are "being stampeded by lobbyists for special interests" eager to lift the moratorium.
- Shorts on the run. Rumor mongers and uptick rule wreck solid strategy. Shorting is essential to prevent excessive speculation and overhyping, but it does not deserve the level playing field its supporters claim. Financial markets exist to help companies raise money and to reward investors for taking risks by supporting companies, sectors and economies as they grow. Hedge funds convinced the SEC that short strategies were as important as long strategies and that they needed a level playing field. Almost overnight, financial stocks started getting punished. Short selling went from being a value play to a momentum play, with many more people in the game than the traditional crowd.

NY Times:
- Defrauded Fund Investors Sue Goldman Sachs(GS).

US News & World Report:
- Palestinians say peace talks with Israel are set for Washington this month. Palestinian officials, speaking on condition of anonymity because no announcement has been made, say chief Palestinian negotiator Ahmed Qureia and Israeli Foreign Minister Tzipi Livni will meet July 30 with Secretary of State Condoleezza Rice.
- Blood in the Financial Streets. Think your job is tough? Try working right now as a mutual fund manager that concentrates on financial-services stocks.
- Mexico may have contracted to deliver oil “several years” into the future at current prices, a sign that it believes crude has peaked, citing energy traders and analysts. An unidentified analyst confirmed that the Mexican government had signed the contracts. "This is a smart move," said Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there's a good chance prices have peaked. "If I were an oil producer, I'd want to lock in these prices." Analysts say if other oil producers follow suit and lock in future contracts, that could be one thing that would cause oil prices to fall, far and fast. "I don't know who else is doing it," said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. "There's been a lot of talk, but it's kept very confidential." When the price of oil falls OPEC likes to pump less oil to keep prices up. If producers sign long term contracts, they're obligated to pump that oil making it more difficult for OPEC to control prices.

- Yahoo Inc (YHOO) is unlikely to get into a bidding war over AOL with Microsoft Corp (MSFT) because if Microsoft gets in the way, Yahoo could instead renew talks over News Corp's (NWSa) Web properties, a person with knowledge of the plans said on Thursday.

Financial Times:
- Josef Ackermann, Deutsche Bank's chief executive, yesterday said the credit crunch was at "the beginning of the end" because banks and regulators had taken action to deal with the crisis and many businesses were slowly returning to normal.
- Conservative fund management firms and custody banks are making billions of dollars from short-selling by lending stocks to facilitate such trades in exchange for lucrative fees. US prime brokerage firms, most of which are owned by big Wall St banks, will reap revenue of $11bn this year, according to a recent study by Tabb Group, a research business.
- Central and eastern Europe's recent rapid economic growth could be thwarted in "a number of countries" by rising inflation, the new president of the European Bank for Reconstruction and Development warned on Thursday. "We must realise that inflation has the potential to destroy part of the progress that has been made in many of these societies - inflation which is double-digit or which is even above 20 per cent," Thomas Mirow told the Financial Times in his first interview since taking up the job at the beginning of the month.
- Emerging economies must make the fight against inflation their "top priority", the International Monetary Fund said on Thursday as it sharply raised its forecast for price increases in the developing world this year and next. Many emerging markets had to raise interest rates, cut government deficits and let currencies appreciate more to contain the inflation risk, the IMF said.

Late Buy/Sell Recommendations

- Reiterated Buy on (ONNN), target $14.
- Reiterated Buy on (NUE), target $90.

Morgan Stanley:
- Rated (CE) Outperform, target $66.
- Rated (ACE) Outperform, target $62.
- Rated (CB) Underperform, target $51.

Caris & Co.:
- Rated (SNDK) Above Average, target $20.50.

RBC Capital:
- Rated (PTNR) Outperform, target $30.

Night Trading
Asian Indices are -1.0% to +.25% on average.
S&P 500 futures -.80%.
NASDAQ 100 futures -.73%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
Commodity Movers
Top 25 Stories

Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Rasmussen Business/Economy Polling

Earnings of Note
Company/EPS Estimate
- (C)/-.61
- (HON)/.94
- (LAB)/.04
- (MAN)/1.50
- (MAT)/.02
- (OSTK)/-.28
- (SLB)/1.12
- (BMI)/.43
- (GAP)/-.41

Upcoming Splits
- None of note

Economic Releases
- None of note

Other Potential Market Movers
- The (DELL) annual meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by energy and steekmaking shares in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.

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