Sunday, August 10, 2008

Monday Watch

Weekend Headlines
Bloomberg:

- The euro dropped the most in more than three years this week, pushing the currency to a six-month low against the U.S. dollar, as traders pared bets the European Central bank will raise interest rates as the economy slows. ``What we have seen over the last few days is the recognition in Europe, in Australia, all around the world, that growth is slowing everywhere,'' said Mohamed El-Erian, co-chief executive officer of Newport Beach, California-based Pacific Investment Management Co., in a Bloomberg Radio interview. ``The euro is no longer as attractive as people once thought.'' The euro's decline below $1.53 and the break of the 200-day moving average at $1.5226 ``marks a significant change in sentiment for the dollar,'' pointing to a further decline to $1.46, Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., wrote in a report yesterday. The greenback rose to a six-month high against the Australian dollar, and advanced to the highest since September against the New Zealand dollar on speculation the central banks will cut borrowing costs. Russia's ruble fell by the most in 2 1/2 years against a dollar-euro basket used by the government after Georgia's Interior Ministry said four Russian fighter-jets entered Georgian airspace and bombed the towns of Gori and Kareli, boosting the risk of war. ``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago.
- Treasury Inflation Protected Securities show that traders' expectations for inflation over the next decade fell to the lowest in almost five years this week as prices of commodities tumbled. ``The bottom line is you've seen a significant turn in commodity prices,'' said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment- banking arm of Canada's biggest lender. ``Going forward you're more likely to see inflation erode.'' Ten-year TIPS yielded 2.18 percentage points less than similar-maturity notes, the smallest difference since October 2003. The yield gap indicates the annual rate of inflation foreseen over the life of the security. Auctions of 10- and 30-year Treasuries this week drew better-than-forecast demand, showing investors are still attracted to the safety of U.S. government debt.

- Corn and soybeans fell to the lowest prices in more than four months, extending this week's declines, as a surging US dollar reduced the appeal of commodities as a hedge against inflation. The dollar rose to the highest since February against a basket of the euro, yen and four major currencies. The UBS Bloomberg Constant Maturity Commodity Index is down 15 percent since June 30, partly because of the dollar's rally. Since reaching records this year, corn is down 35 percent and soybeans are down 28 percent as favorable weather boosted crops. Index funds that invest in a basket of commodities cut net- long positions by 3.7 percent to 372,405 corn contracts last week, down 18 percent from a record 452,568 contracts in February. Index funds that invest in baskets of commodities reduced net-long positions by 0.9 percent to 148,734 soybean contracts in the week ended July 29, down 25 percent from a record of 198,707 on Feb. 19, the data show. ``We are finding out how bad it can be when the pension funds and other investors get out of commodities,'' said Dave Marshall, a farm marketing adviser for TOAY Commodity Futures Group LLC in Nashville, Illinois. ``The rapidity that we take out the bullishness is a hallmark of commodity trading, something these fund managers may now regret.''
- The average price of regular gasoline at U.S. filling stations fell to $3.85 a gallon, an industry survey showed. Gasoline dropped 15 cents in the two weeks ended Aug. 8, according to oil-industry analyst Trilby Lundberg's survey of 7,000 filling stations nationwide. U.S. gasoline demand fell a 15th consecutive week, as motorists cope with high fuel prices by driving less, a MasterCard Inc. report showed August 5. Demand last week fell 3.4 percent from a year earlier, MasterCard, the second-biggest credit-card company, said in its weekly SpendingPulse report. ``This year will probably be the lowest gasoline demand in the U.S. since 1981,'' Lundberg said.
- The European Union is intensifying efforts to end five days of combat between Georgia and Russia that left scores dead and threatens to disrupt a major energy transport route.
- Copper fell, capping the biggest weekly drop since May 2007, on heightened concern that slumping economies worldwide will erode demand for industrial commodities. Copper has tumbled 22 percent from a record in May and touched a six-month low today on signs of less consumption. China's home-appliance makers, the world's largest exporters of the products, are cutting purchases of copper as shipments of air conditioners and refrigerators slow, Jiangxi Copper Co. said this week.
- The cost of protecting Asia-Pacific bonds from default declined, according to traders of credit- default swaps. The Markit iTraxx Australia index fell 6 basis points to 139 as of 10:37 a.m. in Sydney, JPMorgan Chase & Co. prices show. Asia's index of 50 investment-grade borrowers outside Japan, including the Thai government and Hong Kong's Hutchison Whampoa Ltd., fell 3 to 142 and the region's benchmark of high-risk, high-yield borrowers declined 5 to 550, BNP Paribas SA prices show.

- China’s economy will be slowed instead of stimulated the next two months by the Beijing Olympic Games and Paralympics, according to Goldman Sachs(GS). “These measures will likely lead to a visible slowdown in real economic activities, both production and consumption, in August and September,” Goldman said. “We expect a gradually softening economic path in the second half of 2008,” the analysts wrote.
- Singapore said its economy expanded at the slowest pace in five years and predicts exports will decline for the first time since 2001, adding pressure on the central bank to allow the currency to weaken to boost growth. Gross domestic product increased 2.1 percent from a year earlier in the second quarter, after expanding 6.9 percent in the previous three months, the trade ministry said in a statement today.

- Australia's central bank says it will have more room to cut interest rates because of a ``significant moderation'' in domestic demand that will cut economic growth by half and drive up unemployment.
- Time Warner Inc.'s(TWX) Batman saga ``The Dark Knight'' became the third highest-grossing domestic film of all time with $442 million in sales as it topped the movie chart for a fourth straight weekend.
- Billionaire investor Warren Buffett's Berkshire Hathaway Inc.(BRK/A) posted its third straight profit decline as lower rates pressured results in insurance operations. Second-quarter net income fell 7.6 percent to $2.88 billion, or $1,859 a share, from $3.12 billion, or $2,018, a year earlier, the Omaha, Nebraska-based company said yesterday.

- Asian currencies slumped this week, led by Singapore's dollar, on concern slowing global growth will curb demand for the region's assets. Singapore's currency posted its biggest weekly loss in a decade after the Straits Times newspaper yesterday cited Finance Minister Tharman Shanmugaratnam as saying the economy is moving toward a slowdown and growth is unlikely to rebound ``anytime soon.''
- The armed conflict between Russia and Georgia deals a blow to U.S. aspirations of bringing the former Soviet republic into NATO's orbit and securing an emerging energy corridor linking Central Asia to Europe.
- Republican John McCain today vowed to improve medical care for America's military veterans if he is elected president. ``As president, I will do all that is in my power to ensure that those who serve today, and those who have served in the past, have access to the highest quality health, mental health and rehabilitative care in the world,'' McCain said in a speech at a meeting of the Disabled American Veterans.
- Democrat Barack Obama, beset this week with new attacks from Republican rival John McCain, says there will be little or no politicking over the next seven days as he takes a vacation in Hawaii. ``I'm going to go body surfing at some undisclosed location,'' Obama, the presumptive Democratic presidential nominee, told the crowd at a welcoming rally yesterday in Honolulu.
- Egyptian inflation rose to an annual 22 percent in July, the highest since 1992, putting pressure on the central bank to raise interest rates for a sixth time this year. Urban inflation accelerated from 20.2 percent in June, the Cairo-based Central Agency for Public Mobilization and Statistics said today in a faxed statement.

- U.S. Treasury Secretary Henry Paulson said there are no plans to use his new authority to inject capital into mortgage companies Fannie Mae(FNM) and Freddie Mac(FRE), which both posted worse-than-expected earnings last week. Paulson, the former chairman of Goldman Sachs Group Inc., said he won't remain as Treasury secretary after President George W. Bush's term ends in January, regardless of who is elected president in November.

Wall Street Journal:
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Intel Corp. is announcing branding plans for a new generation of chip technology, relying on a term the company has already spent heavily on popularizing.

CNBC.com:
- Lehman Brothers(LEH) Chief Executive Dick Fuld continues to work feverishly on possible transactions that will help the investment bank drum up much-needed capital and offset possibly billions in further writedowns, according to people with knowledge of the matter.

NY Times:
- Reining in the runaway freight train otherwise known as the credit default swap market is a rising priority for regulators who oversee banks and insurers. One of the positives that heightened regulatory interest will bring to this huge market is a push to make participants more scrupulous about assigning proper values to their credit insurance stakes. This may be a rude awakening for many players in financial markets. Those who bought credit insurance as a speculation (hedge funds especially) have been joyously marking up their stakes to reflect the rising defaults. But the recent unwinding of a big credit insurance stake — bought by Merrill Lynch(MER) to cover potential defaults on risky mortgage-related collateralized debt obligations it held — suggests that such optimism may be overdone. Write-downs at these institutions may be imminent.
- Former Genesis singer Peter Gabriel, who found a second career as an investor in online music ventures, has started an Internet site which links advertising to free musical downloads.
- South Korean consumers and shoppers in Turkey are facing problems with soaring debt after lenders issued them credit cards with very little scrutiny to their credit history.
- Time Warner Inc.(TWX) CEO Jeffrey Bewkes is pegging the company’s future on movies and cable-television broadcasts.
- While Knol is only three weeks old and still relatively obscure, it has already rekindled fears among some media companies that Google(GOOG) is increasingly becoming a competitor. They foresee Google’s becoming a powerful rival that not only owns a growing number of content properties, including YouTube, the top online video site, and Blogger, a leading blogging service, but also holds the keys to directing users around the Web.

NY Post:
- Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country. One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

Red Orbit:
- University of California, San Diego electrical engineers have created experimental solar cells spiked with nanowires that could lead to highly efficient thin-film solar cells of the future. Indium phosphide (InP) nanowires can serve as electron superhighways that carry electrons kicked loose by photons of light directly to the device's electron-attracting electrode - and this scenario could boost thinfilm solar cell efficiency, according to research recently published in NanoLetters.

LA Times:
- Mortgage insurer PMI Group's latest report on the risk of falling home prices concludes there are "two distinctly different paths" right now: Most of the nation's housing markets are showing signs of improvement. In 35 of the 50 largest metropolitan areas in the U.S., PMI reports, the risk of future price declines decreased in the first quarter; however, in California, the risk of price declines increased. PMI did find one sign indicating that California's market might be normalizing: Excess housing supply is declining in many markets.

Innovations Report:
- Fuel from Cellulose. Hydrogen technology and solar energy will very probably provide the solution to our global energy problem – in the long term. For an initial quick remedy we may look to bioenergy. Biomass can be used to generate alternative carbon-based liquid fuels, allowing the continued use of current automotive combustion engine technology and existing infrastructure. Mark Mascal and Edward B. Nikitin at the University of California, Davis (USA) have now developed an interesting new method for the direct conversion of cellulose into furan-based biofuels. As they report in the journal Angewandte Chemie, their simple, inexpensive process delivers furanic compounds in yields never achieved before.

Detroit Free Press:
- Where the presidential candidates stand on energy and the environment.

Washington Post:
- Slow Economy Puts Value Investing to the Test. Value investors are now in the same predicament that growth fund managers were in when the tech bubble burst. Like the tech buyers did, many value investors underestimated how widespread and long-lasting the damage from the bubble, in this case housing, would be. Last year was an unusually bad one for value investors. Large-cap value funds gained just 1.42 percent, while large-cap growth funds rose 13.35 percent. This year has not been much better, with some of the largest value funds showing double-digit negative year-to-date returns.

ABA Journal:
- Lawyers Could Be Targeted in SEC Subprime Cases. The Securities and Exchange Commission may be the plaintiff in civil complaints that target lawyers for their role advising lenders and securitizing loans for sale to investors. A typical aiding-and-abetting scenario might be a law firm that aids misrepresentation in a prospectus for a mortgage-backed security. The SEC has opened 48 investigations in the subprime mortgage mess and assigned more than 100 lawyers to the cases. The possibility of aiding and abetting actions—against lawyers and others--won’t be considered until the probes are farther along.

Wealth Bulletin:
- Using data from HedgeFund.Net, a report found that emerging managers—defined as hedge fund managers with a track record of less than three years and less than $300m in assets under management—are beating older hedge funds by 3% to 4% per year. However, the report also found that the rate of new hedge fund entrants is slowing. In the twelve months to June 30, there were 554 new funds, roughly half the number from the year before. Statistical arbitrage and macro-strategy funds were the most popular kinds of funds among the new entrants, followed by funds focused on the energy sector.

The Washington Post:
- Rielle Hunter, the former presidential campaign aide who had an affair with John Edwards, said yesterday that she will not pursue DNA testing to establish the paternity of her 5-month-old daughter, despite the former senator's offer to participate in such a test.

Chicago Tribune:
- Obama partisans block Clinton faction bid to end caucuses.

Reuters:
- GATX Corp (GMT) is offering more than $3 billion for General Electric Co's (GE) rail car leasing business, a source familiar with the discussions said.
- In the first six months of 2008, demand for machine tools, which gives a sense of the pace of US manufacturing, stood at $2.318 billion, up 15.3 percent from $2.011 billion in the same 2007 period. "I think everyone is excited that the underpinning for productivity in our economic growth -- manufacturing technology equipment -- continues to grow at double-digit rates through the second quarter," AMT President John Byrd said in a statement.

Financial Times:
- Citigroup(C) on Friday confirmed a plan to shift its equity research business back into its securities unit, reversing a landmark move made six years ago when regulators were probing Wall Street's conflicts of interest.
- Leading private-equity firms are highlighting their transformation into investors in deeply discounted debt as they purchase more leveraged buy-out financing from banks. In the most recent deal, Royal Bank of Scotland is selling to Apollo, GSO Capital, Blackstone's debt investing arm, and TPG as much as $8bn in loans that financed acquisitions by private-equity firms.
- This week will be crucial in determining whether the dollar has broken free from its six-year downward trend, as speculation mounts that the US is in the best position to emerge quickly from the economic downturn. The dollar index, which measures its value against a basket of six major currencies, put in its best performance for over three-and-a-half years last week. Analysts say other central banks, unlike the Federal Reserve, have been slow to respond to a potential slowdown, refusing to cut interest rates as they focus on fighting inflation. Ulrich Leuchtmann at Commerzbank said in a note he expected the dollar to rise "like a phoenix". He said low US interest rates were not a burden on the dollar but an attraction, proof that the Federal Reserve was able to react quicker to turmoil than other central banks. He said that in a very short period, "sentiment turned by 180 degrees - the market now believes that the US economy once again will be able to leave a crisis behind very quickly". David Deddouche at Société Générale believes a wider adjustment is taking place that will send the dollar higher. He said the decoupling theory pushed the dollar down to multi-year lows. "We believe this is one of the weakest assumptions embedded in the pricing of financial assets," he said.

- European companies have slashed investments in China amid rising labor and transport costs at the same time as they expand in eastern Europe and Russia. Foreign direct investment from the European Union into China fell steeply last year from €6bn in 2006 to €1.8bn ($2.7bn). In Russia, it soared from €10.6bn to €17.1bn. "Lots of European companies are hedging their Chinese manufacturing positions," said David Bartlett, FDI expert and adviser to accounting network RSM International. "Industries are looking more and more at central and eastern Europe, which are plausible alternatives to China for moving production, particularly for costs such as transport."
- An emergency measure protecting a select group of financial stocks from abusive short-selling expires on Tuesday, probably leaving at least a two-month gap before a similar rule, currently being considered, is imposed. The US Securities and Exchange Commission has said that it would not extend the rule preventing "naked" short-selling in shares of 19 key financial entities, including mortgage groups Fannie Mae (FNM) and Freddie Mac, and big Wall Street firms that include investment bank Lehman Brothers (LEH). some market participants are uneasy. "We remain concerned that during this interim time period our members will continue to be exposed to these "distort and short" campaigns," said Sarah Miller, senior vice-president of the American Bankers Association. Ms Miller wants the SEC either to extend the emergency order and include all banks or to issue a proposal as soon as possible. She said the growing volume of "failures-to-deliver" are indicative of abusive short-selling, and that a spike in FTDs is invariably accompanied by significant stock drops, not all of which can be attributable to market or bank-specific conditions. "We suspect that the volume of FTDs has only continued to grow, perhaps dramatically," she said.

- The recent fall in the price of oil is primarily the result of investors unwinding speculative positions that helped drive up oil prices this year, Alan Greenspan has told the Financial Times. The former Federal Reserve chairman said speculation was "importantly responsible" for the rapid move up in oil prices in late 2007 and early 2008. Mr Greenspan said financial speculation in oil was unlikely to resume in the near term and "there is little prospect of a renewed spike in oil while cyclical weakness continues". "Financial speculation did play a significant part in the rapid increase in oil prices," Mr Greenspan said. From 2004 onwards financial investors identified a one-time opportunity to profit from the expected increase in the price of oil caused by pressure of mounting demand on constrained supply.

TimesOnline:
- All signs indicate that euro’s joyride is at an end.

The Herald:
- OPEC has held its nerve while oil prices have dropped nearly 20% in a month and the producer group is expected to let the market slide further before taking any action to cut output. "At the moment, and at this level, there is no movement within Opec to do anything," an Opec source said last week. "I don't think ministers will change output. I think at less than $80 for Opec oil, maybe they would do something." Opec President Chakib Khelil said prices were abnormal last week, when a barrel cost around $123. He said the price could fall to $70 to $80 a barrel in the long term. Some technical analysts, who use charts to predict future price movements, have said the market could fall as far as around $60 before the long-term bull trend was broken. Saudi King Abdullah said in an interview with Italian newspaper La Repubblica in July he wanted to see lower prices, without stating the desired level. He said that the kingdom was "already unhappy" with the rising price when it was hovering at around $100.

Sunday Telegraph:
- United Parcel Service(UPS) held initial talks to buy TNT NV for $15 billion.

Milano Finanza:
- Merrill Lynch(MER) CEO John Thain said the company may be able to pay a dividend. “In the short term we think that we should be able to generate necessary profits to cover the dividend, but it is something that’s always subject to evaluation,” citing Thain.

Economic Daily News:
- Scrap steel prices in Taiwan have fallen 20% over the past two weeks because of the slowdown in the property market. Some traders are stuck with scrap steel stockpiles, which they built up two to three months ago when prices were higher.

Emirates Business 24/7:
- Kuwait is trying to combat high inflation by using a flexible interest and exchange-rate policy, citing Kuwait’s central bank Governor Sheikh Salem Abdul Aziz Al Sabah. Inflation in Kuwait Kuwait has allowed the dinar to appreciate more than 8% since May 2007. reached a record 11% in April and May.

Arabian Business.com:
- Profits are rolling in and recruitment is booming in the Gulf across retail banking, wealth management and brokerage. Most of the income now being generated has been driven by the rampant growth in consumer lending and mortgages. No danger then, of people finding it "harder and more expensive to borrow" here - or at least not just yet. That could change quickly. The Dubai real estate market, where residential property prices have advanced almost 80 percent since the start of 2007, is key to the future fortunes of other Gulf property markets. It's where all the ripples emanate from and is a bellwether of the industry's regional health. Nakheel's move to curb speculation on the Palm's Trump Tower last week by forcing investors to hold property for at least a year before selling it on, might appear draconian and interventionist at first glance. But desperate times may require desperate measures. The rampant price inflation that the market has witnessed in recent months needs to slow down. Otherwise the consequences for the local and regional economy could be severe.

Weekend Recommendations
Barron's:
- Made positive comments on (XTO), (APC), (SCHW), (HCBK), (GE), (QCOM), (HOME), (HRC), (PCLN), (AUXL), (AWK) and (SU).

Citigroup:
- Reiterated Buy on (AMZN), target $97.

Morgan Stanley:
- Leading indicators for industrial demand in emerging markets point to growth, but also show some areas of weakness. Emerging market weakness would represent significant additional downside to earnings and share prices, particularly for infrastructure plays.

Night Trading
Asian indices are +.50% to +1.75% on avg.
S&P 500 futures -.20%.
NASDAQ 100 futures -.13%.

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
Upgrades/Downgrades
Rasmussen Business/Economy Polling

Earnings of Note
Company/Estimate
- (SYY)/.52
- (CNO)/.21
- (CPN)/.16
- (DISCA)/.15
- (CCO)/.19
- (FLR)/.78
- (NUAN)/.21
- (CUZ)/.25
- (MDR)/.77
- (CKEC)/-.19
- (BE)/-.07

Upcoming Splits
- (ALXN) 2-for-1
- (EBIX) 3-for-1
- (TWI) 5-for-44

Economic Releases
- None of note

Other Potential Market Movers
- The (GSX) analyst meeting, (AEZ) analyst meeting, (STSA) analyst meeting, (ESIO) technology tour, Keefe Bruyette Woods Bank Conference, EnerCom Oil & Gas Conference, CSFB Electrical Equipment Conference and the CSFB Tech Communications Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by transportation and automaker shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.

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