Monday, June 29, 2009

Monday Watch

Weekend Headlines

- Commodities, heading for the first quarterly advance in a year, may struggle to repeat their gains in the next three months as supply expands and speculators sell. Nickel may average 29% less in the third quarter than now, crude oil 16%, copper 14% and gasoline 10%, analyst estimates compiled by Bloomberg show. Hedge funds and speculators cut their best on higher prices by 23% in the two weeks ended June 23, the first back-to-back drop since March. “Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be a headwind commodities won’t be able to overcome.” Evraz Group SA, Russia’s second-biggest steelmaker, said June 22 it restarted a blast furnace and Trimet Aluminum AG, Germany’s largest maker of the metal, began raising output in May. China’s aluminum industry, the world’s biggest, is starting or reopening 2.1 million metric tons of annual capacity, equity to about three weeks of demand, according to Barclays Capital. OPEC raised output by a cumulative 485,000 barrels a day in April and May, the first gains since July 2008, Bloomberg estimates show. The increase comes as the IEA, a Paris-based adviser to 28 nations, expects consumption to contract by 2.9% from last year, the biggest drop since 1981. Nickel output rose for two consecutive months through April to 109,400 tons, the most since December, according to the Lisbon-based Intl. Nickel Study Group. Daily average aluminum production expanded in April and May, to 95,400 tons, the Intl. Aluminum Institute in London reported. Lead mines extracted more metal in March and April, taking monthly output to 300,000 tons, the most since December, the Intl. Lead & Zinc Study Group said. Zinc mines increased production to 890,900 tons in April, also the most since December, the Lisbon-based group reported. Lead, aluminum and tin stockpiles in warehouses monitored by the London Metal Exchange rose at least 87% this year. Centrica Plc, the UK’s biggest energy supplier, has a record amount of natural gas in its Rough storage site for this time of year. Heating oil in independent storage in the Amsterdam-Rotterdam-Antwerp area rose 27% this year to 2.72 million tons, according to PJK Intl. BV. Hedge funds and other large speculators are holding a net 653,915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the US Commodity Futures Trading Commission. Their net long position reached 854,743 contracts earlier this month, from as few as 86,220 in December. “Some of the run-up was money that had been laying on the sidelines and poured into the market without looking at the fundamentals and that’s the froth that’s got to come out,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Management in Cincinnati. “We could see the commodities lose about a third of the gain they’ve had in this run up.”

- Strategists who came closest to predicting the US dollar’s value against the euro so far this year see it strengthening as much as 17% in the second half as the US recovers from the recession faster than Europe.

- LG Display Co., the world’s second-largest maker of liquid-crystal displays, rose 2.7 percent to 32,050 won, the highest since April 27. Eugene Investment & Securities Co. rated the stock “buy” with its 12-month share-price estimate of 40,000 won in a report today to initiate coverage of the stock. The second-quarter earnings will post a V-shaped recovery from the first, helped by a rise in shipments and panel prices, as well as lower production costs, the brokerage said.

- The U.S. needs a single bank regulator as well as oversight of all parts of the financial industry to prevent a repeat of the current financial crisis, JPMorgan Chase & Co.(JPM) Chief Executive Officer Jamie Dimon wrote in the Wall Street Journal. The pendulum must not swing too far, however, and financial institutions must be able “to steer capital toward the most promising innovations” by developing products that answer the needs of the market and allow the U.S. to be competitive, Dimon wrote. Strengthening consumer protection by holding accountable the regulators will help combat the abusive practices by poorly or unregulated members of the financial industry, he wrote. A new level of federal bureaucracy which could increase costs and reduce available credit for consumers is not needed though, he said.

- Louis Gerstner, the former International Business Machines Corp. chief executive officer, praised President Barack Obama’s economic performance while criticizing the way the White House handled restructurings of General Motors Corp. and Chrysler LLC. “Who did we pick to figure out how to fix the automobile industry? We picked two investment bankers,” Gerstner said in an interview with Bloomberg Television’s “Conversations with Judy Woodruff” airing today. “It’s sort of like asking the arsonist to run the fire department.” In February, Obama named Steven Rattner, co-founder of private-equity firm Quadrangle Group LLC, as chief adviser on auto-industry issues, and Ron Bloom, a former vice president at investment bank Lazard Ltd., to advise his auto task force.

- The U.S. will reverse its policy of destroying opium crops in Afghanistan and devote “hundreds of millions of dollars” to promoting legal crops, Group of Eight foreign ministers were told today at a meeting in Italy. U.S. special representative Richard Holbrooke told the diplomats that President Barack Obama’s administration will undo the Bush-era policy in favor of increased funding for replacing illicit poppy plants and training farmers, Italian Foreign Minister Franco Frattini told reporters.

- Iranian President Mahmoud Ahmadinejad vowed to take a tougher approach toward the West during his second term, saying the Obama administration’s criticism of his crackdown on dissent after the June 12 election shows its offer of talks on Iran’s nuclear program isn’t genuine. “If they think the government will be influenced, they’re wrong,” Ahmadinejad told judiciary officials at a conference yesterday in Tehran, in comments aired on state television. “The government will have a more powerful and decisive approach in the new term.” He called Western leaders “the arrogants.” “I’m surprised at Obama,” Ahmadinejad said. “He said he wanted to speak to Iran, and we said we are ready, but with this rhetoric? The mask is now dropped and the Iranian people, the world’s people, know they are the same. There is no change.”

- Obama administration officials refused to rule out a new tax on employer-provided benefits as part of an overhaul of the U.S. health insurance system. “The president had said in the past that he doesn’t believe taxing health-care benefits at any level is necessarily the best way to go here, but there are a number of formulations,” Axelrod said on ABC’s “This Week” program today. “We’ll wait and see.”

- People’s Bank of China Governor Zhou Xiaochuan said the nation won’t change its currency reserve policy suddenly, helping the dollar to snap a two-day decline. “Our foreign-exchange reserve policy is always quite stable,” Zhou told reporters at a central bankers’ meeting yesterday in Basel, Switzerland. “There are not any sudden changes.”

- Wall Street’s largest bond-trading firms say the worst may be over for investors in Treasuries after government securities posted their biggest first-half losses in at least three decades. The 16 primary dealers, which trade directly with the Federal Reserve and are obligated to bid at Treasury auctions, forecast the benchmark 10-year note yield will finish the year little changed at 3.58 percent, after rising from 2.21 percent at the end of 2008, according to a survey by Bloomberg News. The dealers, which include JPMorgan Chase & Co. and Goldman Sachs Group Inc., say the sell-off will slow after signs emerged this month that foreign buyers are scooping up record amounts of debt being sold by the Obama administration. Plus, yields at the highest since November are luring investors speculating that the economy’s recovery may be slow. “We have seen an incredible amount of demand,” said Richard Tang, head of fixed-income sales at primary dealer RBS Securities Inc. in Stamford, Connecticut. “A lot of it is asset reallocation, out of risk assets and commodities. It’s been significant.”

- Japan’s industrial output rose for a third month in May as companies rebuilt inventories and the economy started to climb out of its deepest postwar recession. Production increased 5.9 percent from a month earlier, the Trade Ministry said today in Tokyo, the same pace as April, which was the biggest gain since 1953.

- China’s economic growth may slip next year as the government refrains from adding to stimulus spending amid political opposition to a rising fiscal deficit, said Deutsche Bank AG. “A lot of people believe the government can do whatever it takes to stimulate the economy,” Ma Jun, Deutsche’s Hong Kong-based China economist, said. “Those expected big stimulus next year, and therefore stronger growth, will be disappointed.” Economic growth will cool to 7.2% next year from 7.5% in 2009 as increasing overcapacity in manufacturing discourages private investment, Ma estimates. Government-influenced spending will account for four-fifths of China’s growth this year, according to the World Bank. While China’s deficit as a proportion of GDP will be dwarfed by those of nations including the US and the UK, Communist Party policy makers may become concerned that it’s not sustainable, Ma said. “A 5% deficit was unthinkable to most officials just a few months ago,” Ma said. “Further stimulus requiring spending above the 5% level will likely be strongly resisted on concerns about fiscal sustainability.”

- About 1.16 trillion yuan ($170 billion) of Chinese bank loans is estimated to have been used to invest in the stock market in the first five months, China Business News reported, citing a government economist. That is 20 percent of the 5.8 trillion yuan loans banks made in the five months, the Shanghai-based newspaper said, citing Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council. A further 30 percent of the loans may have been used for discounted bill financing, or short-term credits used to fund working capital needs, according to the report. These funds may help form a financial bubble, the newspaper cited Wei as saying, adding this is the economist’s personal view.

- Honduran President Manuel Zelaya was ousted by the military today after his opponents accused him of ignoring court rulings and seeking to change the constitution through a referendum to hold onto power. Zelaya, an ally of Venezuelan President Hugo Chavez, was seized by soldiers at his house and forced to board a plane for Costa Rica. The military acted after the Central American nation’s Supreme Court overturned the president’s decision to fire the commander of the armed forces.

Wall Street Journal:

- The Pentagon recently announced that it is repositioning ground-to-air radar and missile defenses near Hawaii in case North Korea decides to launch another long-range missile, this time toward the Aloha State. So at least 1.3 million Hawaiians will benefit from defenses that many officials in the current Administration didn't even want to build. But what about the rest of us? It's an odd time to be cutting missile defense, as the Obama Administration is doing in its 2010 budget -- by $1.2 billion to $1.6 billion, depending on how you calculate it. Programs to defend the U.S. homeland are being pared, while those that protect our soldiers or allies are being expanded after the Pentagon decided that the near-term threat is from short-range missiles. But as North Korea and Iran show, rogue regimes aren't far from having missiles that could reach the U.S. In case you're not convinced about the threat, consider this exchange between Arizona Republican Trent Franks and Lieutenant-General Patrick O'Reilly, head of the Missile Defense Agency, in a hearing last month at the House Subcommittee on Strategic Forces:


- ASIAN MARKETS' EIGHT-MONTH SPRINT HIGHER is due for a pause or even a little backtracking before they can pick up the pace again. Higher oil prices, renewed concerns about a sustainable recovery, and the World Bank's surprisingly weak growth forecast have already slowed the markets, which were on a tear once signs of a bottom in the U.S. market emerged last fall. The speed of the Asian markets' recovery has frightened global investors, who are skeptical about the V-shaped economic rebound the markets' advance implies, and about the revival of the economic decoupling story. "We still think the greater risk is deflation being driven by the greater risk in the U.S. economy," says Kate Schapiro, who steers Sentinel International Equity Fund (ticker: SWRLX). "We've clearly had our inventory refilling; we need a correction, a pause."

NY Times:

- Swine flu has infected more than a million Americans, federal health officials said Friday, and is infecting thousands more every week even though the annual flu season is well over.

- Dow Chemical(DOW) and Algenol Biofuels, a start-up company, are set to announce Monday that they will build a demonstration plant that, if successful, would use algae to turn carbon dioxide into ethanol as a vehicle fuel or an ingredient in plastics.

Washington Post:
- In the high-stakes battle over health care, a growing cadre of liberal activists is aiming its sharpest firepower against Democratic senators who they accuse of being insufficiently committed to the cause. The attacks -- ranging from tart news releases to full-fledged advertising campaigns -- have elicited rebuttals from lawmakers and sparked a debate inside the party over the best strategy for achieving President Obama's top priority of a comprehensive health-system overhaul. The rising tensions between Democratic legislators and constituencies that would typically be their natural allies underscore the high hurdles for Obama as he tries to hold together a diverse, fragile coalition. Activists say they are simply pressing for quick delivery of "true health reform," but the intraparty rift runs the risk of alienating centrist Democrats who will be needed to pass a bill. In recent days -- and during this week's congressional recess -- left-leaning bloggers and grass-roots organizations such as, Health Care for America Now and the Service Employees International Union have singled out Democratic Sens. Ben Nelson (Neb.), Mary Landrieu (La.), Ron Wyden (Ore.), Arlen Specter (Pa.) and Dianne Feinstein (Calif.) for the criticism more often reserved for opposition party members.

San Francisco Chronicle:

- Good news: California has beaten Monday's federally mandated deadline to say how it will spend most of the $2.6 billion in transportation money received from the Obama administration's stimulus pot. Not so good: The money isn't being used very wisely. So concludes the California Public Interest Research Group based on an analysis of planned spending in California and the other 49 states. In brief: far too much on new roads, not nearly enough for badly needed repairs and public and non-motorized transportation. "Given California's enormous backlog for road repair and mass transit, building new roads is like adding a new wing to a house when the roof is falling in," said Emily Rusch, CalPIRG's state director in San Francisco. The Golden State is not alone. The study, compiled by CalPIRG and Smart Growth America, a nationwide planning advocacy organization, says the vast majority of state plans - Delaware and Iowa being notable exceptions - fall short of the stimulus package's criteria for job creation, infrastructure fixes and reducing sprawl, congestion and energy dependence.

- Handgun purchases in New Jersey would be limited to one per month after lawmakers gave final approval early yesterday to a controversial bill that had stalled for months and re-emerged in the rush before the Legislature's summer break. The measure, now before Gov. Jon Corzine, would make New Jersey the fourth state to limit a customer to buying only one handgun every 30 days, said gun control activists.

Rolling Stone:

- American Bubble Machine. From tech stocks to high gas prices, Goldman Sachs(GS) has engineered every major market manipulation since the Great Depression – and they’re about to do it again.

Sacramento Bee:

- Median sales prices for existing California homes climbed another 4.2 percent in May, marking a third straight month of rising prices, according to new statistics released by the California Association of Realtors. The association called May's rise the largest for the month since it began keeping records in 1979. In Sacramento County, median sales prices rose 8.1 percent from April. Only Orange and Napa counties were higher, CAR said. The association reported a $180,940 median price in Sacramento County, up from $167,340 in April. Statewide, the median sales price climbed to $267,570 in May from $256,700 in April. CAR officials attributed rising prices to a dwindling number of the cheapest bank repos and improved sales in the higher-end market.


- Highlighting investor concern about the market effects of short selling, more than 3,000 comments have been filed with the Securities and Exchange Commission on proposed changes to the short-sale rule. A majority of the comments appear to be from individual investors who want the SEC to restore the uptick rule. That rule was rescinded in 2007 when the SEC put new short-selling rules in place. One of the proposals issued by the SEC in April would restore the uptick rule, requiring that short sales be allowed only at a price above the price of the last transaction. The rule is intended to prevent short-sellers from putting severe downward pressure on stock prices. There is no timetable for acting on the proposal. Groups that represent the mainstream brokerage industry and the hedge fund industry, which employs short-selling techniques, argued that the SEC proposal isn't necessary. But they also hedged their bets by recommending modified versions of the proposal if the agency does move forward. In an unusual twist, NYSE Euronext of New York took a position differing from that of the brokerage industry. The company, which operates the New York Stock Exchange, said in its comment letter that the SEC should adopt the uptick rule. Doing so “could have a real impact on investors' and issuers' confidence in the equities market,” wrote Janet Kissane, its legal and corporate secretary. But Patrick Byrne, chairman and chief executive of Inc., a Salt Lake City company that was on the SEC's list for failure to deliver shorted stock from 2005 to 2007, said that the agency needs to adopt a requirement that shares actually be delivered before they can be shorted. Traders can find loopholes to get around the uptick rule, he said. Adopting the uptick rule is “giving chicken soup to a cancer patient,” Mr. Byrne said. “It's not going to help.”

Financial Times:

- Private equity groups will take more minority stakes in companies as they face up to the shortage of bank debt available to finance full takeovers, according to the head of one of Europe’s biggest buy-out groups. Martin Halusa, chief executive of Apax Partners, told the Financial Times that he expected more companies to be interested in selling minority stakes to private equity groups as they seek to repair their over-indebted balance sheets.

- Merck(MRK) of the US is close to restructuring its lucrative animal medicines assets in a wide-ranging deal likely to be finalized in the next few weeks with its partner Sanofi-Aventis that could earn it at least $4bn.

- The son and heir apparent to North Korean leader Kim Jong-il joined a delegation of senior military officials for a top-secret, week-long visit to China in mid-June in spite of Beijing’s claims that no such trip occurred. The visit was intended to shore up support for the inexperienced Kim Jong-woon, Mr Kim’s 26-year old son, and reassure North Korea’s closest ally that a smooth leadership transition was already under way, military, intelligence and diplomatic sources have told the Financial Times. It is not clear whether Kim Jong-woon met Hu Jintao, China’s president, but a person involved in aspects of the visit said that Mr Kim did meet Chinese vice-president Xi Jinping, the man expected eventually to succeed Mr Hu, as well as former Chinese president Jiang Zemin. The talks focused on North Korea’s nuclear ambitions and its testing of a nuclear weapon as well as the North’s requests for China to forgive some bilateral debt and provide more energy aid. But the main purpose of the visit was to establish Kim Jong-woon’s legitimacy as successor and give him some valuable experience in dealing with his country’s giant neighbour, analysts said. “Kim Jong-woon is too young and it is too early for him to meet world leaders on his own so that’s why he had to travel with his uncle and other senior figures,” said one analyst, who declined to be named because of the sensitivity of the subject. At a bilateral summit in Tokyo on Sunday, Taro Aso, Japan’s prime minister, and Lee Myung-bak, South Korea’s president, said they “can never accept” North Korea’s possession of nuclear weapons.

- Blackstone(BX), the private equity group, is to return to the traditional commercial property market in Europe for the first time since 2004 after the closing on Monday of a larger-than-expected €3.1bn (£2.6bn) real estate fund. The fund launch signals the start of Blackstone’s hunt for opportunistic purchases, from either distressed property investors being forced to sell or from banks that have called in defaulted loans. The private equity leader has shunned commercial property for the past five years, regarding it as overpriced in the final stages of a boom, and subsequently sat on the sidelines as prices in the sector almost halved. Blackstone has instead been investing in operating businesses backed by property, such as care hospitals, student housing, holiday camps, pubs and hotel companies. The Blackstone Real Estate Partners Europe III fund will mainly target over-leveraged traditional real estate, which had been bought at peak levels and aggressively financed. Many of these loans will be maturing within the next two years, and will need to be recapitalized and deleveraged to sustainable levels.

- Spiraling government debt around the world has prompted the creation of the first tradable indices tracking the risks of countries defaulting. Markit , the data provider, will announce plans on Monday to launch four indices of credit default swaps – used as insurance against bond defaults – as investors demand more information about the dangers of the growing debt mountain. These will run alongside CDS for individual countries, which are already traded. Niall Cameron, global head of indices at Markit, said: “Since the onset of the credit crisis we have seen a dramatic increase in demand to track sovereign credit, as evidenced by the heavy volumes of sovereign CDS being traded. “This should come as no surprise given the rapid deterioration in public finances generally.” The two indices Markit expects will attract the most liquidity are the iTraxx SovX Western Europe index, which will track the CDS of 15 countries in western Europe – including the UK, Germany and France – and the Markit iTraxx CEEMEA index, which will track the credit risk of 15 countries in central and eastern Europe, the Middle East and Africa. Two other indices will track the CDS of the group of seven leading industrialized nations, and the CDS of countries in Asia, Europe, Latin America, the Middle East, Africa and North America.

- Buoyant capital markets activity underpinned US banks’ second-quarter earnings, with a boom in equity and debt issuance helping offset continued losses on toxic assets, bankers and analysts said. With two days to go before the end of the quarter and a fortnight before banks begin reporting results, executives said the strong performance in trading and underwriting in the first quarter was exceeded in the three months to June.

Radio Television Hong Kong:

- Hong Kong, heading for its first full-year economic contraction since 1998, has “yet to emerge from the impact of the financial tsunami,” Chief Executive Donald Tsang said. “While recent statistics have shown some signs of economic stability returning, there are still many uncertainties in the global market,” he said.

China Times:

- Hewlett-Packard Co.(HPQ) will order more notebook computers than it had previously forecast from Quanta Computer Inc. and Inventec Co.. Hewlett-Packard increased its full-year estimate for shipments to 38 million notebooks from 34 million because of greater-than-expected demand in the second half of this year. Quanta will benefit from an increase in orders for consumer notebooks, while Inventec will be boosted by higher demand for corporate laptops.


- Iran plans to develop 20 onshore and offshore oil and gas fields as part of its next five-year development plan, some of which will be offered to foreign oil companies, a senior Iranian official said June 23.

Weekend Recommendations
- Made positive comments on (WEN).

- Made negative comments on (HSIC) and (PDCO).

Night Trading
Asian indices are -.25% to +.50% on avg.

Asia Ex-Japan Inv Grade CDS Index +.33%.
S&P 500 futures -.31%.
NASDAQ 100 futures -.24%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Global Commentary
WSJ Intl Markets Performance
Commodity Futures
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Earnings Calendar

Conference Calendar

Who’s Speaking?
Rasmussen Business/Economy Polling

Earnings of Note
- (APOL)/1.12

- (HRB)/2.05

Upcoming Splits

- None of note

Economic Releases

- None of note

Other Potential Market Movers
- The Fed’s Rosengren speaking, Chicago Fed Nat Activity Index and the Dallas Fed Manufacturing Activity Index could also impact trading today.

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

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