Late-Night Headlines
Bloomberg:
- Harvard University, the world’s richest school, licensed its name to a maker of designer clothes to take advantage of a taste for seersucker, khakis, loafers and other “preppy” attire. The clothing line, labeled Harvard Yard, will be made by New York-based Wearwolf Group Ltd., which licensed the Cambridge, Massachusetts, school’s name through its Verus Group subsidiary, Verus said today in an e-mailed statement.
- The U.S. Senate rejected a proposal to temporarily halt the “cash for clunkers” auto discount program, during debate before a final vote on making $2 billion available to consumers. Republican Senator Jon Kyl of Arizona said there should be a “time-out” in the program until there is a full accounting of how much money is left of the initial $1 billion authorized. Without such a delay, dealers may be offering discounts that won’t be reimbursed by the government, he said. The Senate voted 57-40 to reject the amendment.
Wall Street Journal:
- Congress plans to spend $550 million to buy eight new jets, a substantial upgrade to the fleet used by federal officials at a time when lawmakers have criticized the use of corporate jets by companies receiving taxpayer funds. The purchases will help accommodate growing travel demand by congressional officials. The new planes augment a fleet of about two dozen passenger jets maintained by the Air Force for lawmakers, administration officials and military chiefs to fly on government trips in the U.S. and abroad. The congressional shopping list goes beyond what the Air Force had initially requested as part of its annual appropriations. Congress turned harshly critical of companies that fly executives on private jets in the weeks following the government bailout of banks and auto makers last year. The 737s, known as C-40s by the military, are designed to be an "office in the sky" for government leaders, according to Air Force documents describing the plane. The plane is configured with all first-class leather seats, worktables, two large galleys for cooking and a "distinguished visitor compartment with sleep accommodations." A Wall Street Journal analysis of congressional records found that foreign travel by members of Congress and aides was increasing. Last year, House members spent about 3,000 days overseas on taxpayer-funded trips, up from about 550 in 1995, according to the Journal's analysis. Lawmakers disclosed they spent about $13 million traveling the world last year, a tenfold increase since 1995, when travel records first were made available electronically. The travel costs are covered by an unlimited fund created by a three-decade-old law. Drew Hammill, a spokesman for Democratic House Speaker Nancy Pelosi, said Thursday, "The speaker is extraordinarily appreciative of the Department of Defense's efforts to accommodate requests from Congress." The C-40 costs about $5,700-an-hour to fly, according to the Department of Defense. The smaller Gulfstream V, called a C-37 by the military, seats as many as 12 passengers and costs about $3,000 an hour to operate.
- A powerful House Democrat who has turned down a Republican's call to subpoena records of a mortgage program at Countrywide Financial Corp. received two home loans from the lender. Some information in the lawmaker's mortgage documents raises the possibility they were made through the program, which provided loans to public figures and other favored borrowers often at lower interest rates or with lower origination fees than were available to the general public. The loans were made to Rep. Edolphus Towns of New York, who heads the House Oversight and Government Reform committee. The panel's ranking Republican, California Rep. Darrell Issa, has been pushing to have the committee subpoena mortgage records showing who received loans through Countrywide's VIP program -- operated under former Chief Executive Angelo Mozilo and known within the company as "Friends of Angelo." The mortgage documents on the loans to Mr. Towns contain a Countrywide address and branch number that correspond to the VIP program.
- Fannie Mae said it will need an additional $10.7 billion from the U.S. Treasury after it posted a $14.8 billion net loss in the second quarter, as rising unemployment led more prime borrowers to default on their loans. The latest infusion will bring the total bailout for Fannie to nearly $46 billion. The Treasury has agreed to provide as much as $200 billion to keep Fannie Mae running, and it has pledged the same amount to its main rival, Freddie Mac. Government regulators took control of Fannie and Freddie last September.
- The Senate confirmed Sonia Sotomayor as the first Hispanic justice on the Supreme Court by a 68-31 vote, handing President Barack Obama a victory right before lawmakers leave town for their August recess.
- In the wake of a crackdown in Britain that has damped attacks by animal-rights extremists there, the battlefront appears to have shifted to continental Europe, where a series of companies and individuals connected even indirectly to animal research are being targeted by anonymous assailants. Arson has been used in recent months against executives working for NYSE Euronext, which operates the stock exchange where one big animal-research company is listed. Drug maker Schering-Plough Corp. said an employee in Belgium was targeted by animal-rights activists, and animal-rights groups claim they have vandalized the cars and homes of people working for pharmaceutical companies Pfizer Inc. and Bayer AG and British bank Barclays PLC. The matter came to a head this week when Swiss drug giant Novartis AG said someone dug up and stole the ashes of its chief executive's mother from a Swiss cemetery last month, and set his Austrian vacation home on fire Monday.
- Ten Senate Democrats whose votes are pivotal to the success of climate legislation urged the Obama administration on Thursday to support levying tariffs on goods from countries that don't limit their greenhouse-gas emissions. President Barack Obama has resisted the idea, saying it would send "protectionist signals" to the world.In a letter to Mr. Obama, the lawmakers said it was critical to include a "border mechanism" in climate legislation to ensure it would be "trade neutral and environmentally effective." They also warned that it would be "extremely difficult" to support a bill that didn't "deal with these important issues." In response to the senators' letter, a White House spokesman said in a statement that the president "believes that the most effective approach to maintaining a level playing field is to negotiate a new international climate change agreement that ensures that all the major polluters take significant actions to reduce their greenhouse gas emissions."
- France claims it long ago achieved much of what today's U.S. health-care overhaul is seeking: It covers everyone, and provides what supporters say is high-quality care. But soaring costs are pushing the system into crisis. The result: As Congress fights over whether America should be more like France, the French government is trying to borrow U.S. tactics. In recent months, France imposed American-style "co-pays" on patients to try to throttle back prescription-drug costs and forced state hospitals to crack down on expenses. "A hospital doesn't need to be money-losing to provide good-quality treatment," President Nicolas Sarkozy thundered in a recent speech to doctors. And service cuts -- such as the closure of a maternity ward near Ms. Cuccarolo's home -- are prompting complaints from patients, doctors and nurses that care is being rationed. That concern echos worries among some Americans that the U.S. changes could lead to rationing. The French system's fragile solvency shows how tough it is to provide universal coverage while controlling costs, the professed twin goals of President Barack Obama's proposed overhaul.
- Here’s a stumper: In the Treasury financial reform proposal, who comes in for more regulatory retooling: Fannie Mae, or your average 14-man venture capital shop? If you said venture capital, you understand why one of America’s greatest competitive advantages is now at risk in Washington. As part of their regulatory redesign, Team Obama and Congress still don’t have a plan for reforming the giant taxpayer-backed institutions like Fannie that caused the credit crisis. Yet they’re moving to rewrite the rules for investing in tiny technology companies that had nothing to do with the meltdown. Under the proposed rules, venture firms will be declared systemic risks until they can prove themselves innocent. The typical venture capital (VC) firm has nine principals plus five support staff and doesn’t use leverage. Yet Treasury Secretary Timothy Geithner wants VCs to be regulated as investment advisers by the Securities and Exchange Commission.
MarketWatch.com: Nvidia Corp. late Thursday reported a smaller second-quarter loss, as Chief Executive Jen-Hsun Huang declared that the chip maker's business is "recovering." Nvidia(NVDA) shares were up more than 4% in after-hours trading.
NY Times:
- When China announced three weeks ago that its economy had grown by 7.1 percent in the first half of this year, this country appeared to be a lone bright spot during the global recession. But many economists now worry that too much of China’s growth was fueled by aggressive, state-directed lending that could eventually result in a soaring number of bad loans and mounting government debt. While banks in the United States and Europe are still reluctant to make loans because of fears they will not get their money back, Chinese banks issued a record 7.4 trillion yuan, or $1.1 trillion, in loans during the first six months of this year, mostly to big state-owned companies and government infrastructure projects. “Surging investment, fueled by the most rapid bank lending in history, accounted for nearly 90 percent of China’s G.D.P. growth in the first half of this year. And that is worrisome.” Analysts say that in China, new loans have grown this year at nearly three times the pace of a year ago and that some of those loans may have been funneled into the resurgent Chinese stock and property markets, creating the risk of new asset bubbles. A similar lending binge in the 1990s led to an explosion of bad debt that left the biggest state-owned Chinese banks nearly insolvent after the Asian financial crisis, until they were bailed out by the government in a series of moves that ended in 2004. There is one thing economists agree on: The pace of lending in China must slow significantly in the second half of this year, if Beijing is to avert a crisis. In the first half of this year, China’s bank loans were up more than 300 percent from a year ago, to more than 7 trillion yuan, about equivalent to 25 percent of China’s gross domestic product in 2008. “If you tell bankers, lend as much as you like — lend, lend, lend, and don’t worry about the risk, never in history has there not been a large increase in misallocated capital,” said Michael Pettis, a professor of finance at Peking University. “It’s never happened.” Andy Xie, an economist based in Shanghai, said that one of the side effects of this huge lending spree was speculation in commodities, stocks and property — all of which could saddle the banks and local governments with huge debts, once prices fell. “This could be a national debt issue,” Mr. Xie, a former Morgan Stanley economist, said. “All of this is government money.” With exports down more than 20 percent from a year ago, China appears to be stimulating growth with loans to state-owned companies and government works. But how long can that last?
- The Federal Trade Commission said on Thursday that it would begin policing the petroleum industry with penalties for anyone trying to manipulate energy prices. The rule, which will go into effect in November, is aimed at anyone dealing with crude oil, gasoline and petroleum distillates. It prohibits market distortions through false or misleading statements about stockpiles, prices or crude and fuel output. “This new rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump,” the agency chairman, Jon Leibowitz, said in a statement.
- Such cutbacks, in response to the recession that has eroded state finances even while swelling Medicaid ranks, is the reason Washington’s Democratic governor, Christine Gregoire, is among governors from both parties who fear the implications of the health care overhaul now being devised in Washington, D.C. The governors worry Congress will give the states expensive new Medicaid obligations without providing enough new money to pay for them. “We can’t afford to have Congress raise the eligibility for Medicaid coverage without paying for it,” Ms. Gregoire said in an interview. If anything, the states’ fears were stoked further last week when House lawmakers drafting health legislation reached a cost compromise with conservative Blue Dog Democrats that would force states to take on a greater Medicaid spending burden than an earlier version of the bill. “This is profoundly disappointing and makes a bad situation much worse,” said Doug Porter, Washington State’s Medicaid director. In most respects, Ms. Gregoire is an outspoken supporter of President Obama’s effort to overhaul health care. But she knows Washington State’s Medicaid program is already under strain. And Mr. Porter, the state’s Medicaid director, warns that an increasingly thin safety net could break if Congress expands Medicaid eligibility. “I can foresee a situation where states would say ‘I don’t have enough in general funds to put up my share of this new expanded Medicaid program, and I have to get out of the Medicaid program,’ ” he said. “That’s what I think the doomsday scenario is here. ”Under the various strands of legislation under consideration in Congress, as many as 11 million people who are now uninsured could become eligible for Medicaid. The Congressional Budget Office had projected that federal Medicaid spending under the House bill could increase by over $430 billion over 10 years. The open question now is how much of that might become the states’ new burden. Criticism from state governors resonates because of its nonpartisan nature. But it is especially significant coming from Washington State, which has a politically liberal tradition of broad support for health care. No state has yet dropped out of the federal Medicaid program since it was created in 1965. So it seems unlikely that a liberal state like Washington would be the first to do so. It has a tradition of generous Medicaid services, as well as state-subsidized medical coverage for low-income working people who do not qualify for Medicaid. But it is within every state’s power to slash its own Medicaid spending by tightening eligibility, limiting covered services and cutting reimbursement rates for health care providers. And during these fiscal hard times, that is precisely what Washington and many other states have done. Trimmed or gone altogether in various states is coverage for things like dental care, optometry, hearing aids and speech therapy, according to state Medicaid directors, who say that rising costs and expanding Medicaid rolls all but guarantee that more cuts will come.
CNNMoney.com:
- You've got a job. Good. Now keep yourself off a potential-layoff list by avoiding bad office behavior. 15 horror stories straight from the trenches.
Reuters:
- U.S. and European corporate credit default swaps have outperformed equity markets in recent weeks, which may presage a further rise in equity prices, research firm Credit Derivatives Research said on Thursday. Average spreads of five-year credit default swaps in the United States and Europe are at their tightest levels in more than a year, analyst Dave Klein said in a report. "As CDS levels blow past one-year tights, we find the credit market anticipating economic recovery, which would translate into strong near-term equity performance," he said. Strength in credit markets is often viewed as a leading indicator to equity moves, said Klein, and "we often refer back to the old saw that credit anticipates and equity confirms." "If CDS levels hold up, we anticipate strong equity performance," he said.
- The U.S. Senate approved and sent to the White House on Thursday a $2 billion extension of the "cash for clunkers" autos sales incentive program.
- American International Group Inc(AIG), the insurer that has received about $180 billion of federal bailouts, on Thursday named former American Express Co chief executive Harvey Golub as its non-executive chairman.
- Twitter and Facebook suffered service problems from hacker attacks on Thursday, raising speculation about a coordinated campaign against the world's most popular online social networks. The attacks, which came a month after the White House website was targeted in a similar online assault, left millions unable to carry out daily routines that have assumed an increasingly central part of their lives. The incidents also underscored the vulnerability of fast-growing Internet social networking sites that have been heralded as powerful new political tools to counter censorship and authoritarianism.
Financial Times:
- Assets invested globally in exchange traded funds have reached a record high of $862bn on the back of the partial recovery in stock markets and the continuing strong demand for passive investment, according to data from Barclays Global Investors. Net new inflows account for about half of the rebound in ETF assets, with the remainder the result of the rising value of existing assets. Deborah Fuhr, global head of ETF research at BGI, forecast: “We’re on track for assets to reach $1,000bn by the year-end.”
- Morgan Stanley (MS) is to pay $950m to sever yet another link to the US government’s bail-out plan, buying back warrants it gave the authorities as part of a $10bn capital injection at the height of the crisis last year.
The Australian: Blackstone(BX) war chest eyes bank sector
China Daily:
- China's State-owned property developers have been blamed for the soaring property prices in Beijing and Shanghai, after they bought land in these cities at record high prices. Industry analysts are now worried that the buying frenzy would extend into second tier cities also, where the average income levels are much lower. Land sales and property taxes account for a substantial portion of local government revenues and it is only reasonable that government is keen on pump priming the property market. Land sales enriched the government coffers by nearly 200 million yuan per day between the second half of May and the first half of July, according to a report by China Business News on Wednesday. State-owned property developer, was crowned the new "land king" in Suzhou, a neighboring city of Shanghai, in Wednesday's land auction. "Land King" is a newly coined word in Chinese to mock real estate developers who pay the highest price to buy a piece of land in a certain geographic area. Analysts have warned that this kind of revenue growth is unhealthy and not sustainable. State-owned enterprises borrow from the State-owned banks and give the money to the local government at land auctions. "The money circulates within the big government pocket. Tomorrow's non-performing loans, if prices collapse, are just today's fiscal revenue," Xie Guozhong, board member, Rosetta Stone Advisors, said in his blog. Some economists feel that much of the country's massive 4-trillion-yuan stimulus package and record lending in the first half have not been spent for real economic activities and have created asset bubbles. "How far the bubble would go depends on the government's liquidity policy. The current bubble wave is very much driven by the government as it encourages banks to lend at low interbank interest rates," said Xie, adding that the bubble will be pricked when the dollar recovers, possibly in 2012.
Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NFLX), target $56.
Night Trading
Asia Ex-Japan Inv Grade CDS Index unch.
Morning Preview
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Earnings of Note
Company/EPS Estimate
- (MIR)/.49
- (HGG)/.03
- (EIX)/.52
- (AES)/.20
- (ABK)/-1.04
Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for July is estimated at -325K versus -467K in June.
- The Unemployment Rate for July is estimated to rise to 9.6% versus 9.5% in June.
- Average Hourly Earnings for July are estimated to rise .1% versus unch. in June.
3:00 pm EST
- Consumer Credit for June is estimated to fall to -$5.0B versus -$3.2B in May.
Upcoming Splits
Other Potential Market Movers
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and shipping shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.
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