Late-Night Headlines
Bloomberg:
- Corporate credit slumped on concern a five-month credit market rally is “unsustainable” as Japan’s economy grew less than economists estimated and U.S. consumer confidence fell. Yields relative to benchmark rates on U.S. corporate bonds jumped the most since March, while credit-default swaps tied to investment-grade debt rose to an almost-four-week peak. Contracts on JPMorgan Chase & Co. and Goldman Sachs Group Inc. debt climbed to the highest levels in a month, according to CMA DataVision. Investors are concerned the recovery in Japan’s economy, which emerged from its deepest postwar recession in the second quarter, will falter once governments worldwide complete $2 trillion in stimulus spending. Speculation the U.S. consumer will help revive global growth was dented last week when a confidence index fell to the lowest since March. “While there is a rebound in economic activity, consumption is still impacted,” Philip Gisdakis, a Munich-based strategist at UniCredit SpA, wrote in a note to investors today. “This problem will not disappear in the short term and indicates that the current recovery might not be sustainable.” The extra interest investors demand to own U.S. corporate bonds rather than Treasuries jumped 7 basis points, the most since March 30, to 387 basis points, according to Merrill Lynch & Co. index data. Spreads on Merrill Lynch’s broadest index of investment-grade and high-yield debt have widened for the five past trading days, snapping a 20-day narrowing streak. Credit-default swaps on the Markit CDX North America Investment-Grade Index, linked to 125 companies in the U.S. and Canada, jumped 6.2 basis points to a mid-price of 123 basis points as of 4:30 p.m. in New York, the highest since July 22, according to CMA. The CDX index has climbed about 18 basis points since Aug. 7, when it reached a 14-month low amid economic reports signaling the recession may be ending. Contracts on JPMorgan, the biggest U.S. credit-card lender, rose about 5 basis points to 81.6 basis points, the highest level since July 16, according to CMA. Credit derivatives tied to debt of Goldman Sachs gained 10 basis points to 150 basis points, the highest since July 13, CMA prices show. Credit swaps on Citigroup Inc. jumped 21 basis points to 298 basis points, the highest since July 29, according to CMA. All three banks are based in New York. The cost of protecting bank bonds from default also rose, with the Markit iTraxx Financial Index of 25 European banks and insurers up 4.5 basis points to 97.5 basis points and the subordinated index 9 basis points higher at 184 basis points. The extra yield investors demand to own junk-rated debt rather than Treasuries jumped 23 basis points, the most in two months, to a two-week high of 917 basis points today, after climbing 37 basis points last week, its first weekly increase since the period ended July 10, according to Merrill Lynch index data.
- House Speaker Nancy Pelosi said a health-care overhaul should include a government-run insurance program, reiterating her backing for the plan after an administration official suggested the president may back down. “There is strong support in the House for a public option,” Pelosi, of California, said in a statement. “A public option is the best option to lower costs, improve the quality of health care, ensure choice and expand coverage.” Other Democrats called on President Barack Obama to stand by his commitment to create the new government plan to compete with private companies, saying they wouldn’t be able to support any health-reform measure that lacked a public option. Representative Maxine Waters of California said she was “very troubled to hear that after months of negotiations, supposedly moving toward meaningful health-care reform, the public option may in fact be off the table.” Republicans and some Democrats oppose the creation of a federal health-care plan, saying it would undercut private insurers and expand the government’s role too much. Senator Jay Rockefeller, a West Virginia Democrat and member of the finance committee, which is taking the lead in the Senate on the legislation, called the inclusion of a new public health plan “a must.” The public option “is the only proven way to guarantee that all consumers have affordable, meaningful, and accountable options,” he said in a statement. Omitting the government plan “is a deal-breaker for many Democrats,” said Stuart Rothenberg, editor of the nonpartisan Rothenberg Political Report in Washington. Polls show Americans increasingly disapprove of the legislation. While shedding the public option may allay some of those concerns, it risks generating opposition from the 83-member Congressional Progressive Caucus. The group’s co-chairman, Representative Raul Grijalva, an Arizona Democrat, said today he won’t support a measure that doesn’t have a government plan. Health-care reform can’t happen “without a robust public option,” he said in a statement.
- “UPS and FedEx are doing just fine. It’s the Post Office that’s always having problems.” -- Barack Obama, Aug. 11, 2009 No institution has been the butt of more government- inefficiency jokes than the U.S. Postal Service. Maybe the Department of Motor Vehicles. The only way the post office can stay in business is its government subsidy. The USPS lost $2.4 billion in the quarter ended in June and projects a net loss of $7 billion in fiscal 2009, outstanding debt of more than $10 billion and a cash shortfall of $1 billion. It was moved to intensive care -- the Government Accountability Office’s list of “high risk” cases - - last month and told to shape up. (It must be the only entity that hasn’t cashed in on TARP!) That didn’t stop President Barack Obama from holding up the post office as an example at a town hall meeting in Portsmouth, New Hampshire, last week. When Obama compared the post office to UPS and FedEx, he was clearly hoping to assuage voter concerns about a public health-care option undercutting and eliminating private insurance. What he did instead was conjure up visions of long lines and interminable waits. Why do we need or want a health-care system that works like the post office? What’s more, if the USPS is struggling to compete with private companies, as Obama implied, why introduce a government health-care option that would operate at the same disadvantage?
- Adults older than 40 with severe sleep apnea, a condition that blocks their breathing and causes them to gasp, were almost 50 percent more likely to die than those who sleep normally, according to a large, government- funded study.
- Asian currencies may weaken as this month’s 16% drop in China Singapore The correlation between China stocks and Asian currencies “has become tighter” as regional economies become more dependent on Chinese demand for their exports, said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong .
- China, planning to bankroll a $6 billion iron ore expansion of Fortescue Metals Group Ltd. in Australia, is poised to make further investments to help break the “stranglehold” of the world’s three-largest exporters. “The Chinese steel mills are trying to dilute the concentration of iron ore supply,” said Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group Ltd. “They will be looking for more deals like this.”
- Japan’s 3.7 percent economic expansion last quarter ended the country’s worst postwar recession. The bounce may be as good as it gets. Growth will slow to an annual 2.9 percent pace in the three months ending Sept. 30, according to the median forecast of 10 economists surveyed after yesterday’s gross domestic product report. Falling business investment and rising unemployment may hamper a recovery that has been fueled by $2.2 trillion in emergency spending by governments worldwide.
- U.S. airlines will carry 16 million passengers during an eight-day Labor Day holiday period, a 3.5 percent decline from a year earlier, as the global recession trims demand, the Air Transport Association said. About 1 million fewer passengers will fly than a year earlier as domestic and international travel fall, the group said in a statement today. Holiday travel spans Sept. 2 through Sept. 9, according to the ATA, the lobbying group for major U.S. carriers.
Wall Street Journal:
- A senior U.S. immigration official said Monday that his agency will intensify a crackdown on employers of workers in the country illegally as part of the Obama administration's new immigration strategy. John Morton, the new chief of U.S. Immigration & Customs Enforcement, a unit of the Department of Homeland Security, said that the agency is set to increase the number of companies it will audit and systematically impose fines on violators. Violations could also lead to criminal charges, he said. On July 1, Homeland Security Secretary Janet Napolitano announced an audit of employers to verify whether their employees were eligible to work. Mr. Morton said that 654 companies are currently being audited and that many more employers will be notified soon that they also will be under scrutiny by the government.
- Obama Underwrites Offshore Drilling. You read that headline correctly. Unfortunately, the Obama Administration is financing oil exploration off Brazil. The U.S. is going to lend billions of dollars to Brazil's state-owned oil company, Petrobras, to finance exploration of the huge offshore discovery in Brazil's Tupi oil field in the Santos Basin near Rio de Janeiro. Brazil's planning minister confirmed that White House National Security Adviser James Jones met this month with Brazilian officials to talk about the loan. The U.S. Export-Import Bank tells us it has issued a "preliminary commitment" letter to Petrobras in the amount of $2 billion and has discussed with Brazil the possibility of increasing that amount. Ex-Im Bank says it has not decided whether the money will come in the form of a direct loan or loan guarantees. Either way, this corporate foreign aid may strike some readers as odd, given that the U.S. Treasury seems desperate for cash and Petrobras is one of the largest corporations in the Americas. But look on the bright side. If President Obama has embraced offshore drilling in Brazil, why not in the old U.S.A.? The land of the sorta free and the home of the heavily indebted has enormous offshore oil deposits, and last year ahead of the November elections, with gasoline at $4 a gallon, Congress let a ban on offshore drilling expire.
- Earlier this year, Federal Deposit Insurance Corp. Chairman Sheila C. Bair had a discreet visit from a Spanish banker. Francisco González, chairman and chief executive of Banco Bilbao Vizcaya Argentaria SA, the second-largest bank in Spain by stock-market value after Banco Santander SA, wanted to make sure the FDIC kept him in mind when selling assets the agency is getting from failed U.S. banks, according to people familiar with the meeting. BBVA's 64-year-old boss dropped by the Treasury Department and Federal Reserve with a similar message, these people said. In a recent interview, Mr. González wouldn't comment on the meetings, but he said BBVA is interested in making "tactical" acquisitions in the southern half of the U.S. that would build on the foothold the bank has established during the past several years, including the $9.6 billion purchase of Compass Bancshares Inc., of Birmingham, Ala., in 2007. "It would be logical that at the right moment the bank should grow tactically in the U.S., for it to make an acquisition," Mr. González said. "A player like us should be at the table" when the FDIC is hunting for prospective buyers of bank assets.
- As central bankers keep pumping huge sums into the global financial system, they are also pumping up one of the riskier investment strategies in the currency market. Known as the "carry trade," the strategy involves borrowing money in countries such as Japan where interest rates are low, then investing it where rates are higher and pocketing the difference.
- While other recession-wracked restaurant chains offer meals for as little as $5, Panera Bread Co.(PNRA) has this deal on its menu: a lobster sandwich for $16.99. Panera has been bucking conventional industry wisdom during the downturn by eschewing discounts and instead targeting customers who can still afford to shell out an average of about $8.50 for lunch. The St. Louis-based chain of 1,400 cafes says it has been able to persuade customers to pay premiums because it has been improving the quality of its food.
MarketWatch.com: With delinquency rates rising to a record high, banks were still clamping down on lending to businesses and consumers over the past three months, and they said they planned to keep their credit standards tight for at least a year, the Federal Reserve reported Monday. In its quarterly survey of banks' senior loan officers, the Fed said lending standards got even tighter for almost every type of loan, from prime residential mortgages to commercial and industrial loans. The survey covered May, June and July. "The degree of caution exhibited in the survey of senior loan officers over coming quarters will act as a drag on the coming recovery," wrote Richard Moody, chief economist for Forward Capital.
- And at least according to one top-performing newsletter, there's been too much of a good thing in the stock market since this rally began last March. The newsletter is the Value Line Investment Survey, which is in a tie for first place for risk-adjusted performance over the three decades the Hulbert Financial Digest has been monitoring the investment newsletter industry. In its Aug. 21 issue, which was emailed to subscribers early Monday, Value Line reduced its recommended equity allocation to the range of 60% to 70%. This reflects a cautious to outright bearish posture on Value Line's part, since the firm has never lowered its recommended allocation to below 50%. The last time it was lower than it is now was October 2000.
CNBC.com: American International Group(AIG) , the insurer that received billions of dollars in a U.S. bailout, said on Monday that it will pay newly-appointed Chief Executive Robert Benmosche an annual salary of $7 million. In a filing with the U.S. Securities and Exchange Commission, AIG said the salary would consist of $3 million in cash and $4 million in fully-vested common stock. He will also be eligible for a performance bonus of up to $3.5 million. The pay has been approved in principle by Washington's new pay czar Kenneth Feinberg, said AIG. Once the world's largest insurer, AIG was saved last September by a taxpayer bailout that has grown to as much as $180 billion. The company had teetered on the brink of collapse from losses on credit default swaps, a type of derivative that sank in value as the credit crisis grew worse.
NY Times:
- Central Asia Sounds Alarm Over Islamic Radicalism.
- The White House has apparently shut down the e-mail address it was using to track what it called “fishy” information about its efforts to overhaul the health care system.
Emails sent to flag@whitehouse.gov now bounce back, with the reply reading, “The email address you just sent a message to is no longer in service. We are now accepting your feedback about health insurance reform via: http://www.whitehouse.gov/realitycheck.”Macon Phillips, director of new media at the White House, had rolled out the e-mail address in an Aug. 4 blog post, writing, “There is a lot of disinformation about health insurance reform out there, spanning from control of personal finances to end of life care. These rumors often travel just below the surface via chain emails or through casual conversation. Since we can’t keep track of all of them here at the White House, we’re asking for your help. If you get an email or see something on the web about health insurance reform that seems fishy, send it to flag@whitehouse.gov.” The White House maintained that it was not collecting the names of those criticizing its reform push. But the effort got almost immediate pushback from Republican and conservative critics, many of them citing privacy concerns. Senator John Cornyn, a Texas Republican, charged that the administration was creating an enemies list, writing in a letter to President Obama, “I am not aware of any precedent for a president asking American citizens to report their fellow citizens to the White House for pure political speech that is deemed ‘fishy’ or otherwise inimical to the White House’s political interests.”
- The Securities and Exchange Commission, after months of considering what to do about short-selling, came up with a new idea on Monday that could make it virtually impossible to place an order to sell stock short and be sure it would be executed quickly.
IBD:
- By the end of the month, says Andy Fisher, senior vice president for investor relations, United Therapeutics (UTHR) will be selling Tyvaso, an inhaled drug also for PAH.
Forbes:
- By embracing ObamaCare, the American Medical Association could set off a civil war among members.
Washington Post:
- As prospects fade for a public, or government-run, option as part of health-care reform, key senators are considering another model to create competition for private insurers: member-owned, nonprofit health cooperatives. Sen. Kent Conrad (D-N.D.), the chief advocate for including cooperatives in reform legislation, has cited examples as disparate as the Land O'Lakes dairy concern, rural electricity cooperatives and Ace Hardware. But so far, cooperatives have been defined in the health-care debate primarily in terms of what they are not: They would not be run by the government. That may make the cooperatives more politically palatable to conservatives, as well as to some Democrats such as Conrad, who fear that the public option may be a bridge too far. But it also presents new challenges: Cooperatives would face potentially greater difficulty getting off the ground and obtaining discounted rates from doctors and hospitals, observers say.
Politico:
- House Democratic officials say a public option will remain in their version of a health reform bill, even now that the White House has acknowledged it may be dropped later. “This is just for the Senate,” a House leadership official said about the administration’s concession on a public option. “There is no way it passes the House the first time around without a public option. “The liberals (around 100-plus) won’t allow it. It if comes back from conference committee without public option and there is the right pitch that it is this or nothing, then it may pass the House.” Leaders now say the House will put off a vote on health reform until the end of September — to provide a cooling-off period from the raucous town meetings and to give strategists a better sense of where the Senate is headed.
Reuters:
- From Africa to Europe, the Middle East and the United States, China's drive to project its economic might abroad can sometimes breed fear and resentment.The risks are likely to grow as Beijing channels more of its foreign exchange reserves, which stood at $2.13 trillion at the end of June, into foreign investments.
- The U.S. economy is probably due for two strong quarters of economic growth to close out 2009, but the recovery may falter next year, former Federal Reserve Chairman Alan Greenspan said on Monday. "I think we're OK for the next six months," Greenspan told Reuters in an interview. "We are getting a recovery in (housing) starts and motor vehicles, but the process doesn't have legs to it." Auto sales and housing, normally the driving forces behind economic recovery, got a boost from government efforts such as the $3 billion "cash-for-clunkers" trade-in program, which encouraged consumers to buy new cars, but it may not be sustainable.
Late Buy/Sell Recommendations
RBC Capital:
- Rated (KEX) Outperform, target $44.
- Rated (JBHT) Outperform, target $37.
- Rated (UTIW) Underperform, target $13.
- Rated (YRCW) Underperform.
Keybanc:
- Rated (CTV) Buy, target $32.
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Economic Releases
8:30 am EST
- The Producer Price Index for July is estimated to fall .3% versus a 1.8% rise in June.
- The PPI Ex Food & Energy for July is estimated to rise .1% versus a .5% gain in June.
- Housing Starts for July are estimated to rise to 598K versus 582K in June.
- Building Permits for July are estimated to rise to 576K versus 570K in June.
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BOTTOM LINE: Asian indices are lower, weighed down by technology and commodity shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.
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