Between the Hedges Between the Hedges

Portfolio Manager's commentary on investing and trading in the U.S. financial markets

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Wednesday, November 04, 2009

Today's Headlines 

Bloomberg:

- JPMorgan Chase & Co.(JPM) agreed to pay $75 million and forfeit another $647 million in interest-rate swap termination fees to settle a U.S. Securities and Exchange Commission probe into the sale of derivatives that helped push Alabama’s most populous county to the brink of bankruptcy.

- The Federal Reserve restated its intention to keep interest rates “exceptionally low” for “an extended period” and said the U.S. economy is picking up. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today after meeting in Washington. “Activity in the housing sector has increased over recent months.”

- Treasuries fell for a third day after Federal Reserve officials said they’re more optimistic about the economic outlook at the conclusion of today’s policy meeting.

Yields on 10-year notes rose even as central bankers repeated their pledge to leave the target rate for overnight loans between banks in a range of zero to 0.25 percent for an “extended period.” The Treasury said earlier it will sell a record $81 billion in notes and bonds next week.


Wall Street Journal:

- A Republican sweep in Virginia and New Jersey on Tuesday shifted the political terrain against President Barack Obama only a year after his historic election. In New Jersey, Republican former U.S. Attorney Christopher J. Christie ousted incumbent Democrat Jon S. Corzine with a surprisingly strong showing. Virginia voters elected Republican former Attorney General Bob McDonnell as their commonwealth's next governor, handing the state back to the GOP after eight years of Democratic rule.

- Chinese steel mills are offering a growing market for eastern U.S. coal producers. A projected more-than-quadrupling of metallurgical-coal imports by the world's largest steel producer has Appalachian mining companies taking the hitherto rare step of shipping directly to China. U.S. producers benefit from new customers, and rising global prices for the metallurgical, or met, coal that can come from the spillover effect of Chinese demand.

- Iraq is expected to award its giant West Qurna-1 oil field in southern Iraq to a consortium comprising Exxon Mobil Corp.(XOM) and Royal Dutch Shell PLC, a senior Iraqi oil official said. West Qurna-1, with estimated proven oil reserves of 8.6 billion barrels, was one of eight oil and gas fields up for auction in June this year. However, only one oil field was successfully awarded -- Rumaila, Iraq's largest producing oil field. The successful bidder, a group made of BP PLC and China National Petroleum Corp. signed a final $15 billon deal Tuesday to develop the field. Exxon Mobil and Shell proposed in June to raise production from the field to 2.325 million barrels a day in seven years from the current 270,000 barrels a day.

- Israeli officials said Wednesday that naval commandos seized a cargo ship carrying about 500 tons of weapons bound for Hezbollah 100 miles off Israel's Mediterranean coast.

- The pace of layoffs eased in October, but progress in the labor markets remains painfully slow. Private-sector jobs in the U.S. fell 203,000 last month, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. Separately, U.S. service sector growth slowed in October, amid more lost ground in hiring.

- U.S. health officials expressed frustration Wednesday with the nation's struggles to produce vaccines against the H1N1 flu strain and told lawmakers they cannot guarantee that supply problems won't resurface. The new flu strain is spreading faster than the U.S. can make vaccines against it. Equipment problems and the slow pace in growing the new flu strain in laboratories for vaccines scuttled plans to have 161 million vaccines available by October. Today, just 32.3 million doses are available, far less than the 159 million needed to cover all those at highest risk from the H1N1 flu, Centers for Disease Control and Prevention Director Thomas Frieden said at a House Appropriations subcommittee briefing Wednesday.

- Economists expect a decline in the rate of acceleration of China's economic growth as the initial impact of the massive government stimulus plan fades, according to a new poll by The Wall Street Journal.

- Retailers are reporting some encouraging trends from October as they head into the holiday shopping season. Sales during the month, traditionally a time of fall clearance, were better than expected for many retailers, according to analysts' estimates. Although October sales patterns typically don't predict holiday sales trends, retail executives point to signs of pent-up demand and a gradual return of shoppers. "There's generally momentum in the business," said Leslie Wexner, chief executive of Limited Brands Inc., which operates Victoria's Secret and Bath & Body Works.

CNBC:

- U.S. mortgage applications rose for the first time in four weeks, reflecting a jump in demand for home refinancing loans as interest rates on 30-year loans dropped below 5 percent, data from an industry group showed on Wednesday. The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, fell below 5 percent for the first time in four weeks.


NY Times:

- Despite reports of a surge in new hedge funds in 2009, those seeking to hang up their own shingle may be disappointed by a report that says institutional investors plan to allocate 44 percent less in seed capital for the rest of the year. After surveying 50 top global institutional hedge fund seeding firms, Acceleration Capital Group found that the amount of seed capital allocated for the third and fourth quarter was $1.32 billion, compared with $2.35 billion available in the first half of 2009. The survey also says that 52 percent of hedge fund seeders preferred investing in distressed and global macro strategies.

- Following the lead of foreign regulators, New York’s attorney general, Andrew M. Cuomo, filed a federal antitrust lawsuit Wednesday against Intel, the world’s largest chip maker.

- The Securities and Exchange Commission is likely to bring charges against additional defendants in its wide-ranging insider-trading case against Raj Rajaratnam, left, and his hedge fund firm, the Galleon Group, an agency lawyer said at a court hearing on Wednesday. Valerie Szczepanik, the S.E.C. lawyer, would not say when additional defendants might be charged in the case, but Judge Jed S. Rakoff, who is presiding over the civil case in Federal District Court in New York, set Dec. 15 as the deadline to add additional parties in the matter.

NYPost:
- An owner of Harrah's Entertainment, America's biggest casino chain, is doubling down. Private-equity firm Apollo Management is buying bonds in the debt-swamped business so it has more power in the event of a debt restructuring, even if its large equity stake is wiped out.

New York Magazine:

- When the inimitable CNBC reporter Charlie Gasparino announced the title of his new crisis epic, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System, to his friend Teddy Forstmann, the financier was skeptical. "So what you're saying," Ted said, "is that somewhere along the line, Wall Street as an institution had some principles to sell out?" He had a point. Crisis-book connoisseur Moe Tkacik caught up with Gasparino as he obsessively checked his Amazon rankings today to find out more.


The Business Insider:

- The 20 Most Unemployed Cities In America.

- Goldman: India Has Been A Horrible Gold Trader.


zerohedge:

- The Goldman(GS) 10-Q is out, providing numerous interesting datapoints for those willing to scour through them. The key one: Goldman lost money on just one trading day in Q3, making money on all the other 64. As a reminder, even in Q2 Goldman lost money on two trading days. The statistical probability distribution of 1 out of 65 is something that not the SEC, but Richard Feynman should be looking into, as Goldman Sachs, after rewriting the laws of risk/return, is now set to redefine normal distributions and other Statistics 101 concepts. And an indication of just how much of a hedge fund Goldman has become instead of a client servicer, the firm's Equities Commissions revenue for the quarter dropped to $930 million from $1.2 billion YoY, while prop Equities Trading skyrocketed from $354 million to $1.8 billion YoY! And just in case you were wondering someone, somewhere was motivated to destroy Fixed Income powerhouse Lehman and Bear, look no further than Goldman's Fixed Income, Currency and Commodities which did a gentle jump from $1.6 billion in Q3 2008 to $6 billion last quarter. And that explains all you need to know about motivations and backstops.


ocregister:

- Carly Fiorina: Why I’m running for Senate. Our most pressing problems today are too few jobs for Americans and too much spending in Washington.


Gawker:

- The Spitzer Files: How the New York times and the Press Serviced Client No. 9.


Canalys:

- Global smart phone shipments in Q3 2009 rose 4% year on year, slower than the 13% annual growth seen last quarter, and held back primarily by a 6% fall in EMEA. Shipments in North America were up 5%, but the APAC region saw a remarkable 26% rise after several flat quarters. Nokia retained its worldwide smart phone lead, with a share of 40% – slightly up on its year-ago position, but down almost 5% sequentially. RIM held onto second place with a largely unchanged (compared to Q2) share of 21%, while Apple reached a new high of 18% share in third, significantly up from the 14% it held in Q2 as supply of the iPhone 3GS improved in many countries. HTC retained its fourth-place position with 5% share. Looking at the market by operating system, Symbian’s overall lead shrank as its share fell to 46%, ahead of RIM and Apple. Microsoft remained in fourth with its share dipping slightly below last quarter’s previous low point of 9%. The proportion of smart phones running Google’s Android OS climbed to almost 4%, from just under 3% in Q2. Notable performers in Q3 included Apple and RIM, which both saw a new record volume of devices shipped in the quarter. “Demand for the iPhone 3GS far outstripped supply,” Cunningham added. “And we expect to see continued growth for Apple, especially with new operators coming on board, for example in the UK with the end of O2’s exclusivity on the device. Our end-user research indicates growing demand for touchscreen products and Apple’s satisfaction ratings in our surveys are consistently the highest of any vendor. Furthermore, the iPhone’s appeal is not limited to the consumer market, in our October study of 600 European decision makers in medium and large enterprises, more than 20% said they expect the iPhone to be the dominant smart phone platform for running business applications in their organization within the next 3 to 5 years. In France, the iPhone was ahead of Windows Mobile and RIM in this regard – a remarkable result.”


Politico:

- Eager to drain the 2009 elections of drama and import, White House press secretary Robert Gibbs claimed Tuesday night that President Barack Obama was “not watching returns.” You can be sure that he is studying them closely now: The off-year elections were, in two big races, an unmistakable rebuke of Democrats, reshuffling Obama’s political circumstances in ways likely to have severe near-term consequences for his policy agenda and larger governing strategy. Independents took flight from Democrats. They suffered humiliating gubernatorial losses in traditionally Democratic New Jersey, where Obama lent his prestige in a pair of eleventh-hour campaign rallies Sunday, and in Virginia, which had been trending leftward and just last year was held up as an example of how Obama was redrawing the political map in his favor. Tuesday night’s trends were emphatically not in Obama’s favor. Among those paying closest attention are dozens of Democrats who won formerly Republican congressional districts in 2006 and 2008 and are up for reelection in 2010. Many of these pickups that powered the Democrats’ recapture of Congress came in Southern and border states, or in the Ohio River Valley, where political conditions are similar to those in Virginia.


Hedge Funds Review:

- A significant gap in understanding between quants and their supervisors has been revealed in a survey of almost 400 active quants and risk professionals. The majority (86.3%) of quant and risk management supervisors do not fully understand the work that their teams do, according to the survey conducted by Certificate in Quantitative Finance (CQF). The survey asked respondents about the relationship between quants and their managers. A majority (64%) of quants said they believe their supervisors either do not understand at all or only understand a bit about the job of a quant. A clear majority (70%) of quants said the level of understanding of the role of quants within their institutions had decreased or had not changed at all from a year ago. Quants and risk managers have been pointed to by many economists as one of the principle reasons the global financial crisis escalated so precipitously. "These numbers are alarming," said Paul Wilmott, course director for CQF. "They indicate that even with the events of the past year, financial institutions are still not taking the importance of financial education seriously, especially as it pertains to improving relationships and understanding between quants and their managers," he added.


USA Today:

- The government is sending millions of dollars in stimulus aid to communities and housing agencies that federal watchdogs have concluded are unable to spend it appropriately, increasing the risk that the money will be wasted. Since July, auditors working for the Department of Housing and Urban Development's inspector general have scrutinized at least 22 cities, counties and housing authorities in 15 states and Puerto Rico to measure whether they can handle stimulus funds effectively. Only six, they found, could do so. The rest — in line to receive more than $220 million in stimulus aid — had shortcomings ranging from poor management to inadequate staffing that threatened their ability to spend the money quickly and appropriately, a series of audit reports show. The reviews provide one of the first windows, albeit a narrow one, into the vast network of local agencies that ultimately will be responsible for spending more than $8 billion to repair deteriorated public housing, fund homelessness programs, and cope with the foreclosure crisis. The money is part of the Obama administration's $787 billion stimulus package.


Reuters:

- The chairman of the U.S. House Financial Services Committee is seeking changes to draft legislation for the $450 trillion privately-traded derivatives markets, with the intent of making it harder for banks to avoid trading the contracts on exchanges. Barney Frank said in a letter released on Wednesday that he plans to introduce amendments that would give regulators the Commodity Futures Trading Commission and the Securities and Exchange Commission the decision over what contracts are eligible for central clearing, and thus required to be traded on exchanges. He is also seeking to tighten language over what companies may be exempt from centrally clearing their contracts, "to prevent speculators from masquerading as end-users." Critics say that banks want to protect the large margins they earn from trading derivatives, which benefit from opacity in the markets.


Financial Times:

- Gold Oil, an exploration group focused on Latin America, is seeking partners to help fund the development of what could be a large oil discovery off the coast of Peru. The Aim-listed company has started discussions with sovereign wealth funds based in the Middle East about taking an interest in Block Z34, which lies west of four of the largest developed oil fields in northern Peru. These fields have already produced a total of 1.6bn barrels of oil. Gold Oil has analyzed seismic data and identified six drilling leads it believes could have significant commercial potential. Some of these are in 200ft-300ft of water, although the most promising lies in much deeper water.

- Americans are still willing to pay for cable TV, broadband and cinema tickets in spite of weak consumer spending, according to the first crop of third-quarter results from US media companies. Among the media companies that have raised expectations for the second half of the year, Time Warner lifted its profit outlook for 2009 on the back of better-than-expected results at its cable and films division. Viacom on Tuesday reported a similar lift in earnings of 15 per cent in the third quarter from ticket sales of the GI Joe and Transformers films and its MTV Networks cable channels.

ABC Rural:

- Australia’s Victoria is set to harvest its most grain in a decade. The Department of Primary Industries has forecast the state will harvest three times more grain than last year.


Digitimes:

- An overstock of LCD monitor panels is easing, as makers have decreased output for the segment, according to industry sources. Panel makers expect the upcoming holiday shopping lasting till the Lunar New Year holiday in early 2010 will help further digest monitor panel inventory.


Haaretz.com:

- The U.S. House of Representatives on Tuesday condemned a UN report that accuses Israeli forces and Palestinian militants of committing war crimes in Gaza early this year as irredeemably biased and unworthy of further consideration or legitimacy. With a 344-36 vote, the House passed a nonbinding resolution that urged President Barack Obama and Secretary of State Hillary Rodham Clinton to oppose unequivocally any endorsement of the report. Twenty-two representatives voted present. The report, commissioned by the UN Human Rights Council, accuses both Israel and the Palestinian Hamas group of war crimes.
Posted by: Gary / 3:15 PM

The positions and strategies discussed on Between the Hedges are offered for entertainment purposes and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

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