Thursday, January 21, 2010

Friday Watch

Late-Night Headlines

- Oil traded below $76 a barrel and is poised for a second weekly decline after a report showed US refineries slashed operating rates as fuel demand dropped. Oil fell to a four-week low yesterday after the U.S. Energy Department said that plants ran at 78.4 percent of capacity last week, the lowest rate outside the Atlantic hurricane season since at least 1989. Gasoline supplies surged to the highest level since March 2008. Fuel consumption in the past four weeks was 1.8 percent lower than a year earlier. “The refinery utilization rate and low demand figures are alarming signs of structural weakness,” said Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut.

- Goldman Sachs Group Inc.(GS) will benefit from President Barack Obama’s proposal to limit Wall Street risk because it may force its competitors to unwind trading operations, Rochdale Securities analyst Dick Bove said.

- Obama's Plan to Be Judged by a Goldman(GS) Breakup.

- China's money supply is expanding a record 18 percentage points faster than gross domestic product, a signal that inflation is poised to accelerate this year, said China International Capital Corp. "Such overhang historically led to an inflation surge," Ha Jiming, the Hong Kong-based chief economist at CICC, said in a phone interview yesterday. "The government will loosen control on the yuan to combat import inflation and raise interest rates to combat public inflation."

- The euro will weaken further against the dollar as Greece’s budget crisis calls into question the currency’s credibility and the ability of European Union institutions to address deficits, Morgan Stanley said. The 16-nation currency fell for a sixth day versus the greenback, its longest losing streak since October 2008, amid concern Greece will fail to contain its budget deficit. European finance ministers said on Jan. 19 the crisis is affecting other nations, the same day Moody’s Investors Service said the success of the government’s budget plan “cannot be taken for granted.” “The euro is coming increasingly under pressure from the ongoing events in Greece,” Emma Lawson, a foreign-exchange strategist at Morgan Stanley in London, wrote in a research report today. “It boils down to credibility: The credibility of the Greek government in meeting their targets, the credibility of the EU institutions to deal with non-compliant states and the credibility of the euro itself.”

- Investors pulled $348 million from China equity funds last week, the biggest outflow in 18 weeks, on concern China’s moves to cool its economy will slow growth, according to EPFR Global. Chinese stocks fell since the government this month started tightening monetary policy to curb record loan growth and prevent bubbles in the nation’s property and stock markets. The Shanghai Composite Index has fallen 3.6 percent this year, while the Hang Seng China Enterprises Index, which tracks Hong Kong-traded Chinese companies, is down 6.5 percent, the worst- performing Asian gauge this year.

Wall Street Journal:

- SAN'A, Yemen—In nearly a decade of rebuilding its terror network here, al Qaeda has put down deep roots, a move that is now complicating U.S.-backed efforts to battle the group. Unlike other chapters of the global terror network, Yemen's Al Qaeda in the Arabian Peninsula is a largely homegrown movement, with carefully cultivated ties to the local population. That sets it apart from other affiliates of al Qaeda, and could make it much more difficult to dislodge. The group's strategy: apply lessons learned from mistakes by affiliates in other Mideast havens, particularly Iraq and Saudi Arabia. In both those places, al Qaeda's footprint weakened significantly as local support for the group turned sharply against it. To avoid a similar fate in Yemen, the group has worked hard to curry favor with local tribes—so much so that it is now largely interwoven in the country's tribal fabric.

- The Senate voted Thursday to wind down the Treasury's financial-market bailout plan as part a broader bill that would raise the government's debt ceiling, but the 53-40 tally serves only as a symbolic show of disapproval because a Senate rule requires 60 votes to pass any amendments to the legislation. The proposal was the first of a series Republicans plan to offer as the Senate debates a bill to increase the amount of debt the government can issue by $1.9 trillion to $14.3 trillion. The move to wind down the government's $700 billion Troubled Asset Relief Program, or TARP, was sponsored by Sen. John Thune and drew support from 13 Democrats along with all 40 Republicans. The South Dakota Republican called for using unspent bailout funds to reduce the federal budget deficit.

- Republican Scott Brown's victory in the Massachusetts Senate race was lifted by strong support from union households, in a sign of trouble for President Barack Obama and Democrats who are counting on union support in the 2010 midterm elections. A poll conducted on behalf of the AFL-CIO found that 49% of Massachusetts union households supported Mr. Brown in Tuesday's voting, while 46% supported Democrat Martha Coakley. The poll conducted by Hart Research Associates surveyed 810 voters. The finding, disclosed during an AFL-CIO conference call about the poll, represents a fresh problem for Democrats, who count on union leaders and union members as a pillar of the party's base.

- Toyota Motor Corp., in yet another blow to the Japanese car maker's quality reputation, said late Thursday it will recall an additional 2.3 million vehicles to fix sticking accelerator pedals.

- How does an eatery fatten up results in lean times? Look no further than Panera Bread (PNRA) for the recipe. The bakery-cafe chain has kept business sizzling by spicing up the menu with new and improved offerings.

- Tech stocks for the next 10 years.

Business Insider:

- Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged. The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit. But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe. A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business. The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers. Even proprietary trading, for instance, can become related to customer service if it is done through internal hedge funds in which some outside clients are permitted to invest. One insider at a bank pointed to JP Morgan Chase’s ownership of the hedge fund Highbridge Capital. It is thought that under a strict “no hedge funds” rule, Highbridge would have to be sold off. But under the rule proposed by the Obama administration, Highbridge can be retained by JP Morgan because outside clients are permitted to invest in it. A still more devious way is to have a banks own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs(GS) is rumored to be considering this approach. (Goldman isn't commenting on the regs right now.) “This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said. “The market is getting this wrong by selling off the megas,” a person at another bank said.

- We agree with President Obama that it is ludicrous that, a year after a financial crisis almost destroyed the US economy, regulators haven't changed a thing. Tim Geithner's "Too Big To Fail" policy is firmly in place, and our financial institutions can do whatever they want again. So we were relieved to hear that Obama is finally deciding to do something about this. But here's the problem: His new proposal won't fix a thing. Under Obama's proposal, "banks" will no longer be able to trade for their own accounts or own, sponsor, or invest in hedge funds. So if you want to trade for your own account or own, sponsor, or invest in hedge funds, then... just don't be a bank!


- Health care reform teetered on the brink of collapse Thursday as House and Senate leaders struggled to coalesce around a strategy to rescue the plan, in the face of growing pessimism among lawmakers that the president’s top priority can survive. The legislative landscape was filled with obstacles: House Democrats won’t pass the Senate bill. Senate Democrats don’t want to start from scratch just to appease the House. And the White House still isn’t telling Congress how to fix the problem. House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) both tried to put a good face on the obvious chaos on Thursday, promising to press on. “We have to get a bill passed,” Pelosi told reporters. “We know that.” Senate Finance Committee Chairman Max Baucus (D-Mont.) said, “No way is it dead, because it’s so important for the country. And we will find a way to pass [it].”

Real Clear Politics:

- Fox News's rise into the cable news stratosphere continues unabated. According to Neilsen, Fox News drew an astonishing 6.2 million total viewers during primetime Tuesday night, compared to only 1.5 million for CNN and 1.1 million for MSNBC.


- Are 20.7 Billion Reasons Enough For Goldman(GS) To Continue Being A Bank Holding Company?


- U.S. Treasury Secretary Timothy Geithner has expressed some skepticism behind closed doors about the broad bank limits proposed on Thursday by his boss, President Barack Obama, according to financial industry sources. The sources, speaking anonymously because Geithner has not spoken publicly about his reservations, said the Treasury chief is concerned the proposed limits on big banks' trading and size could impact U.S. firms' global competitiveness. He also has concerns that limits on proprietary trading do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.

- A group of top Republicans on the House Financial Services Committee want to slash the pay of executives at mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) by 97 percent. Rep. Spencer Bachus, an Alabama Republican, wants executives at Fannie and Freddie, which were placed under government control by former Treasury Secretary Henry Paulson in 2008, to be paid at the highest end of the government pay scale, or just under $200,000 per year. "There is no better example of the kind of misaligned compensation incentives that contributed to excessive risk-taking in the financial industry than those that were, and continue to be, in place at Fannie Mae and Freddie Mac," Bachus said on Thursday in a statement.

- Google Inc (GOOG) posted a higher-than-expected fourth-quarter profit, but revenue growth was not as strong as some investors had hoped, sending its shares down 4 percent.

- Intuitive Surgical Inc (ISRG) reported far better-than-expected fourth-quarter results on Thursday, with profit up more than 50 percent on increased demand for its da Vinci surgical robot systems and higher instruments and accessories sales. For 2010, Intuitive expects revenue to grow by 25 percent with procedures growing by 35 percent over 2009 levels. Total revenue in 2009 was $1.05 billion. Intuitive shares, which have more than tripled in the past 10 months, rose 7.7 percent to $328 in extended trading from their Nasdaq close at $304.49.

- Air America, a politically liberal talk-radio network, said on Thursday it would cease operations and file for Chapter 7 bankruptcy protection to begin an orderly wind down of its business. The radio network was launched in 2004 by comedian Al Franken, now a U.S. Senator and has helped launch other careers such as that of liberal television personality Rachel Maddow. The network, which had about 100 radio outlets nationwide, has suffered a decline in advertising amid the U.S. recession and a search for new investors failed, Air America Media chairman Charlie Kireker said in a memo to staff on Thursday. Air America, which has struggled under a succession of management changes since its inception, had previously been forced into bankruptcy in 2006 when efforts to resolve an outstanding debt with a creditor from the network's earliest days broke down.

Financial Times:

- There was confusion and shock among bank chiefs, given the scant details of how the crackdown would work in practice, particularly for non-US banks. “If the Obama levy is a guide to how this will be applied, it could be very damaging,” said a board member at one big European bank. Speaking ahead of Mr Obama’s announcement, Josef Ackermann, Deutsche Bank’s chief executive, characterized plans to split up banks or limit their range of activities as “misguided”. Foreign banks with proprietary trading operations would be caught by the US reforms. The new rules would ban the use of a bank’s own capital for hedge fund or private equity investment, or for trading unless it was directly connected to client activity. However, some foreign banks believe they could escape the ban by switching operations from Wall Street to London or continental Europe.

- Google(GOOG) on Thursday gave the first indication that it would seek to stay in China even if it was forced to close down its local search service over its refusal to continue to bow to censorship. “We have lots of other business opportunities in China – we would like them to be successful,” Eric Schmidt, chief executive, said in an interview with the Financial Times. “That’s not the only thing we’re doing in China.” He was speaking shortly after Google had reported a solid rebound in its core search advertising business in the final quarter of last year, and revealed that it had increased hiring and marketing spending as it prepares for a renewed burst of growth coming out of the recession. Mr Schmidt refused to comment on the progress of discussions with the Chinese authorities, though he stressed that Google was still intent on stopping censoring results on its local Chinese search service, and said the company would act “in a relatively short time”. “It’s very important to know we are not pulling out of China,” Mr Schmidt said. “We have a good business in China. This is about the censorship rules, not anything else.”


- Barack Obama will be a one-term president if he doesn't ditch his statism. Barack Obama's only chance of a legacy is to stop thinking like Gordon Brown and start emulating Bill Clinton, argues Alex Singleton. To make comparisons between Barack Obama and Gordon Brown might seem unfair. After all, Obama actually won his leadership position. He's also eloquent, a snappy dresser and comes across as rounded. But he has one fatal flaw - and it's the same as Gordon Brown's. Mr Obama believes that society is a chessboard, and that the keys to the Oval Office give him the power to move the pawns on the board. But both in Britain and America, the characters on the board object to being treated like pawns in politicians' games. They will only tolerate so much meddling from above.

Le Republicain Lorrain:

- European Central Bank council member Christian Noyer said Europe's recovery from recession will be slow and urged the French government to cut its budget deficit. "The recovery will be fragile and slow," Noyer said. "This relates to fading fiscal stimulus, increasing unemployment weighing on household spending and the fact that investment hasn't resumed." The French government will have to reduce its deficit to improve consumer confidence, he said. "The state can't live indefinitely in deficit," Noyer said, adding: "The French are worried about future taxes and are providing for that by saving."

Shanghai Securities News:

- Beijing's sales volume of homes costing more than $439,400 fell 40% in the first 20 days of January as compared to the same period of December.

Evening Recommendations


- Reiterated Buy on (M), target $30.

- Reiterated Buy on (PPG), target $74.

- Reiterated Buy on (AXP), target $48.

- Reiterated Buy on (APH), target $51.

- Reiterated Buy on (TGT), target $61.

- Reiterated Buy on (WPI), target $48.

- Reiterated Buy on (FCS), raised target to $19.


- Rated (SCHW) Outperform, target $22.

Night Trading
Asian indices are -2.50% to -1.25% on avg.

Asia Ex-Japan Inv Grade CDS Index 108.50 +7.50 basis points.
S&P 500 futures unch.
NASDAQ 100 futures -.04%.

Morning Preview
BNO Breaking Global News of Note

Google Top Stories

Bloomberg Breaking News

Yahoo Most Popular Biz Stories

MarketWatch News Viewer

Asian Financial News

European Financial News

Latin American Financial News

MarketWatch Pre-market Commentary

U.S. Equity Preview

TradeTheNews Morning Report In Play

SeekingAlpha Market Currents Bond Ticker

US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Stock Quote/Chart
WSJ Intl Markets Performance
Commodity Futures
IBD New America
Economic Preview/Calendar
Earnings Calendar

Conference Calendar

Who’s Speaking?

Politico Headlines
Rasmussen Reports Polling

Earnings of Note
- (APD)/1.14

- (BBT)/.21

- (EXC)/.85

- (GE)/.26

- (HOG)/-.32

- (JCI).29

- (KMB)/1.25

- (MCD)/1.02

- (SLB)/.64

- (STI)/-.75

Economic Releases

- None of note

Upcoming Splits

- None of note

Other Potential Market Movers
- The (SE) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and commodity stocks in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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