Thursday, February 18, 2010

Friday Watch

Late-Night Headlines

- The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. “These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

- Federal Reserve Chairman Ben S. Bernanke has been asked by a Republican lawmaker to turn over documents related to the decision to rescue insurer American International Group Inc. The Federal Reserve should deliver the records by March 2, according to a letter dated yesterday from Representative Darrell Issa of California, ranking member of the House Oversight and Government Reform Committee. Bernanke last month invited the Government Accountability Office to conduct a “full review” of the central bank’s actions tied to the bailout that swelled to $182.3 billion. “In light of your professed commitments and your apparent desire to cooperate with this committee’s investigation, I am writing to request that you voluntarily produce to this committee all records and communications in the possession of the Federal Reserve” regarding the rescue, Issa wrote. Issa is seeking to widen the probe into what he’s called a “backdoor bailout” of banks that got funds from AIG after its rescue and efforts by the Federal Reserve Bank of New York to withhold details from the public about the payments. Treasury Secretary Timothy Geithner, who ran the New York Fed when AIG was bailed out in 2008, testified last month that the payments were necessary and that subordinates made disclosure decisions.

- Japan’s central bank chief escalated pressure on Prime Minister Yukio Hatoyama to contain the world’s largest debt with a warning that investor “trust” won’t be assured in the aftermath of Greece’s budget woes. “It’s important to gain the trust of financial markets by showing a path for fiscal consolidation,” Governor Masaaki Shirakawa said in Tokyo yesterday. He spoke after his policy board kept interest rates, the level of its government-bond purchases, and bank-lending programs unchanged. Shirakawa’s remarks reflect his concern that increasing the Bank of Japan’s debt purchases risks giving investors the impression that it is willing to fund fiscal expansion. “Shirakawa wants to give a fresh reminder that Japan will lose trust from the market if the nation uses monetary policy to support the government’s finances,” said Norio Miyagawa, a senior economist at Shinko Research Institute in Tokyo. “Basically, it’s impossible to escape from deflation with monetary policy alone.”

Credit-default swaps tied to Japan’s government bonds show an increase in risk. The cost of protecting the debt from default for five years has doubled to 78.8 basis points since the Hatoyama administration started on Sept. 16, according to prices from CMA DataVision in New York. Central bank board member Seiji Nakamura warned this month that the government can’t ignore Greece’s fiscal woes, saying in a speech that the European country’s concerns aren’t just a “burning house on the other side of the river.”

- The dollar touched a nine-month high against the euro after the Federal Reserve raised the discount rate charged to banks for direct loans for the first time in more than three years. The U.S. currency headed for a sixth week of gains against the 16-nation euro as the central bank took another step to withdraw from the unprecedented measures it used to halt the financial crisis. The Australian and New Zealand currencies fell for a third day on concern higher U.S. borrowing costs will weaken the yield advantage of the South Pacific nations’ assets. “The Fed’s action came as a surprise and enhanced speculation that it will withdraw stimulus ahead of major peers,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Market Co., a unit of financier SBI Holdings Inc. “This will drive the dollar higher.”

- The U.S. dollar will gain on bets the Federal Reserve will accelerate increases in its target lending rate following an unexpected change in its discount rate yesterday, Commonwealth Bank of Australia said. The euro will drop to $1.32 while Australia’s dollar may fall toward 86.45 U.S. cents on speculation the Fed will announce its first upward adjustment to the benchmark rate since 2006 sooner than traders had forecast, the bank said. Futures yesterday showed a 47 percent chance the target rate for overnight lending will increase by at least 25 basis points by the Fed’s September meeting. “Today’s rise in the discount rate, along with the Fed’s increase in growth and inflation forecasts, suggests the risk is that the Fed’s first rise in the target on the Fed’s funds rate is earlier” than September, Sydney-based Richard Grace, chief currency strategist at Commonwealth Bank, wrote in a note to clients. “The move by the Fed is U.S. dollar positive.” The dollar gained to $1.3444 per euro today, the strongest since May 18. It rose to 89.29 U.S. cents per Australian dollar from 90.20 cents before the rate announcement. CBA expects the Fed to announce 25 basis points of additional increases to the discount rate charged to banks for direct loans at its April 28 and Aug. 10 meetings. That would take the rate back to “its traditional spread to the target on the Fed funds rate,” Grace said.

- Euro's Bungled Unity Bid Hits Fine Print Amid Greek Debt Drama.

- The United Nations said $1.4 billion is needed to provide food, water, shelter and sanitation to 3 million Haitians throughout 2010, the largest appeal following a natural disaster in the world body’s history. The request includes the $577 million initially sought for the first six months after the Jan. 12 earthquake that killed about 230,000 people in the Caribbean nation and left more than 1 million in need of emergency shelter. The UN has received $619 million so far from UN member nations. “It is designed to finance the continuing costs of emergency relief, but more than that it is designed to help lay the foundation for Haiti’s recovery and reconstruction,” UN Secretary-General Ban Ki-moon said. “Done right, we can turn tragedy into opportunity -- an opportunity to reinvent Haiti.”
- Europe will be drowning in debt by 2020 unless it embarks on an "age of austerity," according to Fortis Bank Nederland NV. Slower economic growth combined with higher refinancing costs will drive up debt levels across the 16-nation euro area unless governments continue consolidation efforts beyond the measures already planned for this year and next, Fortis said. Greece's overall debt would surge to 174% of gross domestic product from 113% last year, while Portugal, Ireland and Spain would face debt-to-GDP ratios of 157%, 140% and 129% respectively. Only Finland would reduce its debt and keep it below the European Union's limit of 60% of GDP, according to Fortis.

- Options traders are paying the most to protect against a drop in Chinese stocks since the depths of last year’s global financial crisis as policy makers in Beijing take steps to cool economic growth. The gap between the implied volatility of options betting on a decline in the iShares FTSE/Xinhua China 25 Index Fund and those that would profit from a gain widened to 7.4 on Feb. 17, the biggest since March, and was at 6.9 yesterday, according to data compiled by Bloomberg. The exchange-traded fund, which holds shares of Chinese companies and trades on U.S. bourses, has dropped 14 percent from its 2009 high on Nov. 16 as the People’s Bank of China ordered lenders to set aside larger reserves in a bid to cool inflation in the fastest-growing major economy. Investors are also concerned that China may let its currency strengthen, making exporters less competitive, according to AlphaShares LLC. “There’s a lot of anxiety about how policy makers keep increasing the reserve ratio for banks and what a strengthening yuan would do to the giant export machine,” said Jonathan Masse, who helps oversee about $480 million in Chinese stocks at Walnut Creek, California-based AlphaShares LLC, the fund company co-founded by Princeton University economist Burton Malkiel.

- The European Union risks repeating Japan’s mistakes of the 1990s as it helps Greece tackle the region’s biggest budget deficit, said Jeremy Beckwith, chief investment officer of Kleinwort Benson. “Greece and the European Union is the world’s biggest game of chicken” since the Cuban missile crisis in 1962, Beckwith said in an interview at the wealth manager’s Edinburgh office. “It’s an effective tightening of policy that we were not expecting a few weeks ago. It’s quite worrying.”

Wall Street Journal:

- The Federal Reserve raised an interest rate it charges banks for emergency loans, and emphasized that a broader tightening of credit for consumers and businesses is still at least several months away. But the late-afternoon increase in the discount rate didn't have the muted impact Fed officials hoped for. Stock futures and bond prices fell, and the dollar rose against the euro. "The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow," Christopher Rupkey, an economist at Bank of Tokyo-Mitsubishi, said in a note to clients.

- The United Nations' nuclear watchdog said it has information suggesting Iran may be working to build a nuclear warhead, an assessment that could escalate the U.S. and other Western governments' confrontation with Iran over its nuclear activities. The International Atomic Energy Agency, a Vienna-based U.N. body, said in a confidential report Thursday that Iran has impeded agency efforts to establish the true purpose of Tehran's nuclear program. "The information available to the agency...raises concerns about the possible existence in Iran of past or current undisclosed activities related to the development of a nuclear payload for a missile," IAEA Director General Yukiya Amano wrote in the report. The expression of concern over the "weaponization" of enriched uranium is a first for the agency.

- The Canadian government will declare its opposition to a global bank tax on transactions and services, potentially blocking efforts by some global leaders to have the tax adopted world-wide. The Canadian Finance Minister, Jim Flaherty, could make a statement on his country's opposition to the tax as early as Friday, according to a senior government official.

- Cisco Systems(CSCO) on Thursday said it was dropping H-P(HPQ) from its reseller program, capping off a year in which the two tech giants have increasingly encroached on one another’s turf. The change, which will take effect April 30, means that H-P will no longer have access to information like Cisco’s product roadmaps, which help partners make long-term plans for how to position Cisco gear. H-P will still be able to sell Cisco products to its customers, but it won’t be eligible for rebates and other incentives.

- The dean of a Hebrew day school in Brooklyn was arrested and charged Thursday in an alleged scheme to extort $4 million from a Connecticut hedge fund. Rabbi Milton Balkany, the dean of the Bais Yaakov day school in the Borough Park section of Brooklyn, was charged with wire fraud, extortion, blackmail and making false statements. Mr. Balkany, 63 years old, faces up to 20 years in prison on the wire fraud count.

- A pilot slammed his small plane into a seven-story building that housed the local office of the Internal Revenue Service Thursday, apparently killing himself and one agency employee, in what federal officials described as a deliberate suicide attack amid a long-running tax dispute. Investigators are looking into whether the pilot, 53-year-old Andrew Joseph Stack, also set his house on fire before taking off in his single-engine Piper Dakota around 9:40 a.m. local time.

- Oil-services company Schlumberger Ltd.(SLB) is in advanced discussions to acquire Smith International Inc.(SII), according to people familiar with the negotiations, a deal that would create an industry giant with revenues double that of its nearest rival. The deal, which the companies could announce in coming days, would bring together two of biggest players in the business of oil field services, which help oil companies locate and drill for oil deposits. Smith's current market capitalization is around $7.5 billion. Assuming a typical deal premium of around 20%, that would take the transaction in the $9 billion range.

NY Times:

- The Pulitzer Prize administrators have decided that The National Enquirer is eligible to compete for the awards, a person briefed on the matter said Thursday. Enquirer editors said they had submitted an entry before the Feb. 1 deadline for their work on the John Edwards scandal, but it was not clear whether the publication qualified for the Pulitzers, widely considered the most coveted honor for American newspapers.

- A series of online attacks on Google(GOOG) and dozens of other American corporations have been traced to computers at two educational institutions in China, including one with close ties to the Chinese military, say people involved in the investigation. They also said the attacks, aimed at stealing trade secrets and computer codes and capturing e-mail of Chinese human rights activists, may have begun as early as April, months earlier than previously believed. Google announced on Jan. 12 that it and other companies had been subjected to sophisticated attacks that probably came from China.

- Inside the crisis at AIG(AIG).


- The Congressional Black Caucus is fighting back against its critics, ripping a New York Times article that investigated the caucus’s connections to corporate interests. A Times story that ran Feb. 14 focused on the CBC’s close connection to the fundraising efforts of the Congressional Black Caucus Foundation, including among companies that critics say are exploitative of the black community. In 2008, the Times reported, the foundation spent more money on a caterer for a single event than on its scholarship program. The CBC is angry that it’s being lumped in with the foundation’s work.

- President Barack Obama needs Harry Reid to get his legislative agenda through the Senate. Reid needs Obama for something more — his political survival. The two leading Democrats are taking those efforts to Las Vegas, where Obama is heading Thursday to bolster the embattled Senate majority leader. The president’s overnight trip, the first of his second year in office, is a sign of how entwined Reid and Obama’s fortunes have become. And of how Obama, whose administration was blindsided last week by Reid’s decision to abort a bipartisan jobs bill, isn’t holding a grudge but instead sees Reid’s success as essential to his own.

Rasmussen Reports:

- As California stumbles through its continuing budget crisis, 60% of likely voters in the state now believe it would be better if most incumbents in the state legislature were defeated in this November’s elections. A new Rasmussen Reports telephone survey in California finds just 17% think it would be better if most of the legislative incumbents were reelected.


- The rumors of a possible partnership by John Paulson and Goldman Sachs(GS) in the speculative attacks on Greece, which I first reported on last week, are now heating up in Europe to the point where one French journalist has multiple sources corroborating them. No one can point to hard evidence, just yet, because these are opaque, unregulated markets. But the news is quickly rising above the status of rumor. The French financial newspaper Les Echos picked up on my post on John Paulson and Greece yesterday. Here is my (rough) translation:


- A group of Democratic lawmakers on Thursday asked Senator Dianne Feinstein to abandon draft legislation that would divert more water to California's farmers, a plan that has quickly become a flashpoint in the state's long-running water wars. Feinstein's proposal, which would ease Endangered Species Act restrictions, has angered environmental activists and fishing groups. The powerful Democratic senator's rebuke by members of her own party underscores the incendiary nature of water politics in America's No. 1 farm state. The 12 lawmakers, who sent a letter to Feinstein asking her to drop the plan, say it could ultimately lead to the extinction of Sacramento River salmon and eliminate up to 23,000 jobs in the Pacific coast fishing industry. Drastic cutbacks in irrigation supplies this year alone from state and federal water projects have idled about 23,000 farm workers and 300,000 acres (121,400 hectares) of cropland. California's Central Valley is one of the country's most important agricultural regions and the state's farmers produce more than half the fruit, vegetables and nuts grown in the United States. Feinstein told Miller she was aware of the fishing industry's decline but said two decades of water allocations had made little difference in salmon populations while farming communities had suffered. "Last year, 400,000 acres (162,000 ha) of land were fallowed. Laid-off workers have been forced to choose between standing in bread lines or leaving the valley in search of work elsewhere," she wrote. "Continuation on this path will lead to the destruction of agriculture. I refuse to sit by idly and do nothing."

- Distressed investors should brace for another wave of bankruptcies as early as this year as more corporate debt payments come due, a senior partner at Grant Thornton said on Thursday. Debt extensions have helped put off various crises and postponed some distressed situations or even bankruptcies. As the economic recovery stretches, however, more corporate pain can be expected, said Harris Smith, a managing partner with Grant Thornton's private equity group based in Los Angeles. "I think it's a matter of time before the bankruptcies start increasing again," Smith told Reuters. "People thought everything was getting better, but it perhaps it isn't."

- A senior U.S. Federal Reserve official sounded a warning on Thursday that inflation expectations are rising, while saying the economic recovery remains on track, though it has a long way to go.

- Dell Inc's (DELL) quarterly gross margin missed Wall Street expectations, hurt by sales of lower-priced personal computers for consumers and a rise in costs for memory chips and other components. The disappointing margin, which reflects Dell's dependence on the computer hardware market, sent its shares down 5 percent in extended trading on Thursday and overshadowed its stronger-than-expected profit and revenue for the quarter.

- Efforts to tighten financial regulation gained speed in the U.S. Senate on Thursday, with revised legislation seen as soon as next week from two key lawmakers now traveling together in Central America. Senate Banking Committee Chairman Christopher Dodd, a Democrat, and Republican Senator Bob Corker, a first-term member of Dodd's panel, are visiting Panama, Costa Rica and other nations on a Foreign Relations Committee trip. As they travel, the two were expected to discuss the bipartisan regulatory reform legislation they hope to unveil within days and bring before the Banking Committee, possibly for a vote as soon as the first week in March.

- First Solar Inc (FSLR), the lowest-cost photovoltaic solar manufacturer, posted a higher-than-expected profit, but its shares fell 6 percent as its outlook disappointed and profit margins narrowed.

- Intuit Inc (INTU) raised its full-year earnings forecast and said sales of its TurboTax tax preparation software will likely beat its previous expectations, sending its shares up 6 percent.

- North American semiconductor equipment makers posted $1.13 billion in average worldwide bookings in January, up 24.1 percent from December, reflecting strong signs of spending in the semiconductor device market. This month's bookings were more than three times higher than the $277.2 million in orders posted in the year-ago period, Semiconductor Equipment and Materials International (SEMI) said in a report. "Semiconductor capital equipment bookings are at the highest level since April 2008," SEMI Chief Executive Stanley Myers said. Book-to-bill ratio in January was 1.20, which means that $120 worth of orders was received for every $100 of product billed for the month.

Financial Times:

- President Barack Obama on Thursday met the Dalai Lama behind closed doors in the White House’s Map Room, an event set to test the US-China relationship in an already turbulent year. The Chinese foreign ministry issued a terse statement on Friday restating its objections: “The US grossly violated the norms governing international relations and ... went against the repeated commitments by the US government that it recognizes Tibet as part of China”. Cui Tiankui, the deputy foreign minister, said he had summoned US ambassador Jon Huntsman “to lodge solemn representations”, according to state-controlled Xinhua news agency. “We are in one of those moments where it is going to take maturity and calm on both sides not to have things unravel,” one former senior official in Beijing has said earlier.


- Britain is at risk of a Government deficit crisis worse than that of Greece, sparking serious fears over the economic stability of the country.

Evening Recommendations


- Reiterated Buy on (CLF), raised estimates, boosted target to $62.

- Upgraded (WBMD) to Buy, target $49.

Night Trading
Asian indices are -1.50% to -.50% on avg.

Asia Ex-Japan Inv Grade CDS Index 117.0 +3.0 basis points.
S&P 500 futures -.97%.
NASDAQ 100 futures -.87%.

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
- (JCP)/.82

- (LPNT)/.60

- (HMSY)/.33

- (PCG)/.73

Economic Releases

8:30 am EST

- The Consumer Price Index for January is estimated to rise +.3% versus a +.1% gain in December.

- The CPI Ex Food & Energy for January is estimated to rise +.1% versus +.1% gain in December.

Upcoming Splits

- None of note

Other Potential Market Movers
- The Fed's Dudley speaking and the 4Q mortgage delinquencies report
could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial stocks in the region. I expect US stocks to open lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.

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