Thursday, April 01, 2010

Thursday Watch

Posted by Gary .....at 12:28 AM

Evening Headlines
Bloomberg:
  • Jarrett Says AT&T(T), Deere(DE) Not Undermining Health Law. Valerie Jarrett, a White House liaison to corporate America, said in an interview she doesn’t think businesses are trying to damage the image of the health- care overhaul with accounting charges tied to the law. “I have not observed an orchestrated effort,” said Jarrett, a senior adviser to President Barack Obama. Health-care charges filed by Boeing Co., AT&T Inc., Caterpillar Inc., Deere & Co. and other companies have generated a series of headlines since the March 23 bill-signing by Obama. The disclosures, tied to a 2013 elimination of a tax break on retiree drug benefits, ultimately may shave as much as $14 billion from U.S. corporate profits, according to an estimate by benefits consultant firm Towers Watson. Several of the companies notified the White House as soon as their regulatory filings were made public, Jarrett said. “We have a good working relationship with them and they didn’t want us to be caught by surprise,” she said. “Some of the ones who have the highest dollar amount I have spoken to directly, and I appreciated them giving me the heads up.” Chicago-based Boeing, the world’s second-largest commercial-plane maker, said today it plans to record a $150 million charge because of the law change. Xcel Energy, the owner of utilities that operate in eight U.S. states, said today it expects to record a $17 million charge. AT&T, based in Dallas, announced last week that it was taking a $1 billion charge. Moline, Illinois-based Deere, the world’s largest maker of farm machinery, announced a $150 million charge. And Peoria, Illinois-based Caterpillar, the world’s largest maker of bulldozers, has claimed a $100 million charge. “The companies who are reporting this charge against their net earnings aren’t pushing back, they’re following the law,” Jarrett said. The American Benefits Council, which represents more than 300 large employers, urged the White House and Congress earlier this week to reverse the retiree drug-benefit provision. Jim Dugan, a Caterpillar spokesman, said his company has raised concerns about the issues surrounding retiree benefits since late last year and plans to keep doing so. “Our intention is to continue to communicate with lawmakers and others about our concerns with the law, in an effort to make sure the impact of the law is understood,” he said in an e-mail. About 3,500 employers provided prescription drug coverage to 6.3 million retirees nationwide who qualified for a federal subsidy in 2008, according to New York-based Towers Watson.
  • U.S. Trade Office Aims at China's Import Rules, Avoids Yuan. The Obama administration steered clear of the debate over China’s currency policy in an annual report on global trade barriers yesterday, focusing instead on procurement and import restrictions that harm U.S. companies. China’s proposal that its government agencies give preference to domestic companies when buying software and equipment discriminates against foreign competitors, the U.S. Trade Representative’s office said in the report on obstructions to selling U.S. goods and services worldwide. The trade office said it’s examining China’s regulations and tax policies.
  • CFTC Approves Collateral Segregation for OTC Clearing. The U.S. commodities regulator approved rules to protect bank client assets that support cleared over-the-counter derivatives trades, giving a boost to CME Group Inc.(CME), the world’s largest futures market. The rules passed by the Commodity Futures Trading Commission mean banks will have to segregate the cash and other collateral investors pledge as margin to back credit-default or interest-rate swaps that are processed by a clearinghouse.
  • Obama Won't Soon Cut Crude Imports, Hofmeister Says. President Barack Obama’s plan to expand offshore oil drilling won’t soon cut reliance on foreign crude and demonstrates “zigzag politics” that hinder energy development, said Royal Dutch Shell Plc’s former U.S. chief. Obama said today that he will allow drilling off the U.S. East Coast and will cancel development in Bristol Bay, Alaska. He said drilling also would be allowed 125 miles (201 kilometers) off the west coast of Florida if a congressional moratorium is lifted. The U.S. Minerals Management Service estimates that Alaska’s Outer Continental Shelf has 26.6 billion barrels of recoverable oil, almost seven times its projection for the East Coast, and 132.1 trillion cubic feet of gas. The decision to scrap drilling in Bristol Bay overturns former President George W. Bush’s action lifting a long-time ban. “Taking Alaska’s Bristol Bay out of consideration just a couple years after the Bush administration allowed it to be considered is demonstrating once again that zigzag politics controls our energy policy more than substantive long-term strategy,” John Hofmeister, the former Shell executive, said today in an interview in Houston. Obama said lease sales in Alaska’s Chukchi and Beaufort seas would be scrapped to allow further scientific study. Oil companies can’t operate effectively with “on-again, off-again” policies, said Hofmeister, who heads Citizens for Affordable Energy in Houston. “We’re pushing off what might be a hard choice to do Arctic drilling,” Hofmeister said. “Meanwhile, OPEC wins again.” He said Alaska is poised for major energy investments and has enormous resources that would benefit consumers.
  • Lihir Gold Rejects A$9.2 Billion Offer From Newcrest.
  • AIDS 'Next big Thing' Rests on Study of Gilead(GILD) Prevention Pill. Gilead Sciences Inc. may learn this year whether its drugs for treating HIV can also stop people from catching the virus in the first place. The approach may help curb the AIDS pandemic in poor countries and bring Gilead $1 billion a year in additional U.S. sales, said Josh Schimmer, an analyst at Leerink Swann & Co. in Boston. Most investors aren’t alert to the potential benefit, he said. Researchers are compiling the first data from 10 trials involving more than 20,000 people, and initial results may be available in July.
  • Mortgage-Bond Yield Spreads Jump as Fed Exits Market. Yields on Fannie Mae and Freddie Mac mortgage securities jumped by the most relative to benchmark rates in five weeks as the Federal Reserve’s unprecedented buying of housing debt drew to a close today. The Fed’s $1.25 trillion of purchases in the $5.4 trillion market of mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae had helped drive yield premiums to the lowest on record. The difference between yields on Fannie Mae current-coupon 30-year fixed-rate securities and 10-year Treasuries increased 0.05 percentage point today to about 0.65 percentage point as of 4 p.m. in New York, according to Bloomberg data.
  • Market Backlash Breeds State Capitalism, Green Sins: Interview. Michael Moore, the satirical filmmaker, says it. So does Richard A. Posner, the outspoken U.S. appeals judge. Both say capitalism has failed. And each, in his own way, reflects what international-law professor Marc De Vos calls “an anti-market psychology,” a Zeitgeist threatening economic growth and human progress. “This storyline -- of how markets have failed -- is getting ingrained in beliefs,” says De Vos, thumping the table during lunch at an Italian restaurant in Brussels. “It’s being exploited politically, and that will not stop anytime soon.”
Wall Street Journal:
  • Laptop Killer? Pretty Close by Walt Mossberg. iPad Is a 'Game Changer' That Makes Browsing and Video a Pleasure; Challenge to the Mouse.
  • Wal-Mart's(WMT) Grocery Sales Expand. Wal-Mart Stores Inc. for the first time has drawn more than half its annual U.S. sales from groceries, as the retailer's aggressive push in food and other consumables is paying off. Groceries accounted for 51% of Wal-Mart's $258.2 billion in U.S. sales last year, up from 49% the year before.
  • Amazon(AMZN) Strikes Two Book-Pricing Deals. Facing the specter of Apple Inc.'s iPad launch, Amazon.com Inc. has agreed to halt heavy discounting of e-book best-sellers in new pricing deals with two major publishers. The e-book agreements, with CBS Corp.'s Simon & Schuster and News Corp.'s HarperCollins Publishers, mirror deals struck earlier this year with Apple for the iPad. Under what's called the agency pricing model, some new best sellers will be priced at $9.99 but most will be priced at $12.99 to $14.99.
  • Credit Suisse May Buy Minority Stake in York Capital. Hedge-fund giant York Capital Management is in talks with Credit Suisse Group about the bank's interest in buying a minority stake of the $12 billion investment firm, according to people close to the matter.
  • Ivy Asset Draws Probe Over Role With Madoff. Ivy Asset Management, which BNY Mellon Asset Management is closing, is under investigation for advice it allegedly gave related to investing with Bernard Madoff, according to a person familiar with the matter. New York Attorney General Andrew Cuomo's office has been investigating Ivy, a fund manager that places money with hedge funds, for about a year, and the investigation has come to a head in recent weeks, the person said. At issue among other things is whether Ivy failed to relay concerns it had about Mr. Madoff's firm.
  • CEOs See Pay Fall Again. Total Compensation Slipped .9% in 2009, Survey Shows, as Recession Took Toll. The boss took another haircut as CEO compensation edged lower in 2009, the first time in two decades that pay declined for two consecutive years. The median value of salaries, bonuses, long-term incentives, and grants of stock and stock options for the chief executives of 200 major U.S. companies declined 0.9% to $6.95 million, according to an analysis for The Wall Street Journal by the Hay Group management consultancy.
  • Would the Founders Love ObamaCare? The resistance to Obamacare is about a lot more than the 10th Amendment. The left-wing critics are right: The rage is not about health care. They are also right that similar complaints about big government were heard during the New Deal and the Great Society, and the sky didn't fall. But what if this time the sky is falling—on them.
  • CBS, ABC Plan Free iPad Shows. CBS Corp. and Walt Disney Co.'s ABC are adapting episodes of their TV shows to be viewable free of charge on Apple Inc.'s new iPad, according to people familiar with the matter, offering Apple new TV content as it prepares for the multimedia gadget's Saturday release.
BusinessWeek.com:
  • Sugar 'Crash' Isn't Over as Output Gains, Traders Say. Sugar prices will extend a slump, following the biggest quarterly plunge since 1985, as Brazil and India, the world’s largest producers, harvest bumper crops next season, analysts and traders said. Raw sugar will fall 9.6 percent to 15 cents a pound by early July as the bulk of Brazilian supplies reach the market, said Marcelo Dorea, a partner at Round Earth Capital in New York. The price will tumble to 13 cents at the end of the year, posting a 52 percent annual loss, said Mark Hansen at CPM Group. “Sugar has transitioned from a bullish scenario to a bearish scenario,” said Dorea, who began trading agricultural commodities in 1981. “Investors should sell into rallies. The market may correct itself a little bit more, but there isn’t anything that would bring sugar up to the levels of the mid- 20s.” Raw sugar tumbled as much as 47 percent from a 29-year high of 30.4 cents on Feb. 1, as importers including India, Pakistan and Egypt withdrew from the market. Today, the contract for May delivery plummeted 1.29 cents, or 7.2 percent, to 16.59 cents on ICE Futures U.S., the biggest drop since December 2008. Output in Brazil’s Center South, which produces about 90 percent of the nation’s sweetener and ethanol, will be a record 34.1 million metric tons in the season starting tomorrow, 19 percent higher than a year earlier, industry group Unica said today. Brazilian yields are beating forecasts as a waning El Nino brings dry weather, boosting prospects for a record harvest. “I had never seen a single mill operating in January before,” Biagi said in an interview on March 24. “This January, we had 90 of them working at full capacity.” The National Federation of Cooperative Sugar Factories Ltd. said today that India’s production may jump as much as 26 percent this year to 18.5 million tons. Output next season may be as much as 24 million tons, according to the Indian Sugar Mill Association. Hedge-fund managers and other large speculators reduced their net-long position in New York futures by 9.3 percent in the week ended March 23, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 155,463 contracts, down 15,890 contracts from a week earlier. Net-longs have dropped 23 percent since Feb. 2, the day after sugar reached the highest level since January 1981. The bullish wagers were up 19 percent from a year ago. “There’s still a very large speculative-long position in the market,” CPM’s Hansen said. “We need prices probably to fall further to see that washed out.”
  • RIM(RIMM) Fourth-Quarter Sales, Shipments Miss Estimates.
NY Times:
  • Hedge Funds' Mediocre Middlemen. Funds of hedge funds are rightly getting a dose of reality. Justifying their extra fees was always a tall order. Unremarkable returns and investor defections have made it harder. And the traditional fees — 1 percent of assets plus 10 percent of gains, known as 1-and-10, are fast becoming 1-and-zero. Hedge funds’ frequently mediocre middlemen eked out an average return of just 13 percent last year — just half the rate for the average multistrategy hedge fund, according to Morningstar. The average fund of funds has performed less well than the average hedge fund in all but two of the last 20 years. That record undermines the sales pitch. Funds of funds variously claim to offer investors valuable diversification, access to exclusive top-ranked hedge funds and due-diligence services that help investors avoid funds that are fraudulent or just poorly run. Yet diversification hasn’t led to superior performance. Although a few hedge funds are once again reluctant to take new investors, most are still happy to take capital from pretty much anyone these days. And the due-diligence claim has been damaged for the sector by the presence of Bernard Madoff’s Ponzi scheme in several portfolios. Large investors can often get better value by hiring consultants to vet a selection of hedge funds directly. Those with smaller wallets can find cheaper alternatives, like mutual fund vehicles that invest in hedge funds. From the perspective of hedge fund managers, funds of funds also proved to be flighty investors during the crisis. The fallout has accelerated one trend that was already under way — a decline in fees. Eurekahedge, a data provider, reports that average performance fees declined to 6.5 percent in 2009, from 10 percent in 2005. If some fund-of-funds experts at banks are representative of the industry, the reality is that incentive fees have already essentially disappeared.
  • Crisis Panel Hot Seat Awaits Rubin and Prince. Get ready for Round Two in the search for answers about why the financial system nearly collapsed in 2008. The Financial Crisis Inquiry Commission said Wednesday that it would question a number of financial executives and government officials during three days of hearings next week. Among those scheduled to testify are Alan Greenspan, the former Federal Reserve chairman; Charles O. Prince, a former chief executive of Citigroup, and Robert E. Rubin, the former Treasury secretary who was once an influential member of Citi’s board.
  • Senator Seeks to Limit Banks' Role in Derivatives. Senator Sherrod Brown, Democrat of Ohio, is seeking to restrict the Wall Street banks’ ownership of clearinghouses for over-the-counter derivatives. Under his proposed amendment to the financial overhaul bill, the large broker-dealers could be mostly shut out of this potentially lucrative business, raising concerns as to where liquidity would come from to clear the huge inflow of O.T.C. trades expected to hit the open market in the near future. Mr. Brown’s amendment would restrict shareholder ownership of a clearinghouse by the large banks to 20 percent in total. The proposal would also prohibit large financial institutions from controlling a majority of the board and would require regulators to set rules for self-dealing.
  • Pfizer(PFE) Chief Says Growth Is Imminent.
Business Insider:
  • Fannie And Freddie's Caving On Standards Has Officially Begun(NYC Condo Salvation Coming Soon).
  • Remember SIVs? China Has 'Em And They're Hiding A Massive Credit Bubble. For awhile now we've been telling you about the work of professor Victor Shih who is warning about the $1trillion+ debts incurred by Chinese state governments. A new report from research from Independent Strategy has a very nice characterization of these local governments, and their analogue to the US crisis: they're the SIVs, the vehicles that allowed Citigroup (C) et. al. to mask the true state of their rot. According to Shih, the rot is located in the so-called Local Government Financing Vehicles (LGFVs) belonging to one of China’s many levels of local government ranging from towns and counties to cities and provinces. LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).
zerohedge:
Pensions & Investments:
  • S&P Lowers CalSTRS' Long-Term Credit Rating. CalSTRS’ long-term issuer credit rating was lowered by Standard & Poor’s to AA- from AA, the rating agency said in a statement.The decline is directly related to S&P’s action on Feb. 3 to downgrade California general obligation bonds to A- from A, David Hitchcock, S&P credit analyst, said in the statement.
  • Ivy Asset Management, the unit of Bank of New York Mellon Corp. that invests in hedge funds, is closing down. BNY Mellon is dismissing Ivy employees and encouraging clients to move their money to two other hedge fund-of-fund units that it owns. Ivy's assets have declined from $15 billion at the end of 2006 to less than $5 billion as of Dec. 31, according to the publication.
Absolute Return + Alpha:
  • Is Credit Ready for a Fall? The big run-up in credit prices over the past year has top hedge fund managers looking for short positions. King Street Capital Management, Cerberus Capital Management, Third Point, York Capital Management, Perry Capital and Eton Park Capital Management are among the top players that think credit may be overpriced right now.
USA Today:
Reuters:
Financial Times:
  • California's Treasurer Joins Default Swap Debate. California has joined a global push to lift the veil on derivatives, as questions abound about how they influence markets - particularly when debt issuers run into trouble. Bill Lockyer, the western US state's treasurer, has asked large banks that sell the state's bonds for information about credit default swaps, including each bank's role in making markets for California and other municipal CDSs, the types of clients and trading volumes. The growth of taxable "muni" bonds, led by California, is expected to increase the use of CDSs for munis because it has opened this market to large, international buyers who also trade CDSs. The state treasurer queried the price of California CDSs, saying the swaps "wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan, Croatia, Bulgaria and Thailand". That could affect state borrowing costs, he said. According to the DTCC, the number of CDS contracts on California has risen from 160 to 422 in the past year.
  • Dimon Attacks 'Demonisation' of Big Banks. Jamie Dimon on Wednesday attacked the “demonisation” of large banks by politicians, arguing that multinational groups need large financial institutions to thrive in global markets. In his annual letter to shareholders, the JPMorgan Chase chief mounted a defence of the role played by banks in the economy and criticised politicians for taking “punitive efforts” against the sector without distinguishing between good and bad performers. “We have to stop slipping into a cacophony of finger-pointing and blame,” Mr Dimon wrote in his letter, an annual tradition inspired by Warren Buffett, one of his heroes. “While bad actors always should be punished, we also should note that not all who got into trouble were irresponsible.”
Telegraph:
  • PIMCO Fears UK 'Debt Trap'. The US bond fund PIMCO has warned that Britain risks a vicious circle of rising debt costs as global investors demand a penalty fee on gilts to protect against inflation.Bill Gross, the fund's chief and emminence grise of bond vigilantes, said the UK was on its list of "must avoid" countries along with Greece and others in eurozone's Club Med. The flood of British debt is likely to "lead to inflationary conditions and a depreciating currency", lowering the return on bonds. "If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap," he wrote in his April monthly note.
  • Government Must Welcome the Private Sector for the Health of the Nation. Care for the elderly has once again been brushed aside by Labour. One of our biggest problems shoved back into the Downing Street filing tray marked "too difficult" – a pile of paper tottering over. No one's pretending insurers have all the answers but at the moment the state provides cover for about 65pc of society's addressable risks when it comes to things like health care provision and care for the elderly, the private sector 35pc. That needs to be reversed if our public finances are ever going to be sane again.
Evening Recommendations
Citigroup:
  • Reiterated Sell on (RIMM), boosted target to $55.
Night Trading
  • Asian indices are +.25% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 98.0 +1.5 basis points.
  • S&P 500 futures +.20%
  • NASDAQ 100 futures +.12%
Morning Preview Links

Earnings of Note
Company/Estimate
  • (KMX)/.24
  • (SCHL)/-.11
  • (WOR)/.21
Economic Releases
8:30 AM EST
  • Initial Jobless Claims for last week are estimated to fall to 440K versus 442K the prior week.
  • Continuing Claims are estimated to fall to 4618K versus 4648K prior.
10:00 AM EST
  • ISM Manufacturing for March is estimated to rise to 57.0 versus a reading of 56.5 in February.
  • ISM Prices Paid for March is estimated at 67.0 versus 67.0 in February.
  • Construction Spending for February is estimated to fall -1.0% versus a -.6% decline in January.
Afternoon
  • Total Vehicle Sales for March are estimated to rise to 12.0M versus 10.36M in February.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bullard speaking, Fed's Dudley speaking, Challenger Job Cuts report and the weekly EIA natural gas inventory report could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and commodity shares 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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