Wednesday, April 07, 2010

Wednesday Watch


Evening Headlines

Bloomberg:
  • L.A. Mayor Asks to Shut City Services Two Days a Week. Los Angeles Mayor Antonio Villaraigosa called for shutting down “nonessential” city services two days a week, after Controller Wendy Greuel said the municipality’s cash may run out next month. The plan would target services that don’t generate revenue, the 57-year-old mayor said in a press conference today. He also said the Department of Water and Power is on a path to a negative credit rating watch. The City Council voted to block a proposed electricity rate increase last week. Fitch Ratings yesterday withdrew its AA- rating on $720 million of bonds the department planned to sell this month, according to a press release.
  • Harvard Class of '69 Blamed for Pension Mess in Hedge-Fund Book. Steven Drobny, who compares the joy of writing to “putting toothpicks in my eyeballs,” said he was obliged to write his second book because he’s worried taxpayers may one day have to bail out pension plans -- and he blames Harvard’s class of ‘69.
  • Vietnam Lures Intel(INTC), Samsung as Asean Woos Companies from China. Vietnam hosts Southeast Asian leaders this week as chair of their 10-nation bloc, shining a spotlight on the political and economic stability that prompted Intel Corp. and Toyota Motor Corp. to increase investments. The communist nation drew 13.5 percent of the Association of Southeast Asian Nations’ foreign direct investment pool in 2008, up from 4.4 percent two years earlier, according to the 10-member group. And its allure may be rising, judging from a December survey by the American Chamber of Commerce in Shanghai. Vietnam is a preferred destination for businesses looking to relocate from China, Asia’s biggest investment recipient, the report said.
  • China Considers Yuan Trading Against Ruble, Won, Official Says. China is considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in cross-border trade, an official at the China Foreign Exchange Trade System said. The People’s Bank of China is investigating the possibility of offering new foreign-exchange pairs, said an official at the Shanghai-based interbank exchange, a subsidiary of the central bank.
  • Israel Aid Pays U.S. Dividends That Exceed Cost: Steve Rothman. The argument that American military aid to Israel is damaging to the U.S. is not only erroneous, it hurts the national security interests of this country and threatens the survival of Israel. U.S. support for Israel is essential, not only for Israel’s national security, but for America’s. Every bit of that support -- and more -- withstands all reasonable scrutiny.
  • Euro Falls a 4th Day Versus Dollar on Greece, Growth Concerns. The euro fell for a fourth day against the dollar on concern a recovery in the 16-nation region will be hampered by discord over Greece’s rescue package. “We certainly see some downside risks to the euro as they don’t seem to have a final credible solution to Greece’s fiscal problems,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia. “The worse that these Greek concerns get, eventually there will be cuts to global growth forecasts.”
  • PBOC Advisor Says May Raise Rates This Quarter. China central bank advisor Li Daokui said the nation may raise interest rates in the second quarter, the China Securities Journal reported today. Inflation will be the biggest factor in China’s decision to increase interest rates, the Beijing-based newspaper cited Li as saying. If the nation’s monthly consumer price index gains more than 3 percent, the government may increase rates, the report cited Li as saying.
Wall Street Journal:
  • Hope Fades for Miners. Methane Halts Search for Four Missing Workers; Blast Has Already Claimed 25.
  • The Dodd Bill: Bailouts Forever. There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.
  • FTC Appears to Be Preparing to Challenge Google's(GOOG) AdMob Deal.
  • Mr. Dimon Goes to Washington. As Congress prepares to push finance regulation to the front burner, plenty of bank executives—stung by Washington's Wall Street bashing—are keeping a low profile. James Dimon, chairman and chief executive of J.P. Morgan Chase & Co., isn't one of them. Buoyed by J.P. Morgan's relative good health, he's spent the past year launching his own campaign to stave off government proposals that would rein in profits, boost consumer protections and impose new fees. Mr. Dimon's bank shelled out more for lobbying efforts last year—$6.2 million—than any of its peers, and the CEO has lately been a regular presence in the halls of Congress. He preaches about how new regulations could force J.P. Morgan to further crimp credit-card lending and raise fees for consumers. One move aimed at banks he's characterized as "un-American." His stance represents a turnaround from the early days of the financial crisis, when he emerged as one of Washington's biggest boosters. People close to Mr. Dimon say that he still supports the Obama administration, but has felt blindsided by some aspects of the overhaul. In 2007, the subprime-mortgage industry was showing signs of stress, and lawmakers were starting to ask questions. Mr. Dimon believed J.P. Morgan needed to develop relationships with regulators and politicians. Unlike Goldman, which had seen top executives Henry Paulson Jr. and Robert Rubin become Treasury secretaries under Presidents Bush and Clinton, J.P. Morgan had few ties with heavy hitters in Washington. After beefing up the bank's government-relations staff, Mr. Dimon started encouraging senior executives and board members to make trips to Washington. He also urged his bankers in states across the country to get acquainted with their local representatives.
BusinessWeek.com:
  • Greece May Find U.S. Lukewarm to Dollar Bond on Deficit Concern. Greece may discover it’s no cheaper to sell bonds in the U.S. than in Europe as the government seeks to persuade investors it can plug the region’s biggest budget deficit. Investors may demand a yield of as much as 7.25 percent to buy Greek 10-year dollar bonds, 410 basis points more than benchmark German bunds and 330 basis points more than Treasuries, according to Paris-based Axa Investment Managers, which oversees about $669 billion. TCW Group Inc., which manages $115 billion in assets from Los Angeles, says Greece may have to offer a premium of as much as 400 basis points over Treasuries.
Marketwatch.com:
  • Paulson & Co. Has a Good March. Paulson & Co. has grown quickly into one of the world's largest hedge fund firms, sparking concern its funds could get too big to generate attractive returns. But there were few signs of that in March. With $32 billion in assets at the start of 2010, Paulson was the third-largest hedge fund firm in the world behind J.P. Morgan Chase(JPM) and Bridgewater Associates. Unlike many big rivals, Paulson is taking in new cash, raising the question of how much money is too much for a hedge-fund manager, Bloomberg News reported in late March.
  • Greenspan, Subprime Lenders to Get Grilled. Financial crisis commission to hear from Robert Rubin on Thursday.
CNBC:
IBD:
NY Times:
  • North Korea Sentences U.S. Man to 8 Years Hard Labor. North Korea said on Wednesday it had sentenced an American man to eight years of hard labour for illegally entering the country, a decision that could further strain ties with Washington. North Korea has previously used detained American citizens as bargaining chips and the announcement comes as the United States has been putting pressure on North Korea to return to stalled international nuclear disarmament talks. Gomes had been teaching English in Seoul for about two years before making the trip to North Korea. He was also active in Protestant churches, his colleagues said. He likely crossed into North Korea in support of U.S. Christian missionary Robert Park who entered the North on Christmas Day to raise awareness about its human rights abuses, said an activist who helped arrange Park's trip.
CNNMoney:
Business Insider:
zerohedge:
  • Greece Sets 10 Year Bund Spread Level For When Total Pandemonium Breaks Out at 450 BPS. Greek website bankingnews.gr reports that today's breach of 400 bps in spread to bunds on the 10 Year GGB is a very critical level, and that if spread widening continues, Greece "risks completely losing control" of its funding situation. The critical level in the 10 Year GGB spread to bunds beyond which all hell will break loose is 450 bps at which point "everyone will unload bonds and then control will be completely lost." (pardon our translation) Odd - no mention of CDS speculators having blown up Greece today: instead it is bond selling... How novel. The site also notes that while today's actions "should be a reasonable response and should reduce the spread, if that does not happen then Greece will completely lose control and very soon." This is likely the worst mistake that Greece could have done.
  • March and YTD Hedge Fund Winners and Losers.
WeeklyStandard:
  • Left-Right Convergence on Financial Reform? It might be time to break up the banks. This is the position advocated by economists Simon Johnson and Robert Reich on the left, and Arnold Kling and others on the right.
Rasmussen Reports:
  • Generic Congressional Ballot: Republicans 47%, Democrats 38%. Republican candidates now hold a nine-point lead over Democrats in the latest edition of the Generic Congressional Ballot. A new Rasmussen Reports national telephone survey finds that 47% would vote for their district's Republican congressional candidate, up from 46% last week, while 38% would opt for his or her Democratic opponent, down a point from the previous survey.
Politico:
  • Obama Judicial Nominee in 'Jeopardy'. Law professor Goodwin Liu is young and progressive, and could be on the fast track to the Supreme Court — but his nomination to a lower court has already hit a troubled patch after he neglected to send some of his most controversial statements to the Senate Judiciary Committee. On Tuesday, Liu sent an additional 117 items to the committee — including some of his most incendiary statements on issues such as affirmative action, school busing and constitutional welfare rights. Liu’s hearing has already been postponed once, and his failure to disclose controversial writings has Republicans saying Liu’s nomination is in “jeopardy.”
Securities Industry News:
  • Hedge Fund Investors Say No to Forced Lock-Ups. Institutional investors are fighting back against forced lock-ups on their monies in hedge funds, according to an annual survey of the hedge fund industry conducted by Credit Suisse. The survey, released on Tuesday, showed that 45 percent of investors have requested the removal of so-called mandatory side-pocketing of assets by fund managers which freeze their ability to redeem their monies from many hedge funds. Instead, the investors want optional side-pocketing which would allow them to decide whether or not their assets should be isolated. According to the Credit Suisse survey about 43 percent of investors have already insisted an increase in how often they can withdraw their monies; thirty nine percent of investors have asked for the removal of stringent lock-ups.
The Wrap:
Reuters:
  • U.S. Consumer Loan Delinquencies Ease in Q4 2009. U.S. loan delinquencies fell in the fourth quarter, marking a second consecutive quarter of improvement, data compiled by a leading bank industry group showed on Tuesday. The American Bankers Association said eight out of 11 categories of consumer loans saw delinquencies fall in the fourth quarter. Among these categories, bank card delinquencies dropped to 4.39 percent from 4.77 percent, while delinquencies on home equity lines of credit fell to 2.04 percent from 2.12 percent. But the association said delinquencies increased in two categories: home equity loan delinquencies increased to a record high of 4.32 percent from 4.3 percent and non-card revolving loan delinquencies increased to 1.46 percent from 1.4 percent. Indirect auto loan delinquencies were unchanged at 3.15 percent, according to the ABA data.
  • U.S. EIA Lowers Global Oil Demand Growth Forecast.
  • US Rules on Smokestack Greenhouse Gases Out Soon. The U.S. Environmental Protection Agency will soon issue rules that will determine which power plants and factories will face greenhouse gas regulations, an agency official said on Tuesday. The measure, known as the "tailoring rule," will set emissions thresholds for the big emitters of gases blamed for warming the planet, such as coal-fired power plants and plants that make cement and glass.
Financial Times:
  • Iceland at Risk of Junk Credit Rating. Iceland risks having its credit rating downgraded to junk status if it fails to resolve the Icesave debt dispute with Britain and the Netherlands, Moody’s warned on Tuesday. The credit rating agency downgraded its outlook for Iceland to negative from stable amid deadlock in negotiations over €3.9bn lost by British and Dutch depositors in the collapsed Icesave online bank. The move came a month after a deal to repay the money was rejected by 93 per cent of Icelandic voters in a referendum, in spite of warnings from the UK that the country risked isolation if it failed to settle the debt. The dispute has held up crucial economic support from the International Monetary Fund and other lenders because the loans, agreed after the Icelandic banking sector collapsed in 2008, were conditional on Reykjavik fulfilling its international obligations. Moody’s said the country’s sovereign rating – currently one notch above junk status at Baa3 – could be placed on review for downgrade if the dispute continued to obstruct access to international finance. “The recovery of the Icelandic economy is threatened by the delays in the resolution of the Icesave dispute,” said Kenneth Orchard, head of Moody’s sovereign risk group. The Icelandic government has repeatedly stressed its commitment to reimbursing the money but it wants Britain and the Netherlands to accept softer repayment terms amid public anger that taxpayers are being asked to pay for the mistakes of bankers and regulators. Moody’s stressed there were no immediate payment concerns surrounding Icelandic sovereign debt and said a resolution of the Icesave dispute remained the likeliest outcome. However, it warned that the stalled negotiations raised questions about the country’s ability to refinance eurobonds maturing in December 2011 and May 2012.
  • Evaluating the Renminbi Manipulation. The incumbent superpower has blinked in its confrontation with the rising one: the US Treasury has decided to postpone a report due by April 15 on whether China is an exchange-rate manipulator. Since a programme of multilateral and bilateral consultations is under way, it was right to give these discussions a chance before taking any action. Is China a currency manipulator? Yes. China has intervened on a gigantic scale to keep its exchange rate down. Between January 2000 and the end of last year, China’s foreign currency reserves rose by $2,240bn; after July 2008, when the renminbi’s gradual appreciation against the dollar – begun three years earlier – halted, reserves rose by $600bn (see chart); and reserves are now close to 50 per cent of gross domestic product. Finally, a massive effort has been aimed at curbing the inflationary effects of intervention. Thus, China has controlled the appreciation of both nominal and real exchange rates. This surely is currency manipulation. It is also protectionist, being equivalent to a uniform tariff and export subsidy. Premier Wen Jiabao has protested against “depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism”. The Chinese pot is calling the US kettle black.
  • Of Cows, Communities and Credit Default Swaps. It strains language to breaking point to describe CDS transactions as anything but gambling. The traders in AIG’s financial products division were inheritors of the amusements of Edward Lloyd’s coffee shop rather than the values of Swiss farmers. With short sales of equities, the need to borrow stock limits positions to the extent of insurable interest. But not in the CDS market. This observation leads directly to the increasingly widely held view – most recently expressed in this paper by my colleague Wolfgang Münchau – that CDS transactions should be permitted if they are insurance but not if they are gambling. The argument is in essence identical to that which led to the establishment of the doctrine of insurable interest in 1745: “It hath been found by experience, that the making of insurances, interest or no interest, or without further proof of interest than the policy, hath been productive of many pernicious practices.” Many things have changed since the 18th century, but many others have remained the same.
Telegraph:
TimesOnline:
  • Copper Breaches $8,000 Barrier But Hot Metal Prices May Soon Cool. The price of copper passed $8,000 a tonne for the first time in 20 months yesterday, but hopes that it was proof of a sustained global recovery promptly suffered a setback when traders said that it may be about to fall steeply again. Traders in South-East Asia said yesterday that even if the Chinese economy continued to storm ahead at its present pace, copper demand was likely to dwindle because so many big construction projects, which use copper wiring extensively, had run their course. Moreover, preparations for the Shanghai Expo have been supporting copper prices since last summer. When the pavilions open their doors in three weeks’ time, building will have stopped and with it significant copper demand. Indeed, after the expo closes at the end of October, the market could be swamped with recycled metal. A fall in demand is also expected from Chinese utilities, responsible for more than half the country’s copper needs. Prodigious quantities of electricity cable have been laid as Beijing has ordered ever-greater investments in infrastructure. Many of those projects were brought forward as part of last year’s $586 billion stimulus programme, government spending that is already beginning to be wound down. State utilities, meanwhile, are coming under financial pressure, particularly those in drought-hit southern provinces, where low river levels have affected hydroelectric plants and have forced operators to buy coal to make up the power shortfall. Overall investment in the Chinese power grid is expected to fall by a quarter this year and cable producers are already talking about buying 10 per cent less copper. The expected decline in copper prices, commodity traders said, would be accelerated because large quantities of copper stocks reputedly were held in Chinese warehouses and not counted among the “official” stocks of the Shanghai exchange. According to one Shanghai-based commodity fund manager, it is thought that off-exchange copper outweighs the material that trades on the Shanghai Futures Exchange by a ratio of two to one.
People's Daily:
  • Stop Using English Phrases, Govt Tells Chinese TV Stations. TV viewers may no longer be able to hear English abbreviations, like "NBA" (National Basketball Association), from mainland broadcasters. China Central Television (CCTV) and Beijing Television (BTV) confirmed to China Daily on Tuesday that they had received a notice from a related government department, asking them to avoid using certain English abbreviations in Chinese programs. Broadcasters and journalists have been asked to provide Chinese explanations for unavoidable English abbreviations in their programs, the report said. The notice not only limits the use of English abbreviations in sports news, but also in economic and political news. Abbreviations such as "GDP" (gross domestic product), "WTO" (World Trade Organization) and "CPI" (consumer price index) will also be substituted with their Chinese pronunciations, it said. The country's top watchdog on television and radio, the State Administration of Radio, Film and Television, refused to comment.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (JWN), target $50.
Night Trading
  • Asian indices are unch. to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 92.5 -1.0 basis point.
  • S&P 500 futures -.17%
  • NASDAQ 100 futures -.13%
Morning Preview Links

Earnings of Note
Company/Estimate
  • (MON)/1.70
  • (FDO)/.78
  • (SHAW)/.47
  • (LWSN)/.09
  • (MDRX)/.16
  • (SCHN)/.46
  • (RT)/.23
  • (BBBY)/.72
Economic Releases
10:30 AM EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,350,000 barrels versus a +2,929,000 barrel increase the prior week. Gasoline supplies are estimated to fall by -1,000,000 barrels versus a +313,000 barrel gain the prior week. Distillate inventories are expected to fall by -1,125,000 barrels versus a -1,085,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus a +1.49% gain the prior week.
3:00 PM EST
  • Consumer Credit for February is estimated to fall -$.7B versus a +$5.0B gain in January.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Dudley speaking, Fed Chairman Bernanke speaking, Fed's Hoenig speaking, monthly retail same-store-sales after close, Treasury's $21 Billion 10-Year Note auction, weekly MBA mortgage applications report, (NVDA) analyst meeting and the (EOG) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

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