Friday, June 11, 2010

Friday Watch

Evening Headlines

  • Euro Company Spreads Rise to Record Versus U.S.: Credit Markets. The risk of owning Europe’s corporate bonds is the highest on record relative to U.S. company debt as investors lose confidence that lawmakers and central bankers can tame the region’s worsening fiscal crisis. Yields on investment-grade bonds in euros rose to a 10- month high of 239 basis points, or 2.39 percentage points, more than government debt, according to Barclays Capital index data. That’s 43 basis points more than the spread for U.S. company fixed-income securities, near the record 44 basis points reached May 27. European bond spreads were below those on dollar debt as recently as February, the indexes show. Yields suggest debt investors are concerned that Europe’s sovereign debt crisis will stifle growth and curb profits.
  • Goldman's(GS) Cohn Sees No Sign of Resolution to SEC Case. Goldman Sachs Group Inc. President Gary Cohn said he sees no signs of a resolution to the Securities and Exchange Commission’s fraud claims against the firm. “There’s no indications of anything at this point,” Cohn told reporters at a conference in Montreal today.
  • Senate Vote on EPA Carbon Rules Splits Democrats. A failed Republican move to block a U.S. agency from regulating greenhouse gases under existing law may have drawn enough votes to damage Democratic hopes of a passing a bigger pollution-reduction plan this year. Six Senate Democrats joined the Republican effort to challenge the Environmental Protection Agency’s planned regulations for carbon dioxide and other gases linked to climate-change. The motion to disapprove the EPA’s carbon regulations from Lisa Murkowski, an Alaska Republican, was defeated 47-53 in a procedural vote. EPA carbon rules are the Obama administration’s backup plan for limiting greenhouse gases if its preferred approach, cap- and-trade legislation that charges polluters a price for the carbon dioxide they released into the atmosphere, doesn’t pass Congress this year. Senate Majority Leader Harry Reid told reporters after the vote he’ll wait for a meeting with Democrats next week before deciding what should be in next month’s energy legislation, although it won’t be branded as “cap-and-trade.” “We don’t use the word cap-and-trade; that’s something that’s been deleted from my dictionary,” Reid said. “Carbon pricing is something we’re talking about.” and Today, all 41 Republicans voted against the EPA’s proposed carbon regulations. The six Democrats to side with them today were Evan Bayh of Indiana, Ben Nelson of Nebraska, Jay Rockefeller of West Virginia, Mary Landrieu of Louisiana and Mark PryorBlanche Lincoln of Arkansas. They joined Republicans in arguing that the EPA regulations, which would take effect next year, are impractical and damaging to the economy. The regulations are a “back-door national energy tax” that would deal “a devastating blow to an economy that’s already in rough shape,” said Senate Republican Leader Mitch McConnell of Kentucky.
  • Wind Companies to Buy More U.S. Parts in Agreement With Unions. Wind-energy companies agreed to buy more parts from U.S. suppliers, and a labor union promised to join in lobbying Congress for a requirement to use more renewable energy. The accord announced today by the American Wind Energy Association and the United Steelworkers union grew out of objections by lawmakers that federal money was being spent to purchase clean-energy components made abroad.
  • Hong Kong's Hang Seng Index may fall 6.3%, extending its slump from its November Peak, as technical analysis signals further weakness, according to MF Global Holdings Ltd.
  • Korea Bank Debt Faces Biggest European Funding Risk, RBS Says. Bonds of South Korean lenders such as Woori Bank are most at risk among Asian financial companies should Europe’s debt crisis escalate, according to Royal Bank of Scotland Group Plc.“If there is a global liquidity crunch, Korean banks are likely the most vulnerable,” analysts led by Kristine Li wrote in a report e-mailed yesterday. “Korea is the most dependent on external bank financing besides Hong Kong and Singapore, and Korean banks have the highest loan-to-deposit ratio.”
  • Papandreou Unwinds Greek Socialist Past to Confront Corruption. Socialist Prime Minister George Papandreou promised to undo decades of welfare policy to win an international bailout for Greece. Keeping the lifeline will force him to reverse another legacy left by past leaders, including his father: corruption and a bloated bureaucracy. Papandreou has promised “clean hands” to win public support for austerity measures that will cost all 11 million Greeks -- from newborns to retirees -- as he introduces in coming weeks a plan to overhaul the pension system, the fattest target in his deficit-cutting campaign. The nation’s financial crisis, which has sparked dozens of anti-government demonstrations including one in which three bank employees were killed, presents an opportunity for a political and economic overhaul that Papandreou must grasp, analysts and investors say. Failure by the 57-year-old, U.S.-born leader threatens default and a cataclysm that may undermine the euro.
  • China Reaches Lewis Turning Point as Inflation Overtakes Labor. Shenzhen Jufeng Handicraft Co. was so eager to ensure employees returned to work after February’s Lunar New Year holiday that it threw them a party, handed out gifts and bused workers to homes 1,000 kilometers away. “We needed to do more to make them stay,” said Sunny Jia, sales manager of the Shenzhen-based company, which makes linen, leather bags and cabinets for such customers as Oscar Collections Ltd. in the U.K. “All our customers wanted orders shipped within a month.” China, once an abundant provider of low-cost workers, is heading for the so-called Lewis turning point, when surplus labor evaporates, pushing up wages, consumption and inflation, said Huang Yiping, former chief Asia economist at Citigroup Inc. The result may prompt manufacturers to switch to cheaper countries such as India and Vietnam. “If the first decade of the 21st century saw China rapidly rising as a global manufacturing center, the post-Lewis turning point could see the opposite,” said Huang, an economics professor at Peking University in Beijing. “Global manufacturing activities concentrated in China today may find their way elsewhere.”
Wall Street Journal:
  • U.S. Firms Build Up Record Cash Piles. U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963. While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe's debt troubles lead to a new market freeze.
  • U.S. Shifts Toward Support for Iran's Dissidents. The U.S. has accelerated its effort to provide dissidents in Iran with computer hardware and software to evade government censors. But it's a shift that many activists say is insufficient to bring political change in Tehran.
  • Federal Budget Deficit in May Totals $135.93 Billion. The U.S. federal budget deficit rose again in May as the government neared the $1 trillion mark a second straight year. The government spent $135.93 billion more than it collected, the U.S. Treasury said in its monthly budget statement released Thursday. Government spending on defense came short of the expectations of research firm Macroeconomic Advisers, causing the research firm to lower its tracking forecast for second-quarter economic growth to 3.6% from 3.7%. The budget report came out a day after Federal Reserve Chairman Ben Bernanke issued a new warning on the U.S. fiscal condition. Mr. Bernanke, who testified to Congress Wednesday, said there is a risk to the overall economy if financial markets begin worrying about the government's commitment to reducing the deficit. The U.S. ran a record $1.42 trillion deficit in fiscal 2009. Fiscal years begin Oct. 1. Mr. Bernanke even said the U.S. could face problems that debt-stricken Greece has suffered if it doesn't come up with a plan soon to cut the deficit.
  • Deflation Fears Stir in Developed Economies. Worries about consumer price deflation are resurfacing in the world's developed economies after weeks of financial-market turmoil driven by Europe's fiscal crisis. The fears are most pronounced in Europe, where policy makers are under pressure to reduce large budget deficits now, before durable recoveries emerge. A combination of spending cuts and tax increases could weigh on economic growth and feed into deflation, which is a broad decline in consumer prices. Deflation makes it harder for consumers, businesses and governments to pay off debts. Principal repayments on debt are fixed but deflation is marked by falling incomes, so as deflation sets in the burden of paying off old debts gets greater. Officials fret about deflation because it is hard to stop. Interest rates are already near zero in the U.S. and elsewhere, so policy makers can't use the traditional tool of rate cuts to spur growth and stop deflation. That's an acute worry today.
  • 'We Are Totally Unprepared'. Nine years after 9/11, a chilling complacency about WMD attacks. The most important overlooked story of the past few weeks was overlooked because it was not surprising. Also because no one really wants to notice it. The weight of 9/11 and all its implications is so much on our minds that it's never on our mind. I speak of the report from the Inspector General of the Justice Department, issued in late May, saying the department is not prepared to ensure public safety in the days or weeks after a terrorist attack in which nuclear, biological or chemical weapons are used.
Bloomberg Businessweek:
  • China's Inflation Rises to 19-Month High of 3.1%. China’s inflation accelerated in May to the quickest pace in 19 months, highlighting overheating risks in the fastest-growing major economy. “China’s economy is still in a cycle towards overheating and the government should step up measures to curb inflation expectations,” Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said before today’s release. “This weekend or this period of time in general before the G-20 summit would be an excellent time” for China to widen the yuan’s trading band, Liu said. Producer-price inflation quickened to 7.1 percent from 6.8 percent.
  • Trouble Rumbling in China for US Companies. In a global economy unsettled by the patchiness of the U.S. recovery and European financial turmoil, China would appear to be the one place in the world no one needs to worry about. Appearances may be deceiving. While China's efforts to rein in real-estate speculation have alleviated fears it might be overheating, experts say other issues—from wage inflation to continued currency controls to a new "Buy China" push—are turning the world's third-largest economy into another source of potential trouble for the foreign companies that do business there. That could be especially bad news for U.S. manufacturers, which have not only moved a lot of production to China but come to rely on it in recent years to offset the weakness in many other markets, including the United States.
  • Reform Panel Members Got Millions From Wall Street. The 43 U.S. lawmakers charged with shepherding a massive government overhaul of the financial industry over its final hurdles in Congress have collected at least $67 million combined in campaign contributions from financial sources. The conference committee's Senate members have received more than $40 million from political action committees and individuals connected with Wall Street securities and investment firms, commercial banks, insurance companies, mortgage bankers, and finance and credit companies. House members, including panel chairman Barney Frank, have collected at least $27 million for their election campaigns over the same period. Democrats, who make up nearly two-thirds of the panel, are the financial industry's greatest beneficiaries, drawing an average of $1.7 million per lawmaker, versus $1.4 million for each Republican. In fact, about one-third of industry contributions, or $21.7 million, went to only two Senate Democrats—Banking Committee Chairman Christopher Dodd of Connecticut and Charles Schumer of New York. Following is a list of conference committee members and the campaign contributions they have received from securities, investment, banking, insurance, mortgage banking and finance companies since 1989 and during the 2010 election cycle, which began January 1, 2009.
NY Times:
Business Insider:
Finance & Commerce:
  • House Passes Bill to Boost FHA Reserves $300 Million a Month. The U.S. House voted to allow the Federal Housing Administration to raise the fees it charges to borrowers, a move that would add $300 million a month to help the agency rebuild its dwindling reserves. The House approved the measure in a 406-4 vote Thursday, sending the bill to the Senate for consideration. The bill allows the FHA, which protects lenders against mortgage defaults, to increase the insurance premium for homebuyers and change the way that fee is collected. It also gives the agency more authority to reject mortgage lenders with excessive defaults.
Huffington Post:
  • Top Fiscal Hawk on Fed Supports Restricting Banks' Derivatives Bets, Goes FURTHER Than Obama. The top fiscal hawk and longest-serving policy maker in the Federal Reserve supports limiting banks' derivatives activities, a potential blow to Wall Street megabanks that use their taxpayer-supported banks to trade the kind of risky financial products that nearly brought down the global financial system. In a letter of support, Federal Reserve Bank of Kansas City President Thomas M. Hoenig endorsed a Senate provision Thursday that would force banks to strip their swaps desks out from their depository institutions, calling it "of utmost importance to our nation's long-term financial and economic stability." The firms would have to move those units, which deal and trade in a type of financial derivative product, into a separately-capitalized institution within the bank holding company, raising as much as a few hundred billion dollars to protect them in case their bets go bad. Or, they could disband the activity altogether. Of the nearly 8,000 banks in the U.S., less than 25 would be seriously affected.
  • Cantor Aims to Focus GOP on Spending. House Minority Whip Eric Cantor will kick off a personal drive Friday to rebrand the GOP “as a party that gets it” and would focus on spending — not ideology — if Republicans win a House majority in November. “People are receptive to a message of responsible leadership,” he said in an interview in his Capitol suite.
USA Today:
  • Australian PM, BHP(BHP) Knock Down Quick Mine Tax Deal.
  • AU Optronics(AUO), CEO Indicted in U.S. for Price-Fixing. AU Optronics Corp, a Taiwanese maker of liquid crystal display panels, and its CEO Lai-Juh Chen, were among those indicted for conspiring to fix prices, the U.S. Justice Department said on Thursday.
  • Investors Ditch Global Equities for U.S., Emerging Bonds - EPFR. Investors slashed their equity holdings and poured money into U.S. and emerging market bonds and commodities last week on lingering fears that global growth will be hit by Europe's debt problems, EPFR Global said on Friday.
  • Fed's Bullard-Senate Bill Would Politicizes Fed. A senior Federal Reserve official warned on Thursday that a Senate proposal to make the New York Federal Reserve Bank president a White House appointee risks injecting a dangerous dose of politics into the deliberations of the U.S. central bank. "This is pretty much blatant politicization of the Fed," St. Louis Federal Reserve Bank President James Bullard told Reuters in an interview. "I also think it's setting up conflicts with the Board of Governors in the future."
Oriental Daily News:
  • Foxconn Technology Group will relocate some of its production lines from China to Taiwan after a spate of suicides at a plant in southern China, citing Terry Gou, chairman of the Hon Hai Group, which includes Foxconn.
Business Standard:
  • Oversupply in Mumbai Luxury Housing Looms Large. Property developers are dreaming of making Lower Parel, a former textile hub in central Mumbai, into a super-luxury residential address for the country’s ultra-rich. However, analysts and property consultants see oversupply of premium houses looming large on the island city’s skyline. In all, Lower Parel is expected to see over 10 million sq ft of residential supply in the next three to four years, according to Religare Capital Markets.
Evening Recommendations
  • Rated (FO) Sell, target $41.
  • Upgraded (BMY) to Buy, target $30.
Night Trading
  • Asian indices are +.50% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 142.0 -9.0 basis points.
  • S&P 500 futures -.14%.
  • NASDAQ 100 futures -.15%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
8:30 am EST
  • Advance Retail Sales for May are estimated to rise +.2% versus a +.4% gain in April.
  • Retail Sales Less Autos for May are estimated to rise +.1% versus a +.4% gain in April.
  • Retail Sales Ex Auto & Gas for May are estimated to rise +.2% versus a +.4% gain in April.
9:55 am EST
  • Preliminary Univ. of Mich. Consumer Confidence for June is estimated to rise to 74.5 versus a reading of 73.6 in May.
10:00 am EST
  • Business Inventories for April are estimated to rise +.5% versus a +.4% gain in March.
Upcoming Splits
  • (LNCR) 3-for-2
Other Potential Market Movers
  • The Fed's Plosser speaking, Fed's Kocherlakota speaking and the Jefferies Life Sciences Conference could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by automaker and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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