Weekend Headlines
Bloomberg:
- China's Hu Buys Time on Yuan Valuation by Announcement Before G-20 Summit. Chinese President Hu Jintao may have succeeded in removing the yuan’s valuation from debate at this week’s Group of 20 leaders’ summit, economists and political analysts say. How much time he’s bought depends on how flexible the currency will become.
- Chinese Exporters Unable to Take Big Yuan Gains, Newspaper Editorials Say. China’s exporters are unable to withstand large fluctuations in the yuan, Chinese newspapers including the China Securities Journal and China Daily wrote today after the central bank pledged greater flexibility for the currency. External demand remains “uncertain,” and shipments may fall in the second half because of the European debt crisis, the China Securities Journal, the nation’s largest financial newspaper, wrote in an editorial. Large yuan gains against the dollar combined with the European crisis would create a “double whammy” for exports, it wrote. The possible effects of the European debt crisis shouldn’t be overlooked because of better-than-expected export data for May, the China Securities Journal wrote. Weak global demand and rising labor costs will increase the difficulty Chinese exporters have in dealing with yuan appreciation, the China Daily wrote in an editorial.
- Toyota, Honda Raise China Wages as Yuan's Flexibility to Threaten Profits. Toyota Motor Corp. and Honda Motor Co. sacrificed earnings in China by raising wages to end strikes last week, and the government’s decision to allow greater flexibility in the yuan’s exchange rate may further erode profit if the move leads to an appreciation of the currency. Foreign manufacturers in China, including the Japanese carmakers and Taiwan’s Foxconn Technology Group, are spending more on labor. Foxconn, which makes iPhones for Apple Inc., said it will double salaries for its lowest-paid workers after at least 10 Chinese employees killed themselves this year. A stronger Chinese currency will add to operating costs for foreign businesses, whose margins are already under pressure from rising wages, said David Cohen, director for economic forecasting at Singapore-based Action Economics.
- Bond Sales Stage Comeback as Interest-Rate Swaps Decline: Credit Markets. Corporate bond sales are back to levels not seen since April as interest-rate swap spreads show investors are gaining confidence that Europe’s debt crisis is contained.
- Fitch Says Next Two Months to Test Kan's Will to Cut Record Japanese Debt. Japanese Prime Minister Naoto Kan’s debt-fighting credentials will be tested over the next two months as he releases a fiscal strategy and his party contests mid-term elections, Fitch Ratings said. “It’s early days for his government, so the intention is there, but it remains to be seen how strong the consensus is” among politicians and the electorate, Andrew Colquhoun, Hong Kong-based director at the company’s Asia-Pacific sovereign group, said in an interview in Tokyo today. “The next two months is quite an important period.” Kan, who took office this month, is scheduled to unveil his plan for containing the world’s biggest public debt this week before facing upper house elections on July 11. He has indicated that he may raise the nation’s consumption tax to 10 percent, a statement surveys show has hurt his approval ratings and signals he may meet resistance to his debt-cutting plans. The outcome of the ballot and release of Kan’s fiscal road-map “will give us information about what political appetite is in Japan for fiscal consolidation, or if it’s there,” Colquhoun said. Colquhoun said today that while the outlook on Japan’s AA- credit rating, the fourth highest, remains stable, it could come “under downward pressure” if the government doesn’t achieve a “credible” fiscal plan. Kan will not only need fiscal targets but also a detailed roadmap of how he intends to achieve them, he said.
- Chinese Turbine Makers Face 'Tough Situation' After Goldwind Shares Slump. Investors’ interest in Chinese wind companies may be slowing after Xinjiang Goldwind Science & Technology Co., China’s second-largest wind turbine maker, shelved a share sale in Hong Kong, analysts said. Goldwind shares declined 4.9 percent to 18.09 yuan at 11:12 a.m. in Shenzhen. The stock slumped by the daily limit of 10 percent on June 18, the first day of trading after the company canceled a plan to raise as much as HK$9.09 billion ($1.2 billion) in Hong Kong, citing poor market conditions. Global investment in wind power eased during the economic slump in the U.S. and Europe, lowering the prices paid for wind farms, according to Bloomberg New Energy Finance. Turbine makers are most at risk of a slowdown as overcapacity narrows margins, said Justin Wu, an analyst for the research group.
- BP(BP) Blunted U.S. Demand. BP PLC, despite being put under pressure by the U.S. government to pay for the oil-spill aftermath, has succeeded in pushing back on two White House proposals it considered unreasonable, even as it made big concessions, said officials familiar with the matter.
- Global Grain Surplus Sows Trouble. Two years after the global food crisis peaked, grain shortages are turning into surpluses that could create their own problems. Some traders and economists are speculating that if the U.S. and world economies don't heat up soon, surpluses could turn into price-depressing gluts.
- The New Bank Fees: How to Fight Back. Bank on it: Higher fees, and more of them, are coming soon to a financial institution near you.
- ObamaCare and the Independent Vote. Voter opposition hasn't changed, and it could be decisive in November. The Democrats made a strategic choice to pass health reform even though they knew it did not have majority support. They assumed passage would generate a positive initial response from the media—which it did. They also hoped that, with time, voters would see reform in a more favorable light, and that health care would not pose an issue in the midterm elections. Were the Democrats right? If our polling is correct, they were not.
- Tech Company Guides The Way As Entertainment Goes Digital. There are so many choices now that some companies make their living simply helping folks connect their electronic devices to TV shows, movies and music. Rovi (ROVI) is one of those companies.
- Cost of Seizing Fannie and Freddie Surges for Taxpayers. and took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords. For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The predicts that the final bill could reach $389 billion.
- Docs' Win on Medicare Too Late to Stop 21% Cut. Doctors who receive Medicare payments won a round Friday in their bid for a raise - but first they'll suffer a big cut in their government reimbursements. The Centers for Medicare & Medicaid Services said that after waiting since May for congressional approval, it can't wait any longer. So it is processing all claims from June 1 up till now. "This is the largest reduction that the doctors' payment has ever experienced," said centers spokesman Peter Ashkenaz. With their future payments still uncertain, physicians found little reason to rejoice over the Senate approval.Heim said she knows physicians who "already decided that they could no longer continue to see Medicare patients if the cut went through. There are other physicians that I've heard from who have decided to stop taking Medicare patients." "This is really outrageous," she added. The American Medical Association also weighed in. "Congress is playing Russian roulette with seniors' health care," said AMA President Dr. Cecil B. Wilson. "Congress has finally taken its game of brinkmanship too far, as the steep 21% cut is now in effect and physicians will be forced to make difficult practice changes to keep their practice doors open." More than 43 million Americans receive medical care through Medicare.
- Wall Street Reform Comes Down to the Wire. With one week down and one week to go on negotiations melding the two Wall Street reform bills, lawmakers have a lot of tough decisions ahead.
- Apple(AAPL): FaceTime Video Calls Won't Use Your Carrier Minutes. Good news: Apple's new FaceTime video calls won't use up your allotment of carrier minutes, even if they're initiated from within a voice call, an Apple rep tells us. "The voice call ends as soon as the FaceTime call connects," Apple tells us. "The FaceTime call is over Wi-Fi so does not use carrier minutes."
- David Kotok: BP Oil Spill Will Cause 1 Million Permanent Lost Jobs. David Kotok of Cumberland Advisors is out with the latest in his sobering, but must-read OIl Slickonomics series. This time he does some math on the direct economic impact on Gulf States. We estimate that an extended moratorium, which we now expect to continue because of Obama political calculus, will cost up to 200,000 higher-paying jobs in the oil drilling and oil service business and that the employment multiplier of 4.7 will put the total job loss at nearly 1 million permanent employment shrinkage occurring over the next few years. Five states have a regional recession/depression development underway. Alaska could become the sixth state on the damaged list.
Washington Post:
- U.S. Military Criticized for Purchase of Russian Copters for Afghan Air Corps. The U.S. government is snapping up Russian-made helicopters to form the core of Afghanistan's fledgling air force, a strategy that is drawing flak from members of Congress who want to force the Afghans to fly American choppers instead.
- Congress to Weigh Regulation of Financing by Auto Dealers. Dealers say that they're just trying to help customers secure loans and that they're already covered by anti-fraud regulations. Heading into the final stages in overhauling financial regulations, a joint congressional committee is ready next week to tackle one of the thornier issues — whether car dealers will be regulated by a proposed consumer protection agency. The joint conference committee is wrestling with the role dealers play in auto financing and the discretion they have to set terms.
- Invisible Stimulus. Lots of spending, very little stimulus. President Obama may parachute in sporadically for invitation-only town hall meetings to promote "Recovery Summer," but that doesn't count as real in flyover country. The administration's six-week push to reinvigorate its stimulus narrative will showcase jobs in stimulus-funded projects to improve highways, parks and other public works. Yet stimulus dollars never hit the ground here. "We didn't receive any of the stimulus money," says Leadville Mayor Bud Elliot. "We weren't eligible because we are considered too poor of a community." Elliott, a Democrat, says the American Recovery and Reinvestment Act was "designed to help large cities, not small-town America."
- Summers Cites Recovery, Risks. He offers cautious view of conditions. The US economy has probably begun a lasting recovery, but the outlook has become more uncertain in recent weeks in the face of the European debt crisis, gyrating stock markets, and weaker-than-expected job growth, said Lawrence Summers, President Obama’s top economic adviser.
- Jones Act: Maritime Politics Strain Gulf Oil Spill Cleanup. Pressure is building for President Obama to lift a 1920 protectionist law so that high-tech foreign oil skimmers can help with the Gulf oil spill. Why are 1,500 available US oil skimmers not on the scene? The Coast Guard Friday "redoubled" efforts to keep the Deepwater Horizon oil spill from impacting Gulf states by calling in more skimming boats and equipment from the Netherlands, Norway, France, and Spain after previously telling one Dutch official "Thanks, but no thanks," to an offer of help. That revelation comes as Florida lawmakers beg for more skimmers to ward off Gulf spill oil approaching the state's white sand beaches and the Unified Command – led by Coast Guard Adm. Thad Allen – struggles with chain-of-command issues as BP changes its on-scene leadership. The news of more foreign ships steaming toward the Gulf also comes amidst a heated political debate over the role of the 1920 Jones Act, a protectionist law that prohibits foreign-flagged boats and crews from doing port-to-port duty within 3 miles of the US coast. On Friday, Sen., Kay Bailey Hutchinson (R) of Texas filed legislation to waive the Jones Act to welcome more high-tech foreign clean-up boats, saying the Jones Act is standing in the way. White House spokesman Robert Gibbs said last week "that we have not had [a] problem" with the Jones Act. At the same time, US marine interests complain that up to 1,500 US-flagged skimmers sit idle, and should be used first.
- Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 28% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -16 (see trends).
- Chances Dim for Swift 9/11 Decision. Attorney General Eric Holder said the decision over where to hold the trial for alleged 9/11 plotter Khalid Sheikh Mohammad was “weeks away” — three months ago. Now advocates on both sides of the issue say they expect the Obama administration to punt the decision until after the November midterm elections— when the controversial plan could do less damage to the political fortunes of endangered Democrats and might face less resistance on Capitol Hill.
- Gates Downplays Biden Pledge, Afghan Violence. Defense Secretary Robert Gates on Sunday contradicted Vice President Joe Biden’s pledge that in July 2011 “a whole lot” of U.S. forces will be leaving Afghanistan. “That absolutely has not been decided,” Gates said on "Fox News Sunday," adding, “I also haven’t heard Vice President Biden say that, so I’m not accepting at face value that he said those words.”
- Florida Rolls the Dice With Chunk of Pension Funds. Chasing bigger investment returns, the agency that manages Florida's $113.8 billion public pension fund wants to make far riskier investment bets. The state wants to reduce the pension fund's holdings in publicly traded stocks and bonds and triple its allocation to hedge funds and other private investments that are less liquid and harder to value. Earlier this month, the head of the State Board of Administration told his bosses that rearranging the state's portfolio would benefit the nearly 1 million public employees and retirees who depend on the fund, as well as the taxpayers who underwrite the system.
- More of Europe's Banks Face Stress Test. More European banks face stress tests to assess their health, officials acknowledged on Friday amid warnings that publishing detailed test results for the continent’s biggest financial institutions may not fully quell investor concerns. European Union leaders have agreed to publish stress test results for 26 banks next month – an unprecedented attempt to restore market confidence battered by weeks of worry about high levels of eurozone sovereign debt. Concern also surrounds the health of Europe’s large number of smaller banks not covered by stress tests. José Manuel Barroso, president of the European Commission, said in Florence on Friday that authorities would persist with bank stress tests involving “much more” than the 26 banks being examined by European regulators. Germany was understood to have wanted to widen stress-testing to include other public-sector banks, seen as a weak link in its system. But Germany said its laws meant it could not compel banks to reveal stress test results. It made clear it would rely on peer pressure to herd banks into line and to publish results. There was also doubt about how the tests to be made public would deal with banks’ holdings of European sovereign debt. That has been one trigger for the waning market confidence in banks, as concerns have intensified about the possibility of a default by a eurozone member. The EU-wide stress test is not understood to have encompassed specifics about banks’ sovereign debt exposure, but an assessment of sovereign risks “will be captured” in other ways, says one person involved in the process. People close to the testing process also suggested it was less draconian than tests conducted last year. Ralf Preusser, head of European rates research at BofA Merrill Lynch Global Research, said: “Publishing stress tests is a good thing – but we do need to know what they have actually stressed. Will they stress the possible outcome of a Greek default on its bonds, for example?” Banks to be tested now were “not really the concerns”, Mr Preusser said. “Concerns surround the second-tier institutions. We need information on these banks.”
- European Stress Tests Spread Debt Jitters. Fears are rising over French and German banks’ exposure to weaker economies in the eurozone such as Greece, Portugal and Spain after moves to publish bank stress tests in Europe. Investors warn the tests could expose the European banking system’s interdependence and spread contagion, which started with Greece, to the continent’s two biggest economies. Elisabeth Afseth, fixed-income strategist at Evolution, said: “The stress tests have focused some investors’ minds on the exposure of France and Germany to the peripheral economies. This could put the French and German bond markets under pressure.” The Bank for International Settlements published figures last week showing that French and German banks were particularly exposed to Greece, Ireland, Portugal and Spain. French and German banks could suffer heavy losses in the event of a country defaulting on its bonds. Most investors expect Greece to default, while the chances of the others following are increasing. Although many investors fear European policymakers will stop short of testing the banks over the possibilities of a Greek or sovereign default, they warn that this is becoming an issue, particularly in France. People close to the tests have signalled that publication is set to contain some disclosure of sovereign exposures.
- More Turmoil Looms in CDO Market. The recent cancellation of so-called monoline insurance contracts on $16bn of collateralised debt obligations backed by subprime mortgages is raising the prospect of more turmoil for one of the most beleaguered corners of the financial markets. Insurers that guaranteed CDOs – complex securities backed by pools of mortgages, loans or other assets – have suffered heavy losses, leading to widespread efforts to unwind, or “commute”, CDO insurance contracts. Earlier this month, Ambac Assurance struck a deal to wipe out insurance contracts – called credit default swaps – on $16.4bn of CDOs as the insurer hovered on the brink of bankruptcy. This means “controlling rights” to the underlying assets will pass from the insurer to the holders of the securities, mostly banks. Analysts said this could lead to a wave of selling of the securities, which could depress prices in markets still struggling to recover from the financial crisis. This, in turn, could have knock-on effects for banks and financial institutions still holding toxic mortgage-backed debts, potentially forcing another round of writedowns.
- Oil Spill: BP(BP) to Sue Partner in Gulf Oil Well. BP is preparing to sue its main partner in the leaking Gulf of Mexico oil field for its share of clean-up costs after the company, Anadarko(APC), said BP's behaviour revealed "gross negligence" and that the accident was preventable. In a fundamental split between the two companies with lead responsibility for the well, a senor BP source told The Sunday Telegraph that Anadarko was "shirking its responsibilities", not accepting its liabilities and that legal action in the US was now likely to follow. Anadarko, which has a 25pc stake in the well, signalled this weekend that it will refuse to pay up.
- £30bn taxes and cuts package to be announced in Budget. The Chancellor is expected to strip millions of middle-income families of child-related benefits as well as targeting the pay packets of public sector workers in an Emergency Budget billed as the most significant and hardest hitting for a generation. VAT is expected to rise from its current level of 17.5 per cent – although it was unclear this weekend whether an increase would come in immediately or be deferred. Treasury officials were preparing the ground for a budget which will cause pain across the economy as the planned spending cuts and tax rises bite into Britain's fragile recovery. One source said that Mr Osborne was attempting to get as much bad news as possible out of the way in the early weeks of the coalition government. "We're putting everything in there – we're kitchen sinking it," he added. The package will be so severe that official forecasts for Britain's economic growth next year – already cut from 3.25 per cent to 2.6 per cent earlier this month – will be cut again, The Sunday Telegraph has learned.
- Barclays(BCS) President Bob Diamond to Defend Lehman Brothers Purchase in Court. Bob Diamond, Barclays' president, will take the stand in New York on Monday to defend the bank's acquisition of Lehman Brothers against claims the the deal was done on the cheap.
- Obama Harms Special Relationship. A poll carried out in Britain and American reveals Obama's handling of the BP oil spill crisis is damaging relations between the two countries. The YouGov poll, which questioned nearly 1,500 people in Britain and almost 600 in America, shows overwhelmingly that Obama’s strident attacks on BP are hurting the special relationship. By 64% to 2% in Britain and by 47% to 5% in America, people believe the president’s handling of the crisis has damaged relations. For British respondents, Obama’s attacks have changed for the worse their attitude to America. Only 54% said they now had a favourable attitude towards America, compared with 66% when the question was asked before the oil spill. More than a fifth of people in both Britain and America, 22% in each case, think Obama is anti-British.
- Macondo Well May Contain 1 Billion Barrels of Oil - And May Flow For a Decade. BP’s ruptured Macondo oil well could contain as much as 1 billion barrels of oil, making it one of the largest oil discoveries in the world in recent years and meaning that it could keep flowing for more than a decade if left unchecked, industry experts claimed last night. Rick Mueller, an oil industry expert at Energy Security Analysis, in Massachusetts, said that the well’s powerful flow rate, which has been estimated by the US Government at up to 60,000 barrels a day and shows no sign of abating, suggested that the well could be far bigger than previously thought. BP previously estimated that the field contained 50 million to 100 million barrels of oil. Mr Mueller said that it was possible that the Macondo field could be of a comparable size to other “super-giant” fields found in the same Mississippi Canyon area of the Gulf of Mexico, 100 miles (160km) to 150 miles southeast of New Orleans. These include BP’s vast Thunderhorse and Tiber discoveries, both of which are believed to contain more than 1 billion barrels of crude and were found in similar water depths of 4,000ft (1,220m) to 6,000ft. BP has said that it will donate all of the income from the oil collected at the Macondo well to a compensation fund. The largest offshore oil discoveries in the world in recent years have been made in Brazil. The Tupi field, off the coast of Rio de Janeiro, is thought to contain 5 billion to 8 billion barrels. Another discovery in India, Mangala, is believed to contain 3.6 billion barrels. Before drilling the Macondo well the Deepwater Horizon rig had made a giant discovery at the Tiber prospect. This was an incredibly deep well, about as far below the Earth’s crust as a passenger jet flies above it. The multiple reservoirs found at Tiber were BP’s second discovery in the so-called Lower Tertiary Play, which spans 300 miles across the Gulf and was deposited between 65 million and 23 million years ago. If the Macondo field is larger than BP initially claimed it could have a dual significance for the company. The well could keep flowing at a rapid rate for many months or years, but it could also be highly valuable in the long term. However, BP is unlikely to return to the well for a number of years. It emerged yesterday that BP is assembling a war chest of up to $25 billion (£17 billion) to help to pay off the mounting compensation bill for the oil spill. The oil company needs ready cash to prove that it can meet its liabilities. BP has hired Standard Chartered to sell off assets worth more than $10 billion and the company is believed to have secured an emergency funding line of $5 billion from a bank consortium led by HSBC. BP has also saved more than $7.5 billion by scrapping its dividend and cutting back on capital expenditure.
- Google(GOOG) Launches Cloud-Based Assault on Microsoft(MSFT). Google is making its most direct assault yet on Microsoft with the launch of its Chrome operating system. The search giant and computer makers will soon release the first laptops loaded with the new system, potentially heralding the start of a new era of online, “cloud-based” personal computing after nearly three decades in which it has been dominated by Microsoft’s Windows.
- Economic recovery in Switzerland will probably be slowed by fiscal austerity programs in the European Union, Jean-Daniel Gerber, the Swiss government's head of economic affairs said.
- European Central Bank President Jean-Claude Trichet said Europe will not allow member states of the euro region to go bankrupt, adding the bloc can't go back to the times before the establishment of the Maastricht Treaty on European economic and monetary union.
- France plans to raise the question of the regulation of commodity derivatives with G-20 nations, French Finance Minister Christine Lagarde wrote. France will seek progress on the subject during its presidency of the G-20, Lagarde wrote. Europe should regulate commodity derivatives, including those based on carbon dioxide quotas, and France plans to send a "reflexion document" to the European Commission in coming months, Lagarde wrote.
- California on 'verge of system failure'. Golden State, like many others, is nearly bankrupt and desperately needs a bailout. Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this. Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines. “People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.” It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps.
- India's Subprime Crisis? Threat of microfinance defaults rises as SKS plans IPO. Savita Ramesh Rathore stood at the door to her dimly lit workshop in Mumbai’s Dharavi slum, filled floor-to-ceiling with bundles of old clothes, and tallied up the cost of her son’s wedding last year. “Jewels, clothes, food, the town hall,” said Rathore, 50, who makes towels from discarded clothes. She borrowed 30,000 rupees ($645) from moneylenders charging 60-percent interest and took additional loans from friends to pay for the wedding. Three months ago, she got a 10,000-rupee loan from urban lender Hindusthan Microfinance Pvt. to repay some of that debt. Rathore is one of 25 million Indians who have taken so-called microfinance loans, often without adequate documentation or collateral, according to Micro-Credit Ratings International Ltd. As Hyderabad-based SKS Microfinance Pvt. plans to become the first such lender to go public in the country, an industry credited with helping alleviate poverty may come under pressure to tighten loan standards to avoid a pile-up of bad debts. “Globally, microfinance is showing characteristics of the western financial markets before the collapse,” said Sanjay Sinha, managing director at Micro-Credit Ratings in New Delhi. “In the US, homeowners were given loans at 120 percent of the value of their properties. In rural India, people are being lent to at 150 percent of the value of their enterprises.”
- A decline in property investments in China will impact the nation's economic growth, Ba Shusong, a researcher at the State Council's Development and Research Center, wrote. Property industry adjustments will also impact local government land revenues, Ba wrote. Local governments may cut their investments as a result, he said.
Barron's:
- Made positive comments on (BP), (MET), (SF), (AKS), (X), (NUE), (STLD), (POT), (BDX), (SWN) and (PTRY).
- Made negative comments on (NFLX).
- Reiterated Buy on (LLY), target $41.
- Reiterated Buy on (AEP), target $41.
- Asian indices are +1.0% to +2.0% on average.
- Asia Ex-Japan Investment Grade CDS Index 120.5 -5.5 basis points.
- Asia Pacific Sovereign CDS Index 125.25 -1.75 basis points.
- S&P 500 futures +1.32%.
- NASDAQ 100 futures +1.30%.
Earnings of Note
Company/Estimate
- (SONC)/.19
- (SCS)/-.06
- None of note
- (DLTR) 3-for-2
- The (CVE) Investor Day could also impact trading today.
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