Tuesday, June 22, 2010

Tuesday Watch

Posted by Gary .....at 12:11 AM

Evening Headlines
Bloomberg:
  • Banks Must Keep Stake in Safest Loans in House Plan. Mortgage lenders would have to keep a financial stake in even the safest loans they offer under a U.S. House plan to amend legislation that would curb risk-taking by financial firms.
  • As Chinese Wages Rise, Machines Replace Migrant Workers. New minimum wage laws, a looser yuan and worker strikes like those at Honda Motor Co. are raising costs at factories in China’s Pearl River Delta, prompting companies to increase automation of assembly lines. Foxconn Technology Group, Nissan Motor Co.’s Chinese venture and VTech Holdings Ltd. said they are investing in factory equipment to reduce their reliance on labor. Wages in the region called the world’s factory floor increased 17 percent in the past six months, according to a survey by the government- backed Hong Kong Trade Development Council. Factory owners in China face declining profit margins from a rising yuan as the government drops a two-year policy that curbed the currency’s gain. Labor costs will probably bloat to 30 percent of gross domestic product in the next decade from 15 percent now, Morgan Stanley estimated this month. Higher wages in urban areas may cost companies about $1.5 trillion by 2015, according to Credit Suisse Group AG. “Factories need to think seriously about how they produce more with less,” said Ian Spaulding, Hong Kong-based managing director at INFACT Global Partners, which advises plant owners on China work practices. “Factories need to begin to enhance their productivity so that they are in a position to remain competitive.”
  • Central Banks Show Euro Losing Reserve Status as Loonie Gains. The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the U.S. and Japan. Reserve managers are joining private-sector investors including Pacific Investment Management Co., which runs the world’s biggest bond fund, in boosting allocations to nations with improving economies and the ability to reduce budget deficits after the European Union was forced to commit almost $1 trillion to prevent a sovereign default by Greece. The failure to coordinate fiscal policy among the 16 nations making up the euro increases the risk a country may leave the currency union, according to Andrew Balls, head of European portfolio management at Pimco, and Jim Rogers, chairman of Rogers Holdings. “The range of possible outcomes includes the preservation of the current euro-zone, albeit as a weaker entity unless urgent progress is made on a deeper fiscal union, or one or more euro-zone members restructuring their debt and also the possible exit of a current member country,” Balls wrote in a research report dated June 14. For reserve managers, the euro-area sovereign debt market has essentially shrunk to 20 percent of its previous size, with primarily German debt meeting central bank standards, said Alan Ruskin, head of currency strategy at Royal Bank of Scotland Group Plc in Stamford Connecticut. “The shrinkage in high quality euro assets that reserve managers can buy does significant damage to euro pretensions to be the largest reserve currency,” Ruskin said. “It puts a ceiling on how large a share the euro can gain as a reserve currency.”
  • Wall Street Is Close to Stiffing Overhaul: Roger Lowenstein. Backroom trading in Congress has put meaningful financial overhaul in jeopardy at the 11th hour. In two key aspects of the legislation, the Senate has refused to go along with the House version, undermining leverage limits on big, risky financial firms in the first instance and driving a knife through shareholder democracy in the second. One clause in the House bill would be singularly effective in preventing a repeat of the 2008 banking collapse. The other would close a 75-year-old loophole in American corporate governance, forcing boardrooms to, finally, become accountable to shareholders. Now, both are at risk.
  • Shell Pays Up for Bond Sale as Energy Debt Extends Losses: Credit Markets. Royal Dutch Shell Plc was penalized by the bond market in a $2.75 billion debt offering and Anadarko Petroleum Corp.(APC) notes tumbled on concern that the worst oil spill in U.S. history will depress profits across the industry. Investors demanded an extra 1.1 percentage points in yield over U.S. Treasuries to buy the five-year notes from Shell, compared with 0.89 percentage point for existing debt of similar maturity from the company, which is based in The Hague. Debt of Anadarko, owner of a 25 percent stake in BP Plc’s leaking well in the Gulf of Mexico, fell the most since June 9.
  • Goldman Sachs(GS) cuts 3-month copper target to $6,800 from $8,125 a ton. Goldman lowered its three-month price forecasts for copper, aluminum and zinc on weaker near-term fundamentals.
  • Korea's Sovereign Wealth Fund to Invest $200 Million in Chesapeake(CHK) Energy. Korea Investment Corp. will invest $200 million in Chesapeake Energy Corp. , the third-largest U.S. natural-gas producer, as the South Korean sovereign wealth fund seeks to diversify its portfolio. KIC joined other sovereign wealth funds Temasek Holdings Pte of Singapore and China Investment Corp., as well as private equity firms Hopu Investment Management Co. and Li Ka Shing (Canada) Foundation in the investor group that bought a total of $900 million of 5.75 percent convertible preferred stock on June 18, Chesapeake said today in a statement.
  • Bets Against U.S. Materials Companies Surge in Options Market. Trading of bearish options on U.S. materials and chemicals companies surged after an investor bet that the industry’s shares will fall in the next month. More than 73,000 puts on the Materials Select Sector SPDR Trust changed hands, seven times the four-week average and the most since May 4. An investor bought 30,000 of the July $32 puts while selling the same amount of July $30 puts, a spread trade that pays the most if the stock falls below the lower strike price by July 16. “The trading implies that the investor is speculating on near-term weakness,” options strategists at Susquehanna International Group LLP in Bala Cynwyd, Pennsylvania, said in a report sent to clients today.
  • California Senate Budget Plan Calls for Oil-Production Tax, Prisoner Shift. California would move some of its prisoners to county jails and increase the share of welfare payments made by the counties under a proposal by Senate Democrats to plug the state’s $19.1 billion budget deficit. The funding for those services would come from sources including $1.2 billion annually from a levy on oil production in the state and $1.75 billion saved by delaying corporate tax breaks. Both of those revenue streams would go to the counties. The Senate Democrats introduced their initial budget plan, which called for the higher taxes, last month.
  • China's Restrictions on Rare Earths Said to Be Targeted by U.S. China’s restrictions on the export of rare earths used in the manufacture of cell phones and radar are being targeted by the U.S. Trade Representative for a potential trade case, according to industry representatives. The U.S. has asked business groups and unions to provide evidence that China is hoarding these elements for a case that may be filed at the World Trade Organization, according to the people, who asked not to be identified because the talks were confidential. China controls 97 percent of production of the materials, known as rare earth elements, giving it “market power” over the U.S., the Government Accountability Office said in a report in April. China restricts exports of the elements through quotas and export taxes of as much as 25 percent, the GAO said. “The export restraints can artificially lower China’s domestic prices for the raw materials due to significant domestic oversupply,” the U.S. trade office said in its annual report on overseas trade barriers in March. Rare earths are a group of 17 chemically similar metallic elements, including lanthanum, cerium, neodymium and europium. The U.S. was self-sufficient in these materials until the mid- 1980s, when lower labor and regulatory costs helped China’s climb to dominance, the U.S. Geological Survey said in a report. The elements are used in radar, high-powered magnets, mini hard-drives in laptop computers, catalytic converters for vehicles, electric-car batteries and wind turbines.
  • Wal-Mart(WMT) Plans to Work With Chicago to Build Dozens of Stores. Wal-Mart Stores Inc. said it plans to work with the city of Chicago to build several dozen stores in the area over the next five years as it seeks new avenues for growth in the U.S.
  • Korea Keeps Emerging Market Status as MSCI Skips Upgrade for Second Year. South Korea was kept as an emerging market at MSCI Inc. as the index provider skipped the nation for an upgrade for a second year. Taiwan, also under a similar review, also retained its status as a developing market.
  • Commodity Gains on Changes to Yuan May Be 'Knee-Jerk' Move, StanChart Says. The biggest jump in commodities in a week after China signaled it will relax the yuan’s peg to the dollar is a “knee-jerk” reaction and investors should focus on prospects for slower growth, Standard Chartered Bank said. “People’s knee-jerk reaction is always: a yuan appreciation will lead to more imports of bulk commodities, but our analysis of empirical data showed there’s no firm causal relation between the two,” Judy Zhu, an analyst at Standard Chartered Bank, said in a phone interview from Shanghai yesterday. China growth, the engine of the global economic recovery, will slow to 9.6 percent in the third quarter and 9 percent in the following three months, from 10.5 percent in the second quarter, according to as many as 21 economists surveyed by Bloomberg. The government wants to cool real-estate speculation and imports of copper, aluminum and nickel fell in May from a year earlier, customs data yesterday showed. “As the yuan appreciation is also a tightening policy for the economy, the initial enthusiasm will likely fade” in commodities, Wang Tao, an analyst at UBS AG in Beijing, said in a report June 20. “Some commentators say this move is positive for commodities. We disagree,” Qu Hongbin, chief China economist at HSBC Holdings Plc, said in a June 20 note. Refined-copper imports by China declined 9.7 percent in May from April, falling for a second month, according to Bloomberg data. “China is still an economy in transition which relies on exports as its main driver, so a revaluation may hurt the economy and affect the government’s efforts to fine-tune growth,” said Dong Shuzhi, an analyst at Jinshi Futures Co., said by phone from Shanghai yesterday.
  • Existing U.S. home sales climbed in May for a third month as buyers took advantage of the remaining weeks of a tax incentive, says economist Ian Shepherdson at High Frequency Economics Ltd. Judging from the recent drop in mortgage applications, sales may plunge in coming months. Financing requests for home purchases plunged 42% from late April through early June, to levels last seen at the start of 1997. Purchases may hold up in June because buyers still had time to make the June 30 closing date to qualify for the credit. Then, beginning in July, sales will tumble, Shepherdson said. "The summer is going to be dreadful because the tax credit pulled activity from the summer into the spring," Shepherdson, the chief U.S. economist at the Valhalla, NY-based research group, said. "New lows do seem entirely possible," he wrote in a note to clients.
Wall Street Journal:
  • Shahzad Admits Trying to Bomb Times Square. A Pakistani-born U.S. citizen, calling himself "a Muslim soldier" avenging U.S. attacks in Muslim countries, admitted Monday that he tried to detonate a crudely made car bomb in New York's Times Square in May. Faisal Shahzad, of Shelton, Conn., pleaded guilty in federal court in Manhattan to a 10-count indictment that included charges of conspiracy to use a weapon of mass destruction, attempting an act of terrorism and transportation of an explosive. He faces life in prison when he is sentenced.
  • The Obama Speech We're Waiting For. Fannie Mae and Freddie Mac Need to Get the BP Treatment.
  • France, Germany Seek Global Pact on Financial-Market Tax. The French and German governments Monday reiterated calls for an international agreement on a tax on financial transactions and a levy on financial institutions in a joint letter to Canadian Prime Minister Stephen Harper. Ahead of the meeting of the Group of 20 industrial and developing nations in Canada this week, French President Nicolas Sarkozy and German Chancellor Angela Merkel said both countries are also in favor of stricter regulations for over-the-counter derivatives and credit-default-swap markets.
  • A Tale of Two Disasters. Bush was blamed for local failures after Katrina. Obama got a free ride for weeks as federal failures mounted during the Gulf spill.
Bloomberg Businessweek:
  • Christie, N.J. Lawmakers in $29.3 Billion Budget Deal. New Jersey lawmakers reached agreement with Governor Chris Christie on a $29.4 billion budget that doesn’t boost the highest U.S. property-tax bills in the U.S. “This budget stays true to the principles I originally outlined, keeping spending within our means and restoring fiscal order without raising taxes,” Christie, a Republican who took office in January, said in a statement today.
NY Post:
  • Obama's Climate Rx: All Pain, No Gain. The cap-and-trade bill that the House passed last summer aims to force Americans to reduce those dreaded carbon emissions by 83 percent in less than four decades -- to the same per-capita level as 1867. Yet, even under the Al Gore-approved climate-science models, the bill would do nothing to stop global warming. The bill is 1,000-plus pages of rules, regulations, handouts, subsidies and whatever else House leaders deemed necessary. Not one of the 435 members read the whole monstrosity -- because the leadership dropped 300 new pages on their desks the night before they voted. Yet the central point is clear enough: The bill simply drives up the price of fossil-fuel based energy so high that the nation will have to somehow get along with only 17 percent of the gasoline and fossil-fuel-powered electricity that it uses today. Don't ask how much it will cost. No one really knows, since you can't put a price on something that has yet to be defined. Last Tuesday, President Obama cited the BP blowout as reason for the Senate to pass its version of the House bill. But senators know that expensive emission reductions are profoundly unpopular. Congress members found this out last summer when protests erupted nationwide within 24 hours of the bill's passage. Polls also suggest that a vote for the warming bill (especially on top of a vote for the health-care bill) is not a good way to keep a job in Congress this November. And, again, the bills (neither the House-like Kerry-Lieberman tome, nor the climate-change lite by Indiana's Sen. Richard Lugar) would do nothing measurable about climate change. The median guess from the United Nations is that, if we do nothing to change our ways, the average world surface temperature will rise about 5 degrees Fahrenheit this century. (In fact, the trends in recent decades strongly suggest that this is an overestimate -- but let's accept it for the sake of the argument.) Now, if only the United States does change its ways, by adopting something like the House bill, we'd prevent about two-tenths of a degree of that warming, according to the UN's climate calculator. That is, the temperature in 2100 gets reduced to what it would otherwise be in 2096. All pain, no gain. In eight years, China's annual totals will be equal to what they emit now plus everything we emit. So if we stopped emitting completely, China completely counters our effort. Add to that a simple fact which no cap-and-trade bill admits: That legislation would push even more of our industry into migrating to China, India and other nations that have no intention of reducing emissions by making energy more expensive. Bottom line: This legislation won't lower global temperatures -- but merely make life more expensive. It'll force you to buy things you don't want, like much more expensive cars, and to use energy sources you'd normally bypass, like ethanol, solar and windmills. All have to be massively subsidized -- with your tax dollars -- to compete with today's mix of coal, gasoline and natural gas.
NY Times:
  • The Tremors From a Coding Error. Investing is always an act of faith, but perhaps never more so than when you entrust your money to a quant fund, Jeff Sommer writes in his latest column in The New York Times. When you put your money into one of them, you are trusting not only that the overall strategy is sound, but also that its algorithms make sense and, furthermore, that they have been translated properly into computer code. But quants are humans. They make mistakes. When errors are embedded in computer code, they may go undetected for weeks, maybe even years. And once an error is discovered, it may take months to fix and even longer to determine its financial impact. This is precisely the headache faced by people who put their money in portfolios run by AXA Rosenberg, a quant subsidiary of AXA S.A., the French financial services giant.
  • Poll Finds Deep Concern About Energy and Economy. The latest New York Times/CBS News poll, which examines the public’s reaction to the oil leak in the Gulf of Mexico, highlights some of the complex political challenges the Obama administration faces. For instance, despite intense news coverage and widespread public concern about the economic and ecological damage from the gulf disaster, most Americans remain far more concerned about jobs and the nation’s overall economy. And in that regard, President Obama does not fare well: 54 percent of the public say he does not have a clear plan for creating jobs, while only 34 percent say he does, an ominous sign heading into this fall’s midterm elections. Respondents were nearly evenly split on the president’s handling of the economy — 45 percent approve, 48 percent disapprove. His job approval rating remains just below 50 percent. And by a nearly 2-to-1 margin, Americans think the country is on the wrong track. They are also impatient with Mr. Obama’s response to the oil disaster in the gulf, by a large margin.
Zero Hedge:
CNNMoney:
Institutional Investor:
StarTribune.com:
  • Hedge Fund Manager to Host Hamptons Fundraiser for Franken. First there was Aykroyd. Then there was Conan. The latest name on the Al Franken fundraising tour? Rosenstein. Not exactly a Hollywood legend, Barry Rosenstein is nonetheless a billionaire hedge fund manager who is slated to host a fundraiser for Franken at his home in the Hamptons on July 30. Rosenstein manages JANA Partners LLC, a fund based in San Fransisco and New York. He and his wife Lizanne (co-host of the fundraiser) have given generously to Democrats over the years, including about $2,600 to Franken's Senate bid. Like several similar fundraisers in recent months, the Rosenstein event will benefit "Franken MVPs," a joint fundraising political action committee that splits funds between Franken's campaign and his leadership PACs. The minimum donation to attend is $500, though giving $5,000 nets guests the title of "co-chair."
Politico:
  • Climate Trial Balloon Proves Explosive. The latest trial balloon for passing climate change legislation appears to be just as explosive as the others. Electric utilities are divided over the prospect of a bill that caps their heat-trapping emissions while shunning mandatory limits on transportation and heavy domestic manufacturers, like pulp and paper mills and chemical plants. Environmentalists also are concerned about the prospect of a more limited global warming bill than what they first envisioned, fearful it won’t come anywhere close to tackling the climate problem while still forcing Senate Democrats to make painful compromises that allow higher levels of traditional air pollutants like smog, soot and mercury. For now, the idea of a power plant-only bill is only in its infant stages. Senate aides are trying to count the votes for the alternative while gauging interest from downtown lobbyists and activists.
USA Today:
Reuters:
Financial Times:
  • Trichet's Fiscal Stance to Raise Hackles in US. Jean-Claude Trichet, the European Central Bank president, has put himself on a collision course with the US by arguing strongly that tighter fiscal policies are the best way to foster growth in industrialised economies. Firm control of government spending and tax policy was essential to restore the confidence of households, business and investors, Mr Trichet told the European parliament. “We are in a situation where a lack of confidence is operating against recovery,” he said. “A budget policy which from a certain point of view you might describe as restrictive is in fact a policy which we would call confidence building.” In London, Jürgen Stark, an ECB executive board member, said the bond purchases would be temporary and pledged that the ECB would not buy bonds on the same scale as the US Federal Reserve or the Bank of England. On fiscal policy, Mr Trichet reflected the ECB’s conviction that the beneficial effects of an expansionary stance were often exaggerated. If public finances were on an unsustainable path, Mr Trichet told the European parliament, “then households are going to be frightened. They are not going to spend or consume as much and companies will not prepare for the future and investors will know that they are going to have difficulty in getting a return on their money and will ask for higher interest rates”.
Telegraph:
  • Battered Eurozone Left Vulnerable to Crisis, Warns Fitch. The global crisis has revealed weaknesses in the eurozone's economic framework which left it particularly vulnerable to the downturn, Fitch has warned. The ratings agency said that although the risk of a eurozone break-up was low over the short to medium term, further episodes of "extreme market volatility" were likely to persist until the recovery and deficit reduction were secured in the region. A report by Fitch said the crisis in the eurozone and investor concerns over the sustainability of the region had arisen because of the existence of the following:
SkyNewsHD:
  • Banks Braced For Budget Crackdown. From what I’m hearing, the austerity Budget that George Osborne will present to parliament tomorrow is also going to be pretty austere for Britain’s banking industry. The most conspicuous manifestation of this will be through the introduction of a new £2.5bn annual levy that will target the biggest banks by taxing their balance sheets (minus their insured deposits and assets that count towards their core tier-one capital ratios). This will be along the lines of the model deployed in Sweden, a banking system for which the Chancellor has expressed admiration in the past. The banks are also expecting at least one measure targeted at the politically hot potato of industry bonuses, possibly through an extension of the Bank Payroll Tax announced by Osborne’s predecessor as Chancellor, Alistair Darling, in last December’s pre-budget report.
Russia Industry Ministry:
  • Russia may tax Chinese steel at 39%.
Yonhap News:
Securities Times:
  • China's property loans should be watched because the government has implemented intensive policies to control the market after rapid gains in home prices, citing an official with the China Banking Regulatory Commission. One prices have "settled", more consumers will buy homes.
China Daily:
  • China may allow the yuan to appreciate by as much as 3% if the country's exports rise by 20% next year and the global recovery continues, citing Zhou Shijian, an economist at Tsinghua University. A rapid rise in the Chinese currency would be a "death knell" for exporters, Zhou said. Yuan appreciation between October 2007 and July 2008 caused about 67,000 bankruptcies in the export sector, Zhou said.
China Securities Journal:
  • China's property tax reform may curb local government dependence on land auctions as a source of income, citing a research report from the State Information Center. Local governments would augment income through the tax as an alternative to seeking high prices at land auctions, the report said.
The Australian:
  • Mortgage Windfall Will End, Says NAB's Mark Joiner. A GOLDEN era of mortgage lending that helped Australia's top two banks earn "super profits" is destined to end, says a top banker. National Australia Bank chief financial officer Mark Joiner, in comments bound to create discord in the cosy banking industry oligopoly, said the financial crisis had removed effective competition in home lending, enabling Commonwealth Bank and Westpac to keep windfall gains arising from the transition to a new global accord on bank capital. Mr Joiner said adoption of the Basel II accord in 2008 had doubled the industry's average return on equity (ROE) for a home loan from about 22 per cent to a stunning 45 per cent. The sudden windfall arose because Basel II enabled banks to hold less capital against more secure home lending due to lower historical loss rates. "I find the national sport of bank bashing a bit ironic because it tends to focus on fees and the passing on of higher funding costs, when the real windfall relates to neither of those issues," Mr Joiner told The Australian. He predicted home lending ROEs would revert to past levels, helped by planned federal government reforms to cut expensive mortgage exit fees, making it easier for clients to switch banks. NAB's critics will say Mr Joiner's blunt commentary directly serves the bank's interests, and invites government intervention to reinvigorate competition. But NAB's numbers man further raised the stakes, endorsing BHP Billiton chairman (and former NAB chief executive) Don Argus's criticism in March that the nation's top banks had become giant building societies. "If you get a 45 per cent ROE in home lending, why would you do anything else, particularly when the industry is looking at a period of constrained balance sheet growth?" Mr Joiner said. "Australia should have a balanced economy; not a big skew to mortgage or business lending."
Evening Recommendations
Citigroup:
  • Upgraded (FTI) to Buy, target $69.
  • Reiterated Buy on (AMZN), target $175.
Night Trading
  • Asian equity indices are -.75% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 121.0 +.5 basis point.
  • Asia Pacific Sovereign CDS Index 117.75 -7.5 basis points.
  • S&P 500 futures +.05%.
  • NASDAQ 100 futures +.14%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (GRB)/.05
  • (CCL)/.29
  • (CMC)/-.11
  • (WAG)/.57
  • (JEF)/.34
  • (JBL)/.33
  • (PRGS)/.35
  • (FUL)/.38
  • (ADBE)/.43
  • (RHT)/.18
Economic Releases
10:00 am EST
  • Existing Home Sales for May are estimated to rise to 6.12M versus 5.77M in April.
  • The House Price Index for April is estimated to rise +.3% versus a +.4% gain in March.
  • Richmond Fed Manufacturing Index for June is estimated to fall to 20.0 versus a reading of 26.0 in May.
Upcoming Splits
  • (DLTR) 3-for-2
Other Potential Market Movers
  • The weekly retail sales reports, Geithner's testimony before the Congressional Oversight Panel on TARP, ABC Consumer Confidence index, Jefferies Consumer Conference, (FSL) analyst meeting, (RENT) investor day and the $40 Billion 2-Year Treasury Note Auction could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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Friday, July 9, 2010 at 5:40:00 AM EDT

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