Friday, October 08, 2010

Friday Watch


Evening Headlines

Bloomberg:

  • Bond Distress Drops to 5-Month Low as Junk Rises Above Par: Credit Markets. The percentage of corporate bonds considered in distress receded to a five-month low as record sales of high-yield debt and declining borrowing costs convince investors that the riskiest companies can pay their lenders. The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds declined to 290, or 12 percent of the total, the lowest share since April and down from 15.9 percent at the end of August, according to Bank of America Merrill Lynch index data. A decline of 3.23 percentage points last month was the most since March. Junk-rated borrowers globally raised a record $98.7 billion last quarter selling bonds as investors plow cash into the market to grab higher relative yields, helping the weakest companies shore up their balance sheets. Defaults by high-yield issuers fell to 4 percent last month from 6.2 percent in June, Moody’s Investors Service said today. “There’s a tremendous yield hunger that isn’t satisfied and that’s pushing up the prices in all the bottom-tier names,” said Margaret Patel, who oversees about $1 billion of assets as a fund manager at Wells Fargo & Co. in Boston.
  • Portugal Braces for Its First Joint General Strike in 22 Years Over Cuts. Portuguese Prime Minister Jose Socrates will face the country’s first joint general strike in 22 years as the two biggest labor organizations prepare to protest against the government’s austerity measures. Portugal plans to cut the wages of state workers and raise taxes to convince investors it can narrow the euro region’s fourth-biggest budget gap after Greece’s debt crisis led to a surge in borrowing costs for high-deficit nations. Portugal’s government is seeking to cut the budget gap from 9.3 percent of gross domestic product in 2009, the fourth- highest in the 16-nation euro region after Ireland, Greece and Spain, to 7.3 percent this year and 4.6 percent next year. It aims reach the European Union limit of 3 percent in 2012.
  • Adobe Shares(ADBE) Surge on Report of Microsoft's(MSFT) Interest in Merger. Adobe Systems Inc. shares surged as much as 17 percent after the New York Times reported that Microsoft Corp. Chief Executive Officer Steve Ballmer recently met with Adobe CEO Shantanu Narayen. The executives recently had a meeting at Adobe’s offices in San Francisco, according to two people familiar with the matter, who asked not to be identified because the meeting was private.
  • Chamber's Donohue Says Obama 'Suffocating' U.S. Business Spirit. President Barack Obama’s administration is imposing regulations that are “suffocating the entrepreneurial spirit,” the head of the U.S. Chamber of Commerce said. Tom Donohue, president of the largest U.S. business group, said the Chamber is starting a new political campaign today against rules on health care, finance, the environment and labor. The Chamber has said it will spend $75 million backing pro-business candidates in the November elections and has led growing business criticism of Obama in recent months. “The regulatory impact on the business community is pervasive, insidious, and needs to be exposed,” Donohue said in prepared remarks for a speech in Des Moines, Iowa. “It is suffocating the entrepreneurial spirit.”
  • IBM(IBM) Hits Record as Palmisano Focuses on Software, Services. International Business Machines Corp. rose to the highest level since it went public in 1915 as investors show support for Chief Executive Officer Sam Palmisano’s strategy of remaking the 99-year-old company. IBM gained 88 cents to $138.72 at 4:01 p.m. in New York Stock Exchange composite trading, topping the previous record of $137.88, adjusting for stock splits, reached in July 1999.
  • Inflation Bonds Show No Trichet Accord Amid Double-Dip Threat: Euro Credit. Bonds that signal investor inflation expectations show that traders disagree with European Central Bank President Jean-Claude Trichet’s declaration that another recession isn’t “in the cards.” The gauge of how the market perceives consumer-price growth over five years beginning in five years’ time, a yardstick Trichet says is used by the ECB, slid this week to the lowest level in at least six years. In France, the yield difference between 10-year notes and inflation-linked debt fell to 182 basis points from this year’s high of 229 basis points in April. While Trichet said yesterday risks to the inflation outlook are “slightly tilted to the upside” after policy makers kept their main interest rate at an all-time low of 1 percent, JPMorgan Chase & Co. estimates investors have bought a record $20 billion worth of derivatives that protect against the risk of deflation this year. Consumer-price gains won’t exceed 2 percent next year in Germany, the region’s biggest economy, amid austerity programs enacted in nations from Ireland to Portugal to Greece, analyst surveys compiled by Bloomberg show. “Demand is huge, indicating some in the market have a very pessimistic view on inflation and growth,” said Jasper Falk, the London-based head of inflation trading at JPMorgan. “In the past, the possibility of having 10 years of cumulative deflation in the euro region was seen as remote and the cost of protection against that was very low. No one thought it was cheap. They thought it was irrelevant.”
  • McDonald's(MCD) Offers Taste of Obama Sausage-Making: Caroline Baum. “We have to pass the bill so that you can find out what is in it.” -- House Speaker Nancy Pelosi, March 9, 2010. She wasn’t kidding. The public got to peek under the hood last week when the Wall Street Journal reported that McDonald’s Corp. wanted out: out of a requirement in the new health-care law that compels employers to spend 80 to 85 percent of premiums on medical benefits. Who knew? For McDonald’s mini-med health-care plan, a low-cost, limited plan covering about 30,000 hourly fast-food workers, the minimum medical loss ratio was economically unfeasible. The company asked for a waiver, according to memos provided to the Journal. It turns out lots of other companies are seeking waivers for limited benefit plans -- along with some states, like Maine, with a small number of insurers, according to Joseph Antos, a health-care scholar at the American Enterprise Institute, a conservative think tank. Another group is lining up to apply for exclusions from the minimum annual cap on benefits that is part of the law. No wonder the Department of Health and Human Services had to put out a memo on waiver guidance.
  • Greenspan Says U.S. Fiscal Deficit Is 'Scary' as Debt Increases. Former Federal Reserve Chairman Alan Greenspan said the fiscal deficit in the U.S. is “scary” and the government needs to reduce entitlement programs. “We’re involved in a dangerous game,” Greenspan said today at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.” U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said. “You need” austerity, said Greenspan, a paid speaker at the event. “We’re going to have to start to cut” from government entitlement programs, he said, adding that reducing the budget is better than raising taxes in closing the U.S. budget deficit. Greenspan said that if the Fed decides to expand its balance sheet through purchases of bonds, a process known as quantitative easing, it may not be enough to get “money moving” and spur growth in the U.S. economy. Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets not being relent, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said.

Wall Street Journal:
  • Genzyme(GENZ) Will Explore 'White Knight'. Genzyme Corp. will evaluate alternatives for the biotechnology firm, including reaching out to other companies, as part of its defense against an $18.5 billion hostile bid from Sanofi-Aventis SA, the company said Thursday.
  • U.K. Treasury Chief Credit Coalition's Spending Cuts. British Treasury chief George Osborne said the austerity program pursued by the U.K.'s new coalition government has taken the country "out of the financial danger zone" and removed doubts in markets about "whether Britain can pay its way in the world."
  • US Lawmakers Push for Halt to Foreclosure Proceedings. A growing number of U.S. congressional leaders are pushing mortgage lenders to halt foreclosure proceedings in the wake of a scandal surrounding poor documentation practices.
  • MGM's Creditors Voting on Debt Plan. Movie studio Metro-Goldwyn-Mayer Inc. is in the final stages of preparing a bankruptcy-protection filing, a move that will pare the debt of the iconic studio and place it under the management of the two founders of rival Spyglass Entertainment.
  • New Rules on Bank Breakups. Federal regulators are expected to outline as early as Friday rules for seizing and dismantling a large financial firm that could allow some creditors to get a better deal than others in limited cases.
CNBC:
Business Insider:
Zero Hedge:
  • $100 Oil Could Sink The Fed's QE2. As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation. Here’s another: The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane. Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.) The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates. To some extent, unconventional Fed monetary policy actions may be arcane enough to make them an unlikely target of populist politicians and grass-roots activists. Still, just last year, the Fed came under blistering criticism for its close-to-the-vest dealings. Legislation to audit the Fed, spearheaded by Tea Party favorite Ron Paul in the House and self-styled socialist Bernie Sanders in the Senate, was largely incorporated in the Dodd-Frank financial regulatory reform bill. If there’s one thing that may turn Fed policy from yawn-inducer to rallying cry, it’s oil prices rising above $100 a barrel, which would hit Americans in their wallets on a frequent basis.
Washington Post:
  • North Korea Pressing Forward on Nuclear Program, Report Says. North Korea appears to be moving forward with a program to enrich uranium for nuclear weapons, a development that would enhance its ability to produce bombs and sell its nuclear weapons technology abroad, according to a report to be released Friday. The report, "Taking Stock: North Korea's Uranium Enrichment Program" by the Institute for Science and International Security, comes as a senior South Korean official warned that North Korea's nuclear program is "evolving even now at a very fast pace."
Politico:
  • Ghailani Case Ruling Could Hurt Terror Trials. A federal judge’s ruling Wednesday that voided key testimony in a case against a former Guantanamo inmate gave critics new arguments against President Barack Obama’s intent to try terrorist suspects in civilian courts “whenever feasible.”
  • Stimulus Funds Went to Dead People. Approximately $18 million worth of stimulus funds went to Americans who are dead, according to report released by the Social Security Administration's inspector general released Thursday. More than 89,000 payments worth $250 each, taken from the $787 billion stimulus package, were doled out to either dead people or prison inmates. Seventeen thousand incarcerated Americans received an aggregate $4.3 million from the economic relief package.
Reuters:
  • PIMCO's El-Erian - Fed's Policy Near 'Becoming Ineffective'. The Federal Reserve's loose monetary policy is in danger of "becoming ineffective," Mohamed El-Erian, the co-chief investment officer at bond fund PIMCO, said on Thursday. "We're getting to the point where monetary policy is becoming ineffective," El-Erian said at an event sponsored by the Financial Times. El-Erian helps oversee more than $1.1 trillion in assets, mostly in fixed-income instruments. "We have a Fed that seems to be unwilling to stay on the sidelines," he said.El-Erian said the biggest story in the last 18 months is that fiscal and monetary responses have fallen short of policy expectations. He also said he sees a 55 percent probability on the U.S. economy having sluggish growth, a 30 percent chance of a double-dip recession and a 15 percent chance that the economy will perform surprisingly well.
  • India Wants Bold IMF Quota Changes - Mukherjee. Restoring the International Monetary Fund's credibility after the global financial crisis requires a bold shift of power to developing economies from the rich nations which have long controlled the IMF, India's Finance Minister Pranab Mukherjee said on Thursday. "These changes can enhance the fund's credibility, only if, bold and forward-looking quota and governance changes are implemented, which will restore the fund's legitimacy," he said in statement to the IMF. "The burden of the quota shift to dynamic emerging markets and developing countries has to be borne primarily by advanced economies and I reiterate my call for a shift of 5 to 6 per cent in quota share from advanced countries to developing countries," Mukherjee said.
Financial Times:
  • Seoul Finds New Way to Finance Iran Trade. South Korea has appointed two state-run banks to finance commerce with Iran and revive business ties damaged by sanctions in an effort to protect $10bn in annual trade with Tehran. Woori Bank and the Industrial Bank of Korea will from this month be allowed to finance legitimate trade with Iran in sectors unaffected by sanctions, channelled through Iran’s central bank.
Telegraph:
NHK World:
  • Japan to Help Develop Rare Earth-Like Materials. The Japanese government plans to earmark funds worth 1.2 billion dollars in this year's supplementary budget to secure the stable supply of rare earth minerals. The plan is part of the government's efforts to reduce the country's heavy reliance on imports from China of rare earth materials, which are vital for producing high-tech products. China is the world's largest producer of rare earth materials. It announced in July that it would largely cut its exports of the metals. It then suspended shipments to Japan following a collision between a Chinese fishing boat and 2 Japanese Coast Guard ships near the Senkaku Islands in the East China Sea. The government plans to use the funds to help with the development of substitutes for rare earth minerals. The government says it will also try to find other countries which can provide Japan with rare earth metals. It will provide subsidies for manufacturers which make plant investments in Japan to safeguard rare earth-related technologies.
Securities News:
  • A Chinese taxation official said the government should levy a tax on property. The government will levy a tax on some property as a trial in select cities before expanding the measures nationwide, citing the official.
Evening Recommendations
RBC Capital:
  • Rated (ILMN) Outperform, target $59.
  • Rated (TSL) Outperform, target $38.
  • Rated (WAT) Outperform, target $81.
  • Rated (LIFE) Outperform, target $54.
  • Rated (YGE) Outperform, target $17.
Night Trading
  • Asian equity indices are -.50% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 106.0 -3.0 basis points.
  • Asia Pacific Sovereign CDS Index 97.25 -1.75 basis points.
  • S&P 500 futures +.16%.
  • NASDAQ 100 futures +.20%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • None of note
Economic Releases
8:30 am EST
  • The Change in Non-farm Payrolls for September is estimated at -5K versus -54K in August.
  • The Change in Private Payrolls for September is estimated at 75K versus 67K in August.
  • The Unemployment Rate for September is estimated to rise to 9.7% versus 9.6% in August.
  • Average Hourly Earnings for September are estimated to rise +.2% versus a +.3% gain in August.
10:00 am EST
  • Wholesale inventories for August are estimated to rise +.5% versus a +1.3% gain in July.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Tarullo speaking, ECB's Trichet speaking, World Bank/IMF meeting and the (CVS) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly modestly higher. The Portfolio is 100% net long heading into the day.

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