Friday, October 22, 2010

Friday Watch

Evening Headlines


  • Fannie, Freddie May Draw $363 Billion, FHFA Says. Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, could draw a total of $363 billion in Treasury Department aid through 2013 if the housing market worsens, the Federal Housing Finance Agency said. Under the best-case scenario, which assumes a strong near- term recovery in the housing market, the total cost to taxpayers would be $221 billion, or $142 billion after dividends.
  • U.S. Debt is Child Abuse: Laurence Kotlikoff, Richard Munroe. We don’t want to think about it, let alone read about it, but higher taxes are on the way. Two tax hikes were passed this year and another is likely. These new taxes are supposedly being levied just on the rich. But over time, they will hit most of our kids. And they are just the beginning of our children’s and grandchildren’s tax trauma, given Congress’s inability to curb spending. The two increases are for Medicare. They were buried inside the 2,000-page health-care bill and take effect in 2013. Earn more than $250,000 ($200,000 if single) and you’ll face an extra 0.9 percentage-point FICA tax for Social Security. And once your income passes this level, you’ll pay a 3.4 percent tax on your asset income. These thresholds aren’t indexed for inflation, let alone growth in real incomes. So these taxes on “the rich” will eventually hit everyone as nominal incomes rise with inflation and productivity. Within 20 years most earners will be paying these new Medicare taxes. The Alternative Minimum Tax also has thresholds that aren’t indexed for inflation. Congress has raised these levels to keep the share of taxpayers affected constant. But there is no guarantee it will continue to do so. There are two other income-tax thresholds that haven’t changed since 1984. These are the income levels at which the first 50 percent and then 85 percent of our Social Security benefits are subject to taxation. In 2000, only 22 percent of recipients were above one of these thresholds. Now it’s 39 percent. When today’s children retire, virtually all will pay taxes on 85 percent of their benefits. If things continue as we adults have planned, our nation’s debt, measured as a share of gross domestic product, will reach Greek levels just when the grandkids start heading to work. At that point, simply stabilizing the debt-to-GDP ratio will require raising taxes by 50 percent, thereby lowering the grandkids’ living standard from 74 to 61. This is a 39 percent bite, more than twice the lifetime tax rate that baby boomers have experienced. Bear in mind, this is an average, not a marginal tax rate; it’s like taxing every dollar the grandkids earn at 39 percent. A 50 percent tax hike will work for a while. But, given projected federal spending, it won’t keep deficits from soaring down the road. So the great-grandkids can expect even higher lifetime tax rates than their parents. We’ve spent six decades passing the generational buck -- taking ever-larger sums from the young and giving them to the old, while promising the young their turn, when old, to expropriate their own offspring. This massive Ponzi scheme is turning the American Dream into the American Nightmare. Stopping it means dramatically limiting the growth of federal spending. Here’s how:
  • Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal. China’s curbs on rare-earth exports may owe more to a 2006 policy to create fewer, larger companies than a knee-jerk response to trade and territorial disputes. A directive that year tagged mining among the pillar industries the government wanted state enterprises to dominate to enhance returns and global competitiveness. This year it started closing down private mining companies to consolidate the industry around a handful of producers led by Inner Mongolia Baotou Steel Rare Earth High-Tech Co. Global repercussions from the overhaul drew attention in July when the government said it would cut export quotas 72 percent in the second half of the year. China accounts for more than 90 percent of worldwide production of the metals, used in components for Toyota Motor Corp. hybrid cars, Lockheed Martin Corp. radars and General Dynamics Corp. tanks.
  • Geithner Said He Won't Let Dollar Fall, Mantega Says. U.S. Treasury Secretary Timothy Geithner told Brazil’s Finance Minister Guido Mantega yesterday that the U.S. won’t allow the dollar to weaken, Mantega said. Mantega said he and Geithner agreed to act jointly with the Group of 20 nations to find a solution for the dollar’s depreciation. Geithner also said in a telephone conversation that the impact of Federal Reserve policies is being “overestimated,” Mantega told reporters in Brasilia today. “He said he doesn’t intend to allow a devaluation of the dollar,” Mantega said. “He assured me that the policy is not to weaken the dollar, but on the contrary, to strengthen it. “I then asked him about the Fed’s policy and he said that this policy’s impact is being overestimated,” Mantega said. Brazil’s finance minister said he told Geithner that a firm stance by the U.S. against further weakening in the dollar would “create conditions to open a negotiation” with other countries seeking to reduce volatility in their currencies, and may help reduce pressure on China to strengthen the yuan. “Otherwise it’s hard, to weaken the dollar and to want a revaluation of the yuan,” Mantega said.
  • RIM(RIMM) BlackBerry Data to Undergo Lab Study Amid Government-Tracking Concern. Research In Motion Ltd.’s BlackBerry device will be studied by University of Toronto computer scientists to determine how the smartphone’s data traffic is handled in countries where governments have tried to track it.
  • Global Emerging-Market Equity Funds Draw Record Inflows as Dollar Weakens. Global emerging-market equity funds drew record inflows in the third week of October as investors sought growth in developing nations and the dollar weakened, according to EPFR Global.

Wall Street Journal:
  • Campaign's Big Spender. Public-Employees Union Now Leads All Groups in Independent Election Outlays. The American Federation of State, County and Municipal Employees is now the biggest outside spender of the 2010 elections, thanks to an 11th-hour effort to boost Democrats that has vaulted the public-sector union ahead of the U.S. Chamber of Commerce, the AFL-CIO and a flock of new Republican groups in campaign spending.
  • Blackstone(BX) Sees 'Buyer's Market' for Hedge Funds. Blackstone Group LP (BX) is looking to back as many as 15 new hedge funds as the private-equity giant tries to take advantage of a wave of emerging managers and a lack of capital for start-ups in the $1.8 trillion industry.
  • Big Win for a Big Bear. One of the nation's largest hedge funds is emerging as a big winner of 2010, earning its managers and clients billions in profits through a series of bearish bets on the U.S. economy. Bridgewater Associates Inc. has scored a return of about 38% at its flagship fund, driven in part by a multifaceted wager that the U.S. economy would be in worse shape than many expected and the Federal Reserve would keep interest rates low, say people familiar with the matter. If it holds, its $15 billion gain would vault Bridgewater, already one of the world's most successful hedge-fund firms, into the pantheon of investors that have achieved huge one-year gains connected to the country's credit crisis. Ironically, some of Bridgewater's clients, generally big institutional investors such as pension funds, are themselves deeply involved in global economic struggles, and in some cases have been hurt by them. "The economic reality of the world is playing exactly into Bridgewater's view," says Ken Miranda, the chief investment officer for the International Monetary Fund's employee pension plan, which has invested with Bridgewater since the mid-1980s. The IMF has shelled out billions to stabilize financial systems in Greece and across Europe this year and recently downgraded economic growth estimates for the U.S. Bridgewater's success of late will also benefit many U.S. public pension funds that invest in the hedge fund, including the Teachers' Retirement System of the State of Illinois. As of 2009, the pension fund had unfunded liabilities totaling $35 billion, which have been exacerbated by recent economic problems, says spokesman Dave Urbanek. "It's the yin and the yang," Mr. Urbanek said of Bridgewater's winning bets on economic weaknesses. Bridgewater stands out for the scale of its wager. With about $86 billion under management overall and about 1,000 people on staff, Bridgewater has honed its macro thesis studying other periods of deleveraging throughout history, such as the Great Depression and Japan during the 1990s. One of Bridgewater's biggest gains came from its bullish investment in Treasurys, says Mr. Jensen. Another big moneymaker has been gold, a commodity that has risen roughly 20% in value this year as investors flee major world currencies in decline. Like many macro hedge funds, Bridgewater uses leverage to amplify returns. Mr. Jensen called Bridgewater's leverage a "moderate, controlled amount that has been tested through many crises, including 2008."
  • USDA Flubs in Predicting Corn Crops Raise Worry. The U.S. Department of Agriculture's failure to accurately predict the size of the current corn-crop harvest has undermined confidence of some investors in the agency's forecasting, which has for years been held as gospel.
  • Idaho Shortcut Stalls Global Trek. A Canadian oil company's $8 billion plan to tap Alberta's oil sands has hit a roadblock en route to U.S. Highway 12. Imperial Oil wants to send 35,000 tons of mining equipment over the Rocky Mountains in 207 massive loads that would creep along the winding, two-lane highway in the middle of the night—four or five shipments a week—for about a year. The route is part of a shortcut of sorts, designed to shave months and thousands of miles off the trip from the equipment's South Korean maker to Canada. For now, though, the equipment modules are starting to pile up at the Port of Lewiston, waiting for an Idaho Supreme Court ruling that could keep the plan in park.
  • Teacher Data Held Back. The Department of Education agreed to back off its plan to release data meant to gauge the effectiveness of 12,000 teachers until a judge has an opportunity to decide whether the data are subject to public-records laws. The DOE had planned to release the data on Wednesday, but the United Federation of Teachers filed suit to stop the department, saying the data were flawed and thus would harm teachers. News organizations including The Wall Street Journal filed public-records requests for the data. "We continue to believe that it is our obligation, under the law, to provide this data, but will await the court's ruling after a full briefing" on Nov. 24, said Natalie Ravitz, a spokeswoman for the DOE, in a statement. The data reports attempt to measure the progress that students in fourth through eighth grades make under certain teachers.
  • NPR's Taxpayer-Funded Intolerance. All Americans, particularly those of Arab or Muslim descent, should protest the firing of Juan Williams. NPR's firing of commentator Juan Williams this week is one of the worst examples of rush to judgment since 9/11. Mr. Williams, whether one tends to agree with him or not, is immensely respected by his fellow journalists and viewers alike for his ability to conduct himself with dignity and respect in a field where extremes of opinion and low-ball tactics have become all too common. He's mostly a moderate liberal who is able to hear other points of view with respect, and he can be nuanced in his own views. In these times, Mr. Williams's instinct for finding both middle and common ground is no small feat.
  • Warren Buffett May Be Getting Unwanted Phone Call from Goldman Sachs. Warren Buffett may be getting an unwanted phone call from Goldman Sachs. The Wall Street Journal says Goldman is "considering" paying back the $5 billion loan it got from Buffett's Berkshire Hathaway (in the form of a preferred stock sale) at the height of the credit crisis in October, 2008. It was widely seen as Buffett's vote of confidence in Goldman at a time when some other big-name firms on Wall Street were going under and confidence was in short supply. Buffett negotiated tough terms in exchange for his money and endorsement, including an annual dividend payment of 10 percent, or $500 million.
  • Friday Look Ahead: G-20 Unlikely to End Talk of 'Currency Wars'.
  • Fed's Bond Buying Won't Help. (video) Whatever the Federal Reserve does to lower interest rates further won't help the U.S. economy, according to First Pacific Advisors fund manager Tom Atteberry, who says that'll just weaken the dollar and hurt savers. Deborah Levine reports.
Business Insider:
  • My iPhone 4 Has Totally Killed My Digital Camera. After a few months of use, I've learned that the camera in the iPhone 4 is so good that I didn't even think about bringing my point-and-shoot Canon with me on the trip.
  • Thanks to Obama and Health Care Reform, I'm No Longer Paying for My Employees' Insurance. For 15 years, I have taken pride in paying the full cost of health insurance for every full-time Palisades Hudson employee who wanted it. This month marks the last time I will do that. Beginning in October, our 20 employees will make their own decisions, and their own arrangements, regarding health coverage. They can stay on our company’s plan, but they will have to pay the entire cost – ranging from $574 to $683 per month – themselves, through payroll deductions. Though I am raising everybody’s salary by $3,000 per year, or $250 per month, as a partial offset to the loss of company-paid health coverage, those who remain on the company plan will have a significant new out-of-pocket expense. The law’s supporters will portray employers like me as bad guys who are using the new law as a smokescreen to make changes we wanted to make anyway. Though the accusation is false, it has a germ of truth: Runaway health insurance costs have been a burden for every business that pays them. Every sensible manager has at least considered steps to stem this financial hemorrhage. Many of us were just holding on so as not to disrupt employees’ lives while we waited for policymakers to do something. Now they have done something, and it only made the problem worse. There is no longer any reason to wait. Want to blame me for cutting my employees’ health insurance? Go ahead. Just keep in mind that the only power I have is to sign checks. I did not create our broken system, and I am not the one who wasted an excellent chance to fix it.
  • Terrifying Ad Depicts a Chinese Professor Gloating About Owning America. (video)
Zero Hedge:
NY Times:
Washington Post:
  • Fox Hands Williams $2 Million Contract. Fox News moved swiftly to turn the controversy over Juan Williams’s firing to its advantage, offering him an expanded role and a new three-year contract Thursday morning in a deal that amounts to nearly $2 million, Matea Gold reports. Roger Ailes took a jab at NPR in the process. "Juan has been a staunch defender of liberal viewpoints since his tenure began at Fox News in 1997,” he said in a statement. “He’s an honest man whose freedom of speech is protected by Fox News on a daily basis.” In his new role, Williams will appear more frequently on the network and have a regular column on
  • Sharron Angle Hits Barack Obama in New Ad. (video) As President Barack Obama travels to Nevada to rally voters for Senate Majority Leader Harry Reid, his Republican opponent, Sharron Angle, aims to use the president's own words against him in a new video. Angle's campaign said the video, touted as the "First Ad of 2012," would be cut down to air as a 60-second television ad in Nevada on Friday, when Obama is scheduled to host a rally for Reid at a Las Vegas middle school. The video sets Obama's promises and rhetoric on the campaign trail against Nevada's dire economic situation. It begins with then-candidate Obama, in a September 2008 appearance, saying, "A troubled economy isn't news." He goes on to detail lost jobs, falling home values, rising prices and increasing health-care costs as chants of "O-BA-MA" ring in the background. "The truth is that while you've been living up to your responsibilities, Washington has not," Obama says. "In 2008, we were promised change we could believe in," the ad says onscreen. Then Obama is shown at the Democratic National Convention, declaiming, "This was the moment when the rise of the oceans began to slow" -- and a picture of an oily-winged pelican is shown. "Then Harry Reid and the president got to work," the onscreen text says. Statistics such as the state's worst-in-the-nation 14 percent unemployment rate flash against a backdrop of photos of Obama and Reid ecstatically embracing.
USA Today:
  • Square Lets iPads, iPhones, Androids Read Credit Cards. The father of Twitter has hatched a start-up that he hopes does for financial transactions what Twitter did for communication. Square, the venture from CEO Jack Dorsey, devised a tiny plug-in that turns digital devices into a credit card reader. Square opens its virtual doors for business Friday. The Square, a free plastic device slightly smaller than a quarter, plugs into iPhones, iPads, iPod Touches and Androids. With a free downloaded application, it lets small businesses and consumers process credit card transactions. Merchants are charged 2.75% of the purchase price, plus 15 cents to swipe a credit card; no contract, set-up fee or monthly charge.
  • Fed's Hoenig - Must Be Mindful of Creating Bubbles. The U.S. Federal Reserve risks creating new problems if it floods the economy with cash to try to reduce the unemployment rate too quickly, Kansas City Federal Reserve Bank President Thomas Hoenig said on Thursday. Telling a group of business leaders that he is very unhappy with the 9.6 percent jobless rate, he also warned against seeking a quick fix. "If you try and bring it down too rapidly you are in danger of creating the next problem," he said. A new round of quantitative easing, or QE2 as it has come to be known, may not be effective in spurring demand, could spark higher inflation than intended, and could hurt the Fed's credibility, he said.
  • G20 Officials Pour Cold Water on US Proposals.
  • Province Urges Canada to Block BHP's(BHP) PotashPOT) Bid.
  • AmEx(AXP) Beats Forecasts But Regulatory Issues Loom. American Express Co's quarterly profit rose a better-than-expected 71 percent as credit quality improved and customers spent more, but regulatory issues cast a shadow of uncertainty over future results.
  • SanDisk(SNDK) Beats Street View After Prices Steady. SanDisk Corp beat profit and margin expectations by reining in costs and keeping prices stable, and foresees a 2011 surge in demand as more consumers opt for smartphones and tablets. Shares in the flash memory maker rose 5 percent despite a current-quarter outlook just below Wall Street's targets. The company predicted surging demand for mobile devices like Apple's iPad for the holidays and into next year.
  • Bucyrus(BUCY) Q3 Misses Wall Street View, Shares Fall. Mining equipment maker Bucyrus International Inc posted lower-than-expected quarterly results, hurt by a decrease in sales of underground mining original equipment. Bucyrus, which competes with Joy Global Inc (JOY), said the fall was mainly in its room and pillar product line.
  • North America Sept. Chip-Gear Orders Fall 11% vs August.
  • Amazon(AMZN) Cost Outlook Weighs on Holiday Prospects. Inc signaled that the cost of expanding its business would grow at a fast clip during the holiday shopping season, sending shares of the world's largest online retailer down 3.8 percent.
Financial Times:
  • Unravelling the Web of Fed QE. It is hard to find anyone who doubts that the Federal Reserve will unleash another super-sized dose of emergency economic stimulus next month. The bigger unknown is what will happen next. And, by priming financial markets, the US central bank has triggered a wave of speculative trading. Indeed, fund managers, strategists and dealers round the world say the next round of “quantitative easing” by the Fed will be a driver of asset prices. Currencies, equities, commodities and the price of government bonds are likely to be dictated by the actions of a small group of policymakers in Washington. The dollar, which has fallen sharply amid rising expectations of renewed easing, could weaken further, they say. Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, one of the biggest bond fund managers, believes that, in time, the effect of policies out of Washington will be that “as an asset class, all currencies will go down against commodities”, in a secular shift that embraces more than just gold. “The dollar is a hard call,” he says. “For the dollar to go down, something has to go up. And nobody wants their currency to go way up.”
Financial Post:
  • Vaclav Klaus: An Anti-Human Ideology. Global warming may just be statistical fluctuations. The global warming dispute starts with a doctrine which claims that the rough coexistence of climate changes, of growing temperatures and of man-made increments of CO2 in the atmosphere — and what is more, only in a relatively short period of time — is a proof of a causal relationship between these phenomena. To the best of my knowledge there is no such relationship between them. It is, nevertheless, this claim that forms the basis for the doctrine of environmentalism. It is not a new doctrine. It has existed under various headings and in various forms and manifestations for centuries, always based on the idea that the starting point of our thinking should be the Earth, the planet or nature, not man or mankind. It has always been accompanied by the plan that we have to come back to the original state of the Earth, unspoiled by us, humans. The adherents of this doctrine have always considered us, the people, a foreign element. They forget that it doesn’t make sense to speak about the world without people because there would be no one to speak. If we take the reasoning of the environmentalists seriously, we find that theirs is an anti-human ideology. To reduce the interpretation of the causality of all kinds of climate changes and of global warming to one variable, CO2, or to a small proportion of one variable — human-induced CO2 — is impossible to accept. Elementary rationality and my decades-long experience with econometric modelling and statistical testing of scientific hypotheses tell me that it is impossible to make strong conclusions based on mere correlation of two (or more) time series. In addition to this, it is relevant that in this case such a simple correlation does not exist. The rise of global temperature started approximately 150 years ago, but man-made CO2 emissions did not start to grow visibly before the 1940s. Temperature changes also repeatedly moved in the opposite direction than the CO2 emissions trend suggests. Theory is crucial and in this case it is missing. Pure statistical analysis does not explain or confirm anything.
  • North Korea could have as many as 10 nuclear weapons, citing Dennis Blair, former U.S. Director of National Intelligence.
  • Japan and the U.S. are in unofficial talks about China's rare-earth metal exports, citing people from both governments. The people would not rule out the possibility of the two countries asking China to end export delays, or taking the issue to the World Trade Organization, according to the report.
Evening Recommendations
  • Reiterated Buy on (ALXN), target raised to $79.
RBC Capital:
  • Raised (TWC) to Outperform, target $67.
  • Raised (CVC) to Outperform, target $32.
Night Trading
  • Asian equity indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 106.0 unch.
  • Asia Pacific Sovereign CDS Index 97.5 -4.0 basis points.
  • S&P 500 futures +.13%.
  • NASDAQ 100 futures +.18%.
Morning Preview Links

Earnings of Note
  • (AAI)/.17
  • (HON)/.62
  • (EXC)/1.12
  • (SLB)/.70
  • (VZ)/.54
  • (KEY)/.03
  • (TROW)/.60
  • (IR)/.79
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Plosser speaking and the (GENZ) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity 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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