Monday, October 25, 2010

Monday Watch

Weekend Headlines

  • U.S. Yield Curve Widens to Steepest Since September on Easing Speculation.The difference between yields on 2- and 10-year Treasuries widened to the greatest amount since September on trader speculation about how much debt the Federal Reserve may buy if it resumes purchases of U.S. securities. Government notes maturing in five years and less were little changed as St. Louis Fed President James Bullard said the size of asset buys in a strategy known as quantitative easing should be based on economic conditions, starting with $100 billion next month. Some previous forecasts have topped $1 trillion for the next year. The U.S. will sell $109 billion in notes and Treasury Inflation Protected Securities next week. “People have been pushed into a corner with all the debate and uncertainty about QE2,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “It will be a tough time with the volatility until we find out more about what’s going on.” The yield curve, the gap between 2- and 10-year yields, steepened to 2.204 percentage points, the most since 2.273 percentage points on Sept. 17.
  • G-20 to Avoid 'Competitive Devaluation,' Prod China. Group of 20 finance ministers and central bankers vowed to avoid weakening currencies to lift exports, leaving leaders to flesh out new ways of prodding fellow member China to allow faster gains in the yuan. Officials ended talks in South Korea on Oct. 23 pledging to refrain from “competitive devaluation” and to let markets set foreign-exchange values more as they sought to calm fears that they risk a trade war by using cheaper currencies to spur growth. They called for more sustainable current-account gaps without embracing a U.S. proposal for targets, an initiative aimed at making a yuan advance more palatable to China. The task of finding a broader agreement now falls to next month’s Seoul summit of leaders as strategists from UBS AG to Westpac Banking Corp. said the decisions taken in Gyeongju were unlikely to mark an end to the dollar’s recent slide or trigger a quicker rise in the yuan. The immediate direction of markets will likely be driven by next week’s Federal Reserve meeting as Chairman Ben S. Bernanke signals it may buy more assets.
  • Germany Says U.S. Federal Reserve Heading 'Wrong Way' With Monetary Easing. The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said. Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank’s efforts to jumpstart the world’s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle. “It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,” Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motors Co.’s German Opel unit. European Central Bank President Jean-Claude Trichet said that the G-20 made “no particular conclusion” after some members expressed concern about proposals for further quantitative easing in the U.S. “The remark was made that the accommodating policy vis-a- vis the U.S. might mean problems for the emerging economies, at least in terms of inflation,” he said. “The point was made that it was much more complicated than that” and that combating deflation “was also a contribution to global prosperity. It was an exchange of views, with no particular conclusion.” Low interest rates and weak recoveries in industrialized economies such as the U.S. have forced investors to flood emerging markets with capital, providing resources for growth yet also threatening to spur inflation, asset bubbles and over- valued exchange rates. Such concerns have prompted economies from South Korea to Brazil to take steps to slow the inflow of speculative cash. “I’m not a friend of this but I can understand” why Brazil introduced capital controls, Bruederle said. Emerging-market equity mutual funds attracted more than $60 billion this year and bond funds lured $41 billion, both on pace for record annual inflows, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based research firm. Forty- nine percent of money managers are now overweight developing- markets equities, the highest level since 2009, according to a BofA Merrill Lynch survey released this month.
  • Hedge Funds Lift Gasoline Bets a 7th Week on French Strike: Energy Markets. Hedge funds raised their bullish bets on gasoline for a seventh straight week on speculation that a French labor strike will curtail European exports to the U.S. The funds and other large speculators increased wagers on rising prices to 57,640 futures and options contracts for the week ended Oct. 19, the highest level since May 7, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. The bets have climbed by 58,809 contracts since the week ended Aug. 31, when wagers on declines outnumbered those for gains by 1,169 contracts.
  • Mexico Kill 13, Wound 15 at Party in Ciudad Juarez, Government Says. Gunmen killed at least 13 people and wounded 15 at a house party in Ciudad Juarez, Mexico, the city across the border from El Paso, Texas, that is besieged by drug- trafficker violence. Seven of the dead have been identified, and range in age from 16 to 25, and a 9-year-old was among the wounded, according to an e-mailed statement from the state of Chihuahua, where Juarez is the most populous city. There have been no arrests, the statement said.
  • Greenspan's Bubbles to Lose Air in Frothy China: Willliam Pesek.
  • Japan Export Growth Slows in Sign of Cooling Rebound. Japan’s exports grew at the slowest pace this year in September, a sign the country is losing its chief engine for growth as demand abroad tempers. Overseas shipments increased 14.4 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 21 economists surveyed by Bloomberg News was for a 9.6 percent gain. From a month earlier, shipments fell a seasonally adjusted 0.1 percent.
  • Ask Labor Whether Foreign Money is Pouring In: Commentary by Kevin Hassett. Foreign money may be having a profound influence on the U.S. elections, more so than many people are aware. I’m talking about the tens of millions of dollars that flow each year from foreign sources to organizations with an immense stake in the course of U.S. politics. More groundless speculation about the U.S. Chamber of Commerce? No. This is real money going to American labor unions, an influx of foreign cash that is now harder to trace thanks to actions taken by President Barack Obama’s administration.
  • China's Energy Demand Growth May Slow Further on Efforts to Curb Economy.
  • Refinancing Surge Gives Lift to Banks Amid Foreclosure Scrutiny. A rush by U.S. homeowners to refinance at near record-low interest rates marks a rare bright spot for the mortgage industry, under attack for choking the economy with shoddy loans and botched foreclosures. Wells Fargo & Co., the biggest U.S. mortgage lender, received $194 billion of loan applications in the third quarter, the second-most in its history, Chief Financial Officer Howard Atkins said last week. About 80 percent were to refinance.
Wall Street Journal:
  • BMW Plans to Test Short-Term Car Rentals. BMW AG has announced plans to launch a project to let drivers in Germany rent its luxury sedans and roadsters by the hour, the latest effort from an auto maker to build a business by enabling consumers to get around without buying a car.
  • Safety Chief Warns China on Toys. Chairman of Consumer Product Safety Commission Says More Recalls, Penalties Lie Ahead if Standards Aren't Met.
  • BofA(BAC) Foreclosure Document Errors. Bank of America Corp. for the first time acknowledged finding some mistakes in foreclosure files as it begins to resubmit documents in 102,000 cases. The Charlotte, N.C., lender discovered errors in 10 to 25 out of the first several hundred foreclosure cases it examined starting last Monday. The problems included improper paperwork, lack of signatures and missing files, said people familiar with the results. In certain cases, information about the property and payment history didn't match. Some of the defects seem relatively minor, according to the bank, and bank officials said they haven't uncovered any evidence of wrongful foreclosures.
  • Key Tax Breaks at Risk as Panel Looks at Cuts. Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015. The tax benefits are hugely popular with the public but they have drawn the panel's focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year. At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars.
  • Google(GOOG) Still a Good Buy.
Bloomberg Businessweek:
  • Union's Bid to Organize Sandwich Shops Rejected. Union efforts to recruit workers at U.S. fast-food restaurants were set back yesterday as Minneapolis employees at Jimmy John’s sandwich shops rejected a bid to affiliate with organized labor.
  • Delfation Disappears With Bond Market Showing No Double Dip. The bond market is showing Federal Reserve Chairman Ben S. Bernanke will succeed in sparking inflation after the smallest gain in core consumer prices in half a century increased concerns that the economy will deflate. Expectations for rising consumer prices have increased faster in the U.S. than any other bond market this month as central bankers made the case for monetary easing through additional asset purchases. Yields on 30-year Treasuries climbed as much as half a percentage point since September to 2.61 percentage points more than similar maturity inflation-indexed debt, the widest gap since May and an indication for anticipated gains in consumer prices.
  • Senate Unlikely to Follow House on Yuan. The Senate is unlikely to take up pending China currency legislation following a weekend promise by the Group of 20 economic powers to shun currency devaluations for trade advantage, analysts said on Sunday.
NY Times:
  • Iran Is Said to Give Top Karzai Aide Cash by the Bagful. The bag of money is part of a secret, steady stream of Iranian cash intended to buy the loyalty of Mr. Daudzai and promote Iran’s interests in the presidential palace, according to Afghan and Western officials here. Iran uses its influence to help drive a wedge between the Afghans and their American and NATO benefactors, they say. The payments, which officials say total millions of dollars, form an off-the-books fund that Mr. Daudzai and Mr. Karzai have used to pay Afghan lawmakers, tribal elders and even Taliban commanders to secure their loyalty, the officials said. “It’s basically a presidential slush fund,” a Western official in Kabul said of the Iranian-supplied money. “Daudzai’s mission is to advance Iranian interests.”
NY Post:
  • Banks Sideswiped. The Federal Reserve is leaning toward slashing the debit-card fees banks collect at retail by at least $10 billion, two sources on opposing sides of the issue said. That would represent a 50 percent cut and eat into the profits of many banks.
Business Insider:
Zero Hedge:
Rasmussen Reports:
  • 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-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).
  • For College Students, It's So Not '08. On college campuses where Barack Obama made politics cool again, most students have moved on. They’ve quit bugging their friends about change, they’re no longer trying to sign up new voters and the knock-on-door day trips now draw only the most hard-core. One statistic from Rock the Vote, the most aggressive organization behind youthful political participation, illustrates the difference between now and 2008 — just 280,000 young voters signed up in its midterm elections voter drive, a fraction of the 2.5 million who eagerly put their name on voter forms two years ago. The bottom line: From coast to coast, universities that brim with liberal ideas and idealistic students won’t be sending nearly as many voters to the polls on Nov. 2. And that’s bad news for Democrats.
  • Manchin Says He Didn't Understand Key Health Care Details. Asked about areas where he disagrees with President Barack Obama, Manchin cited the health care reform legislation Obama signed in March.The Democratic Senate candidate from West Virginia, Gov. Joe Manchin, says he didn't understand key details of the health care reform legislation when he publicly endorsed it in March — an endorsement he has since withdrawn. "Reaching as far as they did in the — in the weeds of the bill that we didn't know about, no one else knew about until it came out — knowing that, I would not have supported that or voted for that at that time," Manchin said on "Fox News Sunday." "The health care reform is far overreaching in areas that I don't agree with — the 1099 part of that, the mandates. Also, the firewall's not strong enough for abortions. I'm pro-life. And we're just a different type of Democrat here in West Virginia," Manchin said. (The "1099" reference is to a revenue-raising provision that requires businesses to report more transactions to the IRS.) "Knowing the existence as far as how reaching it had been, as far as — and onerous — I would have" voted against it, he said."And I think many people didn't know about the bill. It ends up, what, 2,000 pages or more," he added.
Financial Times:
  • Credit Agricole Units Accused of Fraud. Crédit Agricole has been accused of fraud by investors in three US subprime mortgage-backed investment products set up by the French bank that it is claimed were built to fail. In a lawsuit filed on Friday in a New York court, Crédit Agricole Corporate and Investment Bank (Calyon) and Crédit Agricole Securities were alleged to have set up two collateralised debt obligation transactions with poor-quality assets in order for a US hedge fund to bet against it and fraudulently induced investors to purchase $70.5m of notes. It is also alleged to have placed poor-quality assets into a third transaction when it was looking to leave its securitisation business.
  • Bubble Fear as Rare Earth Prices Soar. Fears about Chinese supplies of vital rare earth elements have sent the shares of small mining companies soaring, a surge that executives and analysts warn is turning into a bubble. China, responsible for about 97 per cent of global rare earth production, has cut exports of the minerals used in high-tech goods from PCs to electric cars, driving up prices of the commodities and creating a worldwide hunt for other sources. An index of rare earth company shares produced by Kaiser Bottom-Fish Online, a research service, has risen 12-fold since the end of 2008, and 35 per cent in the past month.
Der Spiegel:
  • European Central Bank President Jean-Claude Trichet told German and French officials on Oct. 18 that a compromise struck over excessive budget deficits puts the foundations of currency union at risk. Trichet told Joerg Asmussen, Germany's deputy finance minister, and Ramon Fernandez, head of France's Treasury, that they didn't understand the seriousness of the situation. Trichet said the measures need to be tougher to shore up confidence in the euro.
China Securities Journal:
  • China's consumer price index in October will be higher than the growth in September, citing Yao Jingyuan, chief economist at the National Statistics Bureau.
  • China may start levying a property tax on a trial basis before March next year, citing Nie Meisheng, president of the China Real Estate Chamber of Commerce.
Oriental Daily:
  • China may delay the implementation of rules for its "mini-QFII" pilot project until the end of the year to prevent its stock market from overheating, citing people close to regulators.
Beijing News:
  • Chinese central bank adivser Xia Bin said pressure to raise interest rates in the nation remains, citing remarks Xia made at a forum.
Weekend Recommendations
  • Made positive comments on (NLC), (CA) and (AMG).
  • Made negative comments on (RNOW).
  • Reiterated Buy on (SLB), boosted target to $82.
Night Trading
  • Asian indices are +.75% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 105.0 -1.0 basis points.
  • Asia Pacific Sovereign CDS Index 97.75 +.25 basis points.
  • S&P 500 futures +.86%.
  • NASDAQ 100 futures +.72%.
Morning Preview Links

Earnings of Note
  • (ATHR)/.67
  • (AAN)/.31
  • (TXN)/.69
  • (RCII)/.56
  • (HRS)/1.24
  • (EW)/.42
  • (VRTX)/-.92
  • (MAS)/.10
  • (AMGN)/1.27
  • (BEAV)/.40
  • (PCL)/.24
  • (ADVS)/.21
  • (DRIV)/.13
  • (SLG)/1.78
  • (VECO)/1.27
  • (RSH)/.35
Economic Releases
8:30 am EST
  • The Chicago Fed National Activity Index for September is estimated to rise to -.3 versus -.53 in August.
10:00 am EST
  • Existing Home Sales for September are estimated to rise to 4.3M versus 4.13M in August.
10:30 am EST
  • Dallas Fed Manufacturing Activity for October is estimated to rise to -8.5 versus -17.7 in September.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking at Housing Conference, Fed's Dudley speaking, Fed's Bullard speaking and the Fed's Dudley speaking could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the week.

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