Tuesday, October 26, 2010

Tuseday Watch

Evening Headlines


  • Bernanke's Next Round of Asset Purchases Risks Jimmy Carter-Like Inflation. For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory. Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms.
  • Pimco's El-Erian Says Fed Easing to Spur Faster Inflation. Federal Reserve Treasury purchases will lead to faster global inflation while failing to revive U.S. economic growth, said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co. Quantitative easing, the strategy of buying bonds to keep borrowing costs low that is under consideration at the central bank, won’t be enough to curb U.S. unemployment, El-Erian said at a reception in New York sponsored by the Financial Women’s Association. The Fed will buy more bonds because it is terrified of deflation, an extended decline in consumer prices, he said. “QE on its own means we’ll have the same issues in six to nine months time with the rest of the world being inflated,” El-Erian said. “It will have some benefits but not as much as we’d like. It will have costs and unintended consequences.” Fresh purchases will drive up commodity prices as much of the money injected into the U.S. economy leaks out to other currencies, El-Erian said. He also has said governments and central banks haven’t detected the “ongoing paradigm shift” in their economies that will require remedies beyond stimulus programs. Among the fault lines he spots are strained balanced sheets, persistently high unemployment and a misunderstanding of financial markets. “We have a structural unemployment issue,” El-Erian said in New York. “It is worrisome because it erodes the skillset of a society. The numbers are terrifying. The longer you are unemployed, the more difficult it is to get a job.”
  • Fed-Induced Junk Rally Makes Riskiest Debt Most Expensive: Credit Markets. The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued. The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.2 percentage points, or 3.3 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average. Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels. Goldman Sachs Group Inc. advised its clients to avoid adding CCC rated debt in a report published Oct. 22 because of slower economic growth.
  • Copper Climbs to 27-Month High on Dollar Concern; Zinc at Nine-Month Peak. Copper advanced to the highest level in more than 27 months, gaining for a third day, as investors sought alternatives to a weakening dollar. Zinc rose to the highest price in nine months.
  • Citigroup's(C) Pandit Says Basel Accords Could Make Credit Crunches Worse. Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse. While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said. “By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S. Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout.
  • Buffett-Backed BYD's Profit Plunges More Than 99% as Sales Drop. BYD Co., the Chinese carmaker backed by Warren Buffett, fell the most in more than five months in Hong Kong trading after third-quarter profit dropped 99 percent amid faltering sales. The shares declined as much as 7.7 percent to HK$52.50, the biggest drop since May 17, and traded at HK$53.55 as of 10:18 a.m. after BYD posted net income of 11.34 million yuan ($1.7 million) for the three months ended Sept. 30. It was the fourth- biggest decline among 982 stocks in the MSCI Asia Pacific Index. “Profit was pretty disappointing and well below our estimations,” said Galant Ng, an analyst at Taifook Securities Group Co. in Hong Kong. BYD suffered from declining car sales and higher costs, Ng said in an interview today. The company, the fastest growing automaker in China last year, cut its 2010 vehicle sales target 25 percent in August as it struggled to maintain momentum amid higher taxes on small cars. Vehicle sales at BYD, 10 percent owned by Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., slumped 25 percent in September to 33,085 vehicles. BYD’s deliveries dropped 19 percent in August. “Most local brands suffered from the government policy tax revision,” Ricon Xia, a Hong Kong-based senior analyst at Mitsubishi UFJ Asset Management, said before the earnings. BYD’s fourth quarter also “won’t be very strong,” he said.
  • JPMorgan(JPM), Bank of America(BAC) Subpoenaed Over Foreclosures in Texas by Abbott. Texas Attorney General Greg Abbott sent subpoenas to JPMorgan Chase & Co., Bank of America Corp. and seven other banks or loan servicers seeking information about foreclosure practices, a spokesman said. “The state is subpoenaing information and documents,” Jerry Strickland, the spokesman, said in an interview. He didn’t elaborate. The state also subpoenaed Ally Financial Inc., CitiMortgage Inc. and Wells Fargo & Co.

Wall Street Journal:
  • Credit Suissse: Hedge Funds Fully Recovered High Water Mark. Credit Suisse Group (CS) said Monday that hedge funds have fully recovered their high water mark in September.
  • Ford's(F) Drive to Ditch 'Junk'. For the past 12 months, Ford Motor Co. has been on a campaign to lift its credit rating out of "junk" territory and get back to investment grade. Judging by the way bond investors view the company, it's just about there.
  • Pimco's El-Erian: Expects Greece Will Default In 3 Years. Mohamed El-Erian, chief executive and co-chief investment officer of bond giant Pimco, said he bets Greece will default on its debt in three years. Greece is likely to default, and it will be to the country's and the European Union's benefits, said El-Erian, speaking at the Buttonwood Gathering in New York. Without an orderly restructuring, he said, Greece's economy could spiral into a lost decade of high unemployment and low growth as seen in Asia and Latin America in the past. That is because the fiscal plan imposed by the International Monetary Fund and EU for Greece's bailout to adjust its debt to GDP ratio will require enormous growth sacrifices, and yet see the country's debt rise further into the future. "Europe has shown its ability to make changes that people thought were not very likely," said El-Erian. He said it is in the region's interest for Greece to default "because the alternative doesn't promise growth and employment generation."
  • Buffett Flags a Successor. Fund Manager Named Leading Candidate as Next Investment Chief at Berkshire.
  • Big Insurance, Big Medicine. ObamaCare is already driving a wave of health-care consolidation - and higher costs. ObamaCare's once and future harms have been well chronicled, but the major effects so far are less obvious and arguably more important: A wave of consolidation is washing over the health markets, and the result is going to be higher costs. The turn toward consolidation among insurance companies is not new, and neither is it among doctors, hospitals and other providers. Yet the health bill has accelerated these trends, as all sides race to anticipate and manage political risk and regulatory uncertainty. This dynamic is leading to much larger hospital systems and physician groups, and fewer insurers dominated by a handful of national conglomerates. ObamaCare was sold using the language of choice and competition, but it is actually reducing both.
  • Foreclosure Sales Were 'Accurate', Moratorium Stands: BofA. Bank of America issued a statement Monday crying out against so-called "factual errors" regarding its foreclosure affidavit review process, as an industry-wide foreclosure scandal continues to plague several of the nation's largest lenders.
  • India Warned Over Capital Inflow Risks. Economists are warning that New Delhi may be underestimating the risks of excessive capital inflows, as huge foreign portfolio investment into India has helped push both the stock market and the rupee to pre-crisis levels.
Business Insider:
NY Times:
  • Connecticut Fund Manager Sued for Fraud Over Fees. A Connecticut hedge fund manager was accused by state and federal regulators on Monday of inflating the value of its holdings, which allowed it to fraudulently collect millions of dollars of undeserved fees.
New York Daily News:
  • Are Bert and Ernie Gay? Official 'Sesame Street' Twitter Account Sparks Rumors With Ambiguous Post. It was the tweet heard round "Sesame Street." "Ever notice how similar my hair is to Mr. T's?" lovable sweater-clad Bert wrote on the official "Sesame Street" Twitter account in June. "The only difference is mine is a little more 'mo,' a little less 'hawk.'" Taking the "mo" to mean "homosexual," the tweet had gay bloggers, activists, and parents buzzing that the show was letting them in on a big secret with an under-the-radar wink. The Los Angeles Times took the post as the latest evidence in a history of clues the show has dropped over the years that Bert and Ernie are more than just friends, reviving the (nearly) age-old question: are Bert and Ernie gay?
Rasmussen Reports:
  • Mess in Rhode Island for Obama. President Barack Obama’s decision not to endorse the Democratic gubernatorial candidate here turned a routine campaign stop Monday into a political headache, complete with the candidate telling Obama to "shove it."
  • Comcast(CMCSA) Launches New Web Video Service, Stepping Up Fight. Comcast Corp. (CMCSA), the largest U.S. cable operator, on Monday rolled out a service that allows its subscribers to watch an array of television shows and movies on a personal computer or laptop.
  • Euro Close to Overvalued; Growth Risk- IMF Official. The euro is close to being overvalued and further gains could impede growth rates in the single currency area, Bas Bakker, an economist at the International Monetary Fund, told a news conference on Monday. "(The) euro is at a level which we call close to overvaluation. A stronger euro means slower growth (in the euro zone). Should there be further appreciation, the effect will be larger but it is difficult to comment on day-to-day exchange-rate changes," Bakker said.
  • Chavez Nationalizes Venezuela Arm of U.S. Bottle Co. Venezuelan President Hugo Chavez ordered the takeover of the local unit of U.S. glass bottle firm Owens-Illinois (OI) on Monday, part of a drive to nationalize large swathes of the food processing and distribution business. Since an election last month that left the socialist leader's party with a reduced majority in parliament, he has nationalized a large fertilizer factory, a motor lubricants firm and a huge swathe of land belonging to a wealthy British family. "Expropriate it ... a company of North American capital that has been here for years exploiting the workers, destroying the environment," he said of Owens-Illinois on a late night TV appearance a few hours after returning from a tour of friendly nations such as Russia and Iran.
  • Nissan COO: 'huge sense of crisis' over strong yen. A top executive at Nissan Motor Co said on Tuesday he has a "huge sense of crisis" towards the strong yen.
  • Fed's Hoenig Says More Easing Could Be Dangerous. A U.S. Federal Reserve official who has persistently dissented against the central bank's easy money policies said on Monday that further monetary easing would be a hazardous bet. "There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in a speech, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero. Hoenig said further asset buying -- which other officials have said will likely resume in November -- would be "a very dangerous gamble."
  • TI(TXN) Sees PC, TV Weakness for Few Quarters. Texas Instruments Inc (TXN) warned its fourth-quarter revenue will be hurt by slowing demand for chips for computers and televisions, sending its shares lower even though its results beat Wall Street forecasts. The maker of chips used in products from cars to cellphones said strong demand from industrial customers was offset by weak chip sales for consumer products.
  • Digital River Q3 Tops Wall Street. E-commerce services provider Digital River Inc (DRIV) reported better-than-expected quarterly results, helped by extension of services with Microsoft (MSFT) and new contract from video-game publisher Electronic Arts (ERTS), and forecast fourth-quarter revenue above market estimates.
  • Banks Should Be Broken Up, Bank of England Governor Mervyn King Warns. Mervyn King, Governor of the Bank of England, has thrown his weight behind breaking up the banks as part of wider reforms to protect the taxpayer from another financial industry meltdown.
  • German Boom Creates ECB Policy Nightmare as South Lags. Blistering growth in Germany is aggravating the growing gap between the eurozone's North and South and may force the European Central Bank to tighten monetary policy long before the high-debt states are ready, Standard & Poor's has warned.
  • Barack Obama's Poor Economic Policies Are Playing into China's Hands. No one here wants to turn America back into the Wild West but the current paralysis of US governance is the single biggest mistake America is making and the single biggest competitive advantage being enjoyed by China. Beggar-thy-neighbour trade wars based on currency devaluation is only a very short-term tonic for America and is no substitute for longer-term sustainable job creation. It is jobs that will create the wealth to allow households to pay off their mortgages and afford the fees needed to pay for higher education that will equip the next generation to compete. Quantitative easing (a way of printing money) will support the price of financial assets in the short term in the hope of inspiring confidence and a positive wealth effect. But a return to the credit-induced consumerism and illusions of wealth that characterised the last boom are no answers to America's current economic problems. And that goes for the UK too.
21st Century Business Herald:
  • The Chinese city of Chongqing may impose a property tax on second homes and large first homes, citing a government official.
Shanghai Securities News:
  • China should resist pressure from the U.S. and Europe to let its currency appreciate, Wang Yong, a central bank researcher wrote. The Asian nation should not increase holdings of U.S. or European government bonds as long as pressure remains, Wang wrote.
Evening Recommendations
  • Reiterated Buy on (NSH), raised target to $39.50.
RBC Capital:
  • Rated (ESRX) Outperform, target $57.
  • Rated (MHS) Outperform, target $68.
Night Trading
  • Asian equity indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 101.0 -4.0 basis points.
  • Asia Pacific Sovereign CDS Index 95.0 -2.75 basis points.
  • S&P 500 futures +.08%.
  • NASDAQ 100 futures +.07%.
Morning Preview Links

Earnings of Note
  • (PCAR)/.32
  • (AMTD)/.23
  • (CMI)/1.40
  • (ATI)/.05
  • (ARG)/.81
  • (UIS)/.99
  • (PNR)/.52
  • (LXK)/.97
  • (KMB)/1.28
  • (VNO)/.46
  • (X)/.22
  • (BIIB)/1.22
  • (JCI)/.57
  • (CPLA)/.77
  • (RCL)/1.56
  • (COH)/.55
  • (MHP)/1.10
  • (DD)/.34
  • (UA)/.60
  • (F)/.38
  • (MCK)/1.09
  • (CHRW)/.61
  • (FISV)/1.00
  • (MEE)/-.19
  • (WBSN)/.30
  • (PNRA)/.74
  • (BXP)/1.03
  • (ILMN)/.24
  • (FFIV)/.72
  • (DV)/.96
  • (NVLS)/.83
  • (CBG)/.17
  • (JLL)/.95
  • (BRCM)/.71
  • (BWLD)/.43
  • (AGCO)/.49
Economic Releases
10:00 am EST
  • Consumer Confidence for October is estimated to rise to 49.9 versus a reading of 48.5 in September.
  • The House Price Index for August is estimated to fall -.2% versus a -.5% decline in July.
  • Richmond Fed Manufacturing Index for October is estimated to rise to 1.0 versus a reading of -2 in September.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Dudley speaking, S&P/CaseShiller Home Price Index, weekly retail sales reports, $35 Billion 2-Year Treasury Notes Auction and the weekly ABC Consumer Confidence report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and real estate shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

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