Wednesday, October 20, 2010

Wednesday Watch

Evening Headlines


  • China Hides Rampant Inflation in Money Binge: Patrick Chovanec. Money, money everywhere. At least that’s what it feels like at the moment in China. Awash in luxury cars, condos and expensive jewelry, the Chinese are enjoying what looks to be an unstoppable boom. But inflation figures due to be released tomorrow should give pause to those who assume China’s economy is on sound footing. To an extent few fully appreciate, China’s astonishing growth rates these past two years have been fueled by an even more astonishing expansion of its money supply, by more than 50 percent. Until now, the inflationary consequences have been largely camouflaged in the form of rising asset prices.
  • CMBS Yields Fall to '10 Low, Spur Sales, Beat Company Debt: Credit Markets. Relative yields on commercial mortgage bonds have fallen to the lowest this year as investors look beyond climbing delinquencies and unprecedented defaults in a wager that the worst is over for the debt. A $3.6 billion commercial-mortgage backed bond, used as a market barometer because it trades frequently, pays 279 basis points more than the benchmark swap rate, down from 500 basis points at the end of 2009, according to RBS Securities Inc. data. Bonds rated AA and tied to property loans have soared 9.4 percent since June 30, compared with 4.2 percent for similarly rated corporate debt, Bank of America Merrill Lynch index data show.
  • Bank of America(BAC) Leads Rise in Bank Risk Amid Mortgage Concern. A benchmark indicator of corporate credit risk rose for the fourth time in six days amid concern banks will have to buy back soured mortgages and China unexpectedly raised its benchmark lending rate for the first time since 2007. Bank of America credit swaps rose 17.4 basis points to 200, CMA data show. The largest U.S. lender, which today reported a $7.3 billion loss tied to new rules on consumer accounts and credit cards, said it’s fighting demands to buy back allegedly faulty loans.
  • Consumers' Holiday-Gift Spending to Drop This Year, Survey Says. U.S. consumers will spend about 2 percent less on gifts this holiday season as shoppers remain concerned about a weak economy, the Consumer Electronics Association estimated, citing an annual survey. The average consumer will spend $750 on holiday gifts, the industry trade group said today in a statement. A third of the survey’s respondents said they planned to reduce spending for reasons related to unemployment, the association said. Electronic gadgets ranked as the most-sought gift, with shoppers expected to spend $232 each on average, a 5 percent increase from last year and the highest amount since tracking began in 1993, the Arlington, Virginia-based CEA said. Notebook computers and Cupertino, California-based Apple Inc.’s iPad tablet top the list of gifts, followed by clothes and electronic readers such as Seattle-based Inc.’s Kindle.
  • Bets Against U.S. Technology Stocks Increase Following Apple(AAPL), IBM(IBM) Earnings. Trading of put options on U.S. technology stocks surged to 7.4 times the four-week average, with almost half of the volume coming from a single wager the shares will pare their 19 percent rally since August in the next two months. Almost 180,000 puts to sell the Technology Select Sector SPDR exchange-traded fund changed hands as of 4 p.m. in New York, 82 times the number of calls to buy. The ETF that tracks companies including Apple Inc. and Microsoft Corp. lost 1.8 percent to $23.82. The biggest trade was in a “butterfly” strategy involving 80,000 December contracts that pay off the most if the fund falls to $22 before expiration on Dec. 17. “It’s definitely a sign of pessimism in the technology sector,” said Caitlin Duffy, an equity options analyst at Greenwich, Connecticut-based Interactive Brokers Group Inc., in an interview. “The butterfly spread is a large volume position and it may or may not be a hedge.”
  • U.S. Lawmakers Request FCC to Review China's Huawei, ZTE on Security Risks. U.S. lawmakers asked the Federal Communications Commission to review the security risks of domestic companies ordering network equipment from China’s Huawei Technologies Co. and ZTE Corp. The Chinese companies are in "active" discussions to supply at least two U.S. companies, Sprint Nextel Corp. and Cricket Communications Inc., Senator Jon Kyl, an Arizona Republican, wrote in a letter co-signed by three other lawmakers yesterday. It’s at least the second time in two months that U.S. lawmakers have prodded the Obama administration to review the risks of buying Chinese telecommunications equipment. Eight U.S. lawmakers on Aug. 18 warned that a Sprint contract with Huawei would “undermine U.S. national security.”

Wall Street Journal:
  • CBOE Chief: SEC and CFTC Still in Turf War. Despite their joint efforts following the "flash crash," the federal agencies that regulate the securities and futures industries still spend too much time battling each other for influence, the chairman of the Chicago Board Options Exchange said. "There's a level of cooperation now, but the underlying issues remain," CBOE Holdings inc. Chairman and Chief Executive William Brodsky said in an interview, criticizing the Securities and Exchange Commission and the Commodity Futures Trading Commission for what he said are turf battles resulting in delays that are not caused by the agencies' increased workload.
  • GOP in Lead in Final Lap. A vigorous post-Labor Day Democratic offensive has failed to diminish the resurgent Republicans' lead among likely voters, leaving the GOP poised for major gains in congressional elections two weeks away, according to a new Wall Street Journal/NBC News poll. Among likely voters, Republicans hold a 50% to 43% edge, up from a three-percentage-point lead a month ago.
  • Florida AG Investigating Five For-Profit Schools. The Florida Attorney General's office has launched a civil investigation into five for-profit colleges, including four publicly traded schools, seeking information on potential misrepresentations in financial aid, recruitment and other areas.
  • U.S. Probe Criticizes Handling of Loans. Obama Administration Investigation Finds Considerable Variation Among Operations of Five of the Largest Loan Handlers. A four-month-long Obama administration probe into five of the country's largest mortgage servicers has discovered "a significant variation" among their operations, with some servicers "significantly worse than others" in how they handle home loans, U.S. Secretary of Housing and Urban Development Shaun Donovan said in an interview. Mr. Donovan wouldn't identify which companies were laggards in the HUD review, but he said the administration plans to make the results of its investigation public in the next few weeks.
  • BofA(BAC) Sues FDIC Over Mortgage Losses. Bank of America Corp. is suing the Federal Deposit Insurance Corp. over $1.75 billion in losses suffered by investors in a subsidiary of mortgage lender Taylor Bean & Whittaker, the latest legal fallout from one of the messiest collapses in the nation's mortgage securitization meltdown.
  • FDIC Aims to Shed Some Real-Estate Assets. Agency to Launch Its First CMBS Deal as Bank Failures Mount and the Volume of Distressed-Property Loans Increases. With more banks collapsing because of commercial real-estate lending, the Federal Deposit Insurance Corp. is working on a new way to sell failed banks' hard-to-value real-estate assets back to the private sector, according to people familiar with the matter. Up until now, the FDIC has mostly sold soured property loans to investors in partnerships with the agency. These arrangements enticed private investors to buy distressed real-estate assets while giving taxpayers the opportunity to make money should the assets rise in value. But as the volume of real-estate loans mount, the FDIC now is looking to bundle and sell some of them as commercial mortgage-backed securities, or CMBS. The agency is expected to launch its first CMBS deal, expected to be backed by at least $500 million of performing commercial mortgages, by the end of this year or in January, the people said.
  • U.S. Plans Increased Military Aid for Pakistan. Administration Seeks More Action by Islamabad Against Militants.
  • The Overseas Profits Elephant in the Room by John Chambers and Safra Catz. There's a trillion dollars waiting to be repatriated if tax policy is right.
Bloomberg Businessweek:
  • Dudley Says Fed Working With Regulators on Foreclosure Review. The Federal Reserve is working with two other U.S. regulators to review foreclosure practices, governance and documentation at mortgage servicers, said William Dudley, president of the Fed Bank of New York. “We want to ensure that the housing finance business is supported by robust back-office operations -- for processing of new mortgages as well as foreclosures -- so that buyers of homes and investors in mortgage securities have full confidence in the process,” Dudley said in a speech today in New York.
Business Insider:
Zero Hedge:
NY Times:
  • New York Fed: Banks Should Buy Mortgages. To the long list of those picking fights with banks over bad mortgages, add the Federal Reserve. Two years after the Fed bought billions of dollars in mortgage securities as part of the financial bailout, its New York arm is questioning the paperwork — and pressing banks to buy some of the investments back. The Federal Reserve Bank of New York and several giant investment companies, including Pimco and BlackRock, have singled out Bank of America, which assembled more than $2 trillion of mortgage securities from 2004 to 2008.
LA Times:
  • Obama Spending Stimulates the National Debt by $3,039,000,000,000. The United States of America now owes someone(s) $13,665,000,000,000. By 2012, when Hillary Clinton next challenges Barack Obama for their party's presidential nomination, the national debt will be even larger than today's record -- $16,500,000,000,000, according to current federal estimates. That's more money than the entire United States economy produces in a complete year. Obama prefers to lay the blame or credit for this gargantuan spending increase at the cowboy-booted feet of his Lone Star Republican predecessor. During George W. Bush's Oval Office tenure, the national debt increased more -- by $4.9 trillion, in fact. However, Bush took 96 months to do that. Obama has accomplished his spending feat in less than 21 months. Under his spendership the national debt has grown about $4.8 billion every day since he took the oath of office twice, just to be safe.
  • Early Vote a Bad Omen for Harry Reid. Early-voting numbers out of Nevada’s two biggest counties could spell trouble for Senate Majority Leader Harry Reid in his tough contest against Republican Sharron Angle. In Reno’s Washoe County and Las Vegas’s Clark County, Republican turnout was disproportionately high over the first three voting days, according to local election officials. The two counties together make up 86 percent of the state’s voter population. The sparsely populated counties outside Clark and Washoe, which have yet to report complete early-voting results, are strongly Republican. Some 47 percent of early voters in the bellwether Washoe County so far have been Republicans, while 40 percent have been Democrats, according to the Washoe County Registrar. Nearly 11,000 people had voted in Washoe over the first three days of early voting, which began Saturday. Voter registration in the county is evenly split, 39 percent to 39 percent. The disproportionate turnout is a concrete indication of the Republican enthusiasm that is expected to portend a nationwide GOP wave.
  • Barbara Boxer in Closest Match of Career vs. Carly Fiorina. California's Senate slugfest has turned into a battle of extremes as both candidates play to their political bases while still trying to entice support from the moderate middle.
  • Lenovo Says PC Demand Slowed at End of Quarter. Demand for personal computers slowed slightly at the end of the September quarter, with a clear slowdown seen in western Europe, said a senior executive at Lenovo Group Ltd, the world's fourth biggest PC maker. "Demand has recovered, but it was a little bit softer towards the end of the quarter," Milko van Duijl, chief of Lenovo's operations in mature markets, told Reuters in an interview on Tuesday. Van Duijl said there was a particular slowdown in demand from consumers and small-to-medium sized corporations in western Europe towards the end of the quarter. "Demand seems to be a little bit on a holding pattern," he said.
  • Toshiba to Beat H1 Forecast on NAND Demand. Toshiba Corp will beat its first-half operating profit forecast by more than 43 percent on strong sales of flash memory chips, but stick to its full-year outlook, the Nikkei newspaper reported on Wednesday.
  • Western Digital(WDC) Warns of iPad Hit, Weak Holidays.
  • Intuitive Surgical(ISRG) 3rd Quarter Profit Rises, Shares Fall. Intuitive Surgical Inc on Tuesday reported better-than-expected third-quarter profit on increased demand for its high-priced da Vinci surgical systems, but procedure growth was a bit below analysts' estimates and its shares fell nearly 4 percent.
  • President Barrack Obama said he had no problem with Venezuela's plan to develop a nuclear energy program as long as it acts responsibly. Venezuela has the right to peacefully use nuclear power.
Financial Post:
  • Province Says No to BHP(BHP). Saskatchewan has rejected the proposed takeover of Potash Corp. of Saskatchewan Inc. after BHP Billiton Ltd. refused to meet the province’s demands, putting the $40-billion offer in jeopardy and leaving the federal government with a difficult decision. For weeks, the Saskatchewan government has expressed doubt that BHP’s bid for Potash Corp. would provide a “net benefit” to the province. But Tuesday, a source familiar with the transaction confirmed that Saskatchewan will recommend that Investment Canada reject the bid, citing concerns about loss of tax revenue.
The Australian:
  • BHP Billiton(BHP) Threat to Walk Away From Mining Tax Deal. JULIA Gillard's mining tax compromise has come under fire from the companies that negotiated it, with BHP Billiton threatening to walk away from the deal. The threat comes amid reports Resources Minister Martin Ferguson wants to renege on a key part of the agreement. In the first sign the mineral resources rent tax is on shaky ground with the three giant miners that helped draft it, BHP is understood to be furious with public and private statements by Mr Ferguson that any future increases in state royalties could not be offset by cuts to their resource rent tax.
China Business News:
  • China's banking regulator issued a notice to the nation's lenders ordering a halt of real estate loans to developers found to be hoarding land or property. Banks were also told not to accept applications for real estate loans from the 78 central government owned enterprises ordered in March to exit the property market as real estate development isn't their core business. The China Banking Regulatory Commission also ordered banks not to accept loan applications from developers that don't put up the projects they're borrowing for as collateral for the loans.
  • China needs to take greater effort to manage "hot money" inflows after increasing interest rates, citing Ba Shusong, deputy head of the financial institute of the State Council's Development Research Center.
People's Daily:
  • China's rate rise can reduce "hot money" inflows by stabilizing property prices and the stock market, citing Fan Jianping, head of the economic forecast department of the State Information Center.
Xinhua News Agency:
  • China central bank raised interest rates on current inflation at the moment, citing Li Daokui, an adviser to the People's Bank of China.
Evening Recommendations
  • Reiterated Buy on (ITW), target $52.
  • Reiterated Buy on (GS), target $200.
Night Trading
  • Asian equity indices are -1.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 118.0 +2.5 basis points.
  • Asia Pacific Sovereign CDS Index 99.0 unch.
  • S&P 500 futures +.24%.
  • NASDAQ 100 futures +.35%.
Morning Preview Links

Earnings of Note
  • (BLK)/2.46
  • (UTX)/1.28
  • (CMA)/.41
  • (ETN)/1.38
  • (USB)/.43
  • (DGX)/1.00
  • (SWK)/.88
  • (ABT)/1.04
  • (MO)/.52
  • (STJ)/.68
  • (BA)/1.07
  • (MS)/.21
  • (WFC)/.56
  • (RHI)/.13
  • (NFLX)/.71
  • (KMP)/.37
  • (SCHN)/.42
  • (TSCO)/.38
  • (EBAY)/.37
  • (ADS)/1.50
  • (GENZ)/.53
  • (LCC)/1.17
  • (DAL)/.94
  • (XLNX)/.64
  • (AMR)/.32
  • (LRCX)/1.37
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a -416,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,500,000 barrels versus a -1,769,000 barrel decline the prior week. Distillate inventories are expected to fall by -1,000,000 barrels versus a -255,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.3% versus a -1.20% decline the prior week.
2:00 pm EST
  • Fed's Beige Book
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Lacker speaking, Fed's Plosser speaking, weekly MBA mortgage applications report, (BLKB) analyst day and the (PWE) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down 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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