Monday, November 08, 2010

Monday Watch

Weekend Headlines

  • Euro Falls as Concern Over Irish Bond Sales, Greece Damps Investor Demand. The euro fell for a second day against the dollar as concerns about Ireland’s capacity to gain support for its budget and political uncertainty in Greece reduced the appeal of the region’s assets. Europe’s currency weakened versus 11 of its 16 major counterparts before European Union Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today to look at Ireland’s budget plan. The euro also dropped as the extra yield that investors demand to hold Ireland’s debt rather than German bunds has more than doubled in the last three months. “The recent blow out in euro area peripheral country government bond spreads relative to bunds is starting to weigh on the euro,” said David Forrester, a currency economist at Barclays Capital in Singapore.
  • Hedge Funds Raise Bullish Bets on Oil to Four-Year High: Energy Markets. Hedge funds ramped up bullish bets on oil to the highest level since at least June 2006 as the Federal Reserve enacted stimulus measures, helping spur crude to a two- year high and weakening the dollar. The funds and other large speculators increased wagers on rising crude prices by 8.6 percent in the seven days ended Nov. 2, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. So-called net-long positions climbed to a record for the CFTC data available. The Dollar Index, which tracks the U.S. currency against those of six major trading partners, slipped 0.9 percent last week and is down 13 percent since this year’s June 7 peak. “It’s all about the dollar being debased,” said Mike Armbruster, co-founder of Altavest Worldwide Trading in Mission Viejo, California. “You’re going to see managed money take its cue from the dollar. If the dollar continues to weaken, you’ll see them continue to go long oil.” Oil for December delivery rose $5.42 last week, or 6.7 percent, to settle at $86.85 a barrel on Nov. 5 on the New York Mercantile Exchange, the first five-day rally since April. JPMorgan Chase & Co. and Bank of America Merrill Lynch last week forecast that oil may return to $100 a barrel for the first time since the 2008 financial crisis. “Whatever QE2 will or won’t do in the economy, it will cause the price of raw materials to rise,” said Jennifer Fan, portfolio manager with Arrowhawk Commodity Strategies, a hedge fund in Darien, Connecticut.
  • Obama Says Election May Spur 'Midcourse Corrections'. President Barack Obama said today that Democratic losses in last week’s congressional elections may require him to make some “midcourse corrections,” conceding the results were a “healthy” outcome of democracy. “One of the wonderful things about democracy is that when the people are not happy it’s their right, obligation and duty to express their unhappiness, much to the regret sometimes of incumbents,” Obama told Indian university students at St. Xavier’s College in Mumbai. “But that’s a good thing, that’s a healthy thing,” Obama said.
  • October Payroll Increase Points to Acceleration in U.S. Consumer Spending. Employment in the U.S. rose in October for the first time in five months, a sign the world’s largest economy may strengthen in the final quarter of the year.
  • Irish Fight to End Bond 'Buyers Strike' as EU Comes to Examine Budget Plan. Ireland will try to win support this week from the European Union to avoid a Greek-style bailout as investors balk at buying the country’s bonds. EU Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today for a two-day visit after the government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros ($8.4 billion) in 2011. While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May. “It’s close to a buyers strike at this point,” said Jens Peter Soerensen, chief analyst in Copenhagen at Danske Bank A/S, a primary dealer in Irish government bonds. “Something needs to happen in the next few weeks to change the dynamic.”
  • BP(BP) to 'Reset' Dividend, Won't Sell Refineries, Times Reports. BP Plc, which in June canceled three quarterly dividend payments, is considering reducing the amount it pays out to shareholders, the Sunday Times reported, citing the energy company’s chief executive officer, Robert Dudley. “We have the opportunity to reset the dividend level and the mix of the kind of businesses we do,” Dudley said in an interview with the newspaper. “That is certainly part of our thinking going forward.” BP isn’t planning to sell refineries, according to Dudley. After selling 10 refineries in the past decade, BP now has plants that “give you value going forward,” the report cited him as saying.
  • Duquesne Alumni Said to Start New Hedge Fund With $5 Billion. Stan Druckenmiller’s former colleagues at Duquesne Capital Management LLC are opening a new firm with $5 billion in assets, said four people briefed on the plans, the second-largest hedge-fund startup ever.
  • Obama to Ease Export Restrictions for Indian Defense, Space Organizations. U.S. President Barack Obama will announce a relaxation in export controls for India today to reduce barriers to commerce and align the countries’ trade regimes to reflect their strategic alliance, an administration official said. As part of the agreement, the Obama administration will support India’s full membership in multilateral nuclear non- proliferation regimes and remove India’s defense and space organizations from the U.S. “entities list,” which restricts them from doing business with the U.S. “This really includes India as a major player in a non- proliferation world,” Michael Froman, Obama’s deputy national security adviser, said in Mumbai today. “Removing these entities from the list will allow for greater trade and cooperation in civilian space and defense and enable our governments to focus on other outstanding barriers.”
  • Mexican Violence May Escalate After Accused Drug Leader Killed in Shootout. Mexican marines killed an alleged drug cartel leader known as “Tony the Storm,” a move that may cause violence to intensify in northeastern Mexico as drug gangs fight over shipping routes to the U.S.
  • Dubai Third-Quarter House Prices Fall 6% on Reduced Lending, Colliers Says. Dubai home prices declined 6 percent in the third quarter while the United Arab Emirates’ biggest construction firm, Arabtec Holding PJSC, reported 96 percent drop in profit and Deyaar Development PJSC suffered a loss. The Dubai House Price Index dropped 6 percent in the third quarter compared with the previous one, reaching its lowest level since the second quarter of 2009 on a summer slowdown and as banks continued to restrict lending, Colliers International, a brokerage, property and asset management company said today.
  • Groupon Said to Seek Venture Funding That May Value Company at $3 Billion. Groupon Inc., owner of a daily coupon website with 20 million subscribers, is seeking venture funding that may value the company at about $3 billion, according to three people familiar with the matter. The company aims to raise the funding to help it expand beyond the 230 markets where it now operates, said the people, who declined to be identified because the fundraising is private. The company had been discussing funding that would value it in the range of $2 billion to $3 billion, two of the people said.
Wall Street Journal:
  • Citi Debt Funds Probed by SEC. A Securities and Exchange Commission investigation of soured Citigroup Inc. debt funds has subpoenaed former in-house brokers, some of whom contend the bank misled investors about how risky the funds were, according to people familiar with the matter.
  • Investor Said to Press For Symantec(SYMC) Breakup. Activist investor Relational Investors LLC is building a stake in Symantec Corp. with plans to press for a breakup of the software company, a person familiar with the matter said. Such a breakup would involve splitting Symantec into two businesses--security and data storage, this person said.
  • AOL(AOL) Hires Advisers, With Eye on Yahoo(YHOO). AOL Inc. has hired financial advisers to explore various strategic options for the company, one of which includes a possible tie-up with bigger rival Yahoo Inc., people familiar with the matter said.
  • GOP to Use Debt Cap to Push Spending Cuts. Republicans are planning to demand major spending cuts next year before they would agree to raise the amount of federal debt that can be issued, setting up a clash between the Obama administration and a Congress stocked with lawmakers who campaigned as deficit hawks.
  • Regulators, Banks Grapple With Volcker Rule's Reach. When J.P. Morgan Chase & Co. lawyers came to Washington in September to vent about prohibitions in the Volcker rule, they didn't bother stopping at the White House or Congress. The reason: The power to hammer out exact language in the rule aimed at preventing risky bets belongs to a small army of regulators, including some who were unknown on Wall Street before the financial-overhaul bill passed in July.
  • Which Firms Need Tougher Oversight? Don't Look at Me. Companies across the financial-services industry are aggressively seeking to avoid being subjected to tougher regulation—and to make sure their competitors are. At issue is a new regulatory designation created by Congress's overhaul of finance rules earlier this year, in which firms classified as "systemically important" would have to comply with additional rules and submit to oversight from the Federal Reserve. Life insurers, hedge funds and asset managers are pelting regulators with arguments for being exempt.
  • Ripple Effects Likely as Starbucks(SBUX), Kraft(KFT) Pzrt Ways. Starbucks Corp. wants to part ways with Kraft Foods Inc., a move that could shake up the single-cup coffee market in U.S. grocery stores. Late Thursday, Starbucks said it wants to unwind an agreement under which Kraft has distributed Starbucks bagged coffee as well as its Seattle's Best coffee brand in supermarkets and other food retailers since 1998. The business has grown to $500 million in annual sales from $50 million 12 years ago, according to Tim McLevish, Kraft's chief financial officer.
  • Battle Looms Over Tax Breaks, Spending Cuts. Newly empowered Republicans pushed Sunday to extend Bush-era tax levels for as long as possible and pledged significant cuts in spending, as President Barack Obama sought to maintain his footing in an escalating budget battle. The fiscal fight over the coming weeks and months likely will be a crucial one for both sides, helping to set the policy and political tone for the next two years and beyond.
  • As Global Economy Shifts, Companies Rethink, Retool. When leaders of the world's largest economies gather for a summit in Seoul this Thursday, their mantra will be "global rebalancing."
  • California: The Lindsay Lohan of States. Sacramento is headed for trouble again, and it shouldn't expect a bailout.
  • The New Malaise and How to End It by Keven M. Warsh. Given what ails the economy, additional monetary policy measures are poor substitutes for more powerful pro-growth policies.
  • G20 Finds Common Ground Opposing US. The Group of 20 is beginning to look more like the G19 plus 1 as emerging and rich countries alike accuse the United States of breaking a vow of unity. This week's G20 summit will require every bit of President Barack Obama's diplomacy skills after the Federal Reserve embarked on a new $600 billion bond-buying spree, sparking criticism from four continents that the U.S. central bank was ignoring the global repercussions.
  • Stocks Return to April Highs While Pessimism Grows. If you're already confused about what drives the stock market, try mulling this one over: The major indexes have climbed back to their spring highs, while we've grown more pessimistic. Since April, when the Standard & Poor's 500 index last pierced 1,200, Wall Street prognosticators have cut estimates for economic growth and trimmed corporate earnings projections. The chatter is darker now, too. Gone is talk of a robust "V'' shaped recovery and of the Federal Reserve's exit strategy from policies designed to stimulate the economy. Now we worry whether a new dose of stimulus might not prove enough. Yet stocks have climbed anyway, with the S&P 500 up 10 percent this year. "Stocks are climbing a wall of worry," says James Paulsen, chief investment strategist at Wells Capital Management. Paulsen suggests all the worry is keeping many investors from jumping headlong into stocks. And that means if the recovery gathers steams, as he expects, these investors may start buying in earnest, propelling stocks higher. "There is still dry powder," he says.
NY Times:
  • Saudis Warned U.S. of Attack Before Parcel Bomb Plot. Saudi intelligence officials warned the United States in early October that Al Qaeda’s affiliate in Yemen was planning a terrorist attack using one or more aircraft, three weeks before a plot to send parcel bombs on cargo planes was foiled at the last minute, American and European officials said Friday.
  • He Saw Trouble Coming. Now He Sees It Going. ARE we finally coming out of the woods, economically speaking? Two data points from last week seemed to indicate an upswing ahead. October’s employment figures rose more than economists had expected, and the stock market clawed its way back to levels last reached just before the calamitous events of fall 2008. But positive indicators can and do disappoint, so I decided to consult an expert on these matters: Ian Shepherdson, chief United States economist at High Frequency Economics. As a reader of economic tea leaves over the last five turbulent years, Mr. Shepherdson has a darn good record. For instance, unlike the throng of economists who failed to see the housing crisis coming, Mr. Shepherdson warned his clients in fall 2005 that real estate would crash and a recession would ensue. He was early, of course, and now acknowledges that he was not nearly emphatic enough in his warnings. But he was fundamentally right back then and has been consistently on target since. So, I am happy to report that he sees the beginnings of a turn in the economy that could translate to a rise in gross domestic product growth and an improving employment picture in the second half of 2011.
  • Amazon(AMZN) to Buy for $540 Million. "What Amazon fears most: Diapers" declared the cover of BusinessWeek earlier this fall. Now it's clear that Amazon didn't fear diapers, it just wanted them for itself.
  • How Apple(AAPL) Gets to $500. If you're the kind of investor who likes to fiddle with Wall Street's assumptions, you'll get a kick of the report the folks at Trefis issued Friday.
Business Insider:
  • Economist Intelligence Unit Says Ireland Is In Much Worse Shape Than It Thinks. Ireland is heading for default in June because the country will not be able to raise money on the public debt markets, according to the Economist Intelligence Unit's Megan Greene. Speaking to the Irish Independent, Greene said the country will have to tap the eurozone support system, the ESF, in June because they are in much worse shape than they realize.
  • Hussman: Bernanke Has Engaged in FISCAL Policy, And is Unconstitutionally Usurping The Power of Congress. In his latest letter, John Hussman writes about -- what else -- his utter contempt for the Bernanke, quantitative easing, speculative bubble-making, and all the standard ills that people ascribe to the the Fed. An interesting point he makes is that Bernanke -- by having made purchases other than plain vanilla US Treasury debt during QEI -- essentially was practicing fiscal policy (rather than monetary policy) and was thus usurping powers specifically designated to Congress.
  • World Bank Chief Calls For a New Global Gold Standard. On the even of the G20 Summit, World Bank Chief Robert Zoellick has what will be a much-talked-about op-ed in the FT regarding the topic du jour: the currency war. In it he lays out multiple ideas including a specific plan for yuan appreciation, an end to unilateral currency interventions, a focus on growth via "supply-side-bottlenecks (i.e. structural adjustment), and perhaps most surprisingly: gold.
Zero Hedge:
  • Sean Corrigan Butchers the Chairman's Inversion of Cause and Effect, Discusses the Fed's Brand New "Unbridled Imperial Arrogance". Diapason's Sean Corrigan is out in full force for the second week in a row, this time looking at the consequences of a QE2, in which as he explains, the very premise of cause and effect has been inverted by the Federal Reserve, and which will result in even more dire consequences bequeathed by the launch of the HFRBS QE2. Yet in the last ditch effort to preserve a crumbling system, Bernanke is willing to sacrifice it all: the middle class, the dollar, and now logic. Here is how... and why.
  • Betting on an Infinite Bernanke Put? Not So Fast, Says Fed Governor Kevin Warsh. If the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case—even with the unemployment rate still high—we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially.
LA Times:
  • State Money Tied into Probe. SEC eyes hedge fund backed by Barney Frank pal. The state’s pension portfolio for thousands of public employees has a $700 million stake in a hedge fund investment firm that is under investigation by the Securities and Exchange Commission for allegations it misled investors by claiming to be a women-owned business. The firm, Pacific Alternative Asset Management Co. LLC, marketed itself as a firm run and owned by women in a male-dominated industry. Yet it was hedge fund mogul and Barney Frank pal S. Donald Sussman who in 2000 provided a $2 million loan to four entrepreneurs of the fledgling company, giving him a 40 percent stake in the investment manager’s parent company, Paamco Founding Partners Co. LLC.
  • Use of Less Invasive Robotic Surgery Grows Among N.J. Surgeons. The surgery is drastically less invasive, which results in much quicker recovery time for those in need of repair. The patient on the table in this case only had three tiny incisions through the ribs, versus the potential cutting of the breastbone. "The next day they are in their own room — and back to work in two and a half weeks," said Patel, who has performed 700 such bypasses from his robotic cockpit. Robotic surgery has been around for a decade, but has only recently begun to carve out this significant niche in medicine. A combination of better tools and — more importantly — surgical experience has resulted in a boom of robotic surgeries worldwide. In New Jersey, where the first all-robotic kidney transplant ever was performed at St. Barnabas Medical Center in 2008, surgeons report they rely on robots to assist them in as many as half their operations. The reasons are simple, doctors say. Robotic tools allow them to cut less, spill less blood, leave less scarring and pain and probe with greater precision than ever before. They say that while no machine can ever replace a surgeon’s instinct, no surgeon can replicate a robot’s steady hand. By far the most common robotic machine is the da Vinci Surgical System like the one in Saint Michael’s, made by the California-based Intuitive Surgical(ISRG). More than 1,600 da Vinci machines are operational in hospitals worldwide — 1,200 of which are in the U.S. and 36 in New Jersey. The latest model was released last year, which added high-definition 3-D imaging and an updated interface to the machine, and made it easier for surgeons to use. Surgeons have responded. In 2009, the da Vinci robot assisted about 90,000 prostate surgeries and 70,000 hysterectomies worldwide, according to Intuitive. The combined number is eight times greater than it was five years ago.
  • President Obama, on '60 Minutes,' Blames His Leadership. President Barack Obama acknowledged a series of errors since taking office, admitting that he misjudged the pace of the economic recovery, that he has sometimes strayed from his campaign promise to change the tone of debate in Washington, and that leadership “isn’t just legislation.” “We were so busy and so focused on getting a bunch of stuff done that we stopped paying attention to the fact that, yeah, leadership isn’t just legislation, that it’s a matter of persuading people and giving them confidence and bringing them together, and setting a tone,” Obama said in an interview conducted Thursday for airing Sunday on CBS’s “60 Minutes.” “We haven’t always been successful at that, and I take personal responsibility for that. And it’s something that I have to examine carefully as I go forward.”
  • Seniors Fed Democrats in Midterms. In an election marked by dramatic defections from the Democratic Party, older voters swung hardest, seemingly threatened by President Barack Obama’s mantra of change. Voters over 65 favored Republicans last week by a 21-point margin after flirting with Democrats in the 2006 midterm elections and favoring John McCain by a relatively narrow 8-point margin in 2008. Concerned by changes to Medicare and compelled by a Republican Party that promised a return to America’s glory days, seniors played a crucial — and often understated — role in races across the country. They were unswayed by ubiquitous Democratic warnings about Republican changes to Social Security. And they put a series of campaigns out of reach for Democrats.
USA Today:
  • Microsoft(MSFT) CEO Sells $1.3 Billion of Shares. Microsoft Corp. CEO Steve Ballmer has sold about $1.3 billion worth of his company shares recently, the first time he's done so in seven years. Ballmer confirmed the stock sales Friday and said they were made to diversify his investments and aid his year-end tax planning. He said he plans to sell as many as 75 million shares by year's end. Securities and Exchange Commission filings by Ballmer this week show he sold about 50 million shares.Ballmer still holds about 350 million shares, worth some $9 billion at Microsoft's current price of around $26.
  • Senior U.S. House Republican Opposes Fed Easing Plan. The Federal Reserve's plan to boost U.S. economic growth with $600 billion in bond purchases is a mistake that will trigger inflation, a leading Republican in the House of Representatives said on Sunday. Representative Paul Ryan, expected to become chairman of the House budget committee when Republicans take control of the chamber in January, told the "Fox News Sunday" program that the "upsides are very low" in the central bank's moves to inject more money into the U.S. economy. "I think its going to give us a big inflation problem down the road," Ryan said. Ryan said the Fed should stick to its main job of ensuring price stability, adding that the Fed's plan was "destabilizing" investment outlooks.
Sunday Tribune:
  • The European Central Bank owns an estimated $25 billion worth of Irish government bonds. That would amount to a fifth of Ireland's national debt.
  • Ireland's government backed away from a plan to cut the state pension because of opposition from lawmakers.
  • The European Union will ease some climate regulations for automakers, citing an unpublished EU document. Automakers will be able to have fuel-saving technology approved by their member-state regulators instead of filing with the EU.
Financial Post:
  • Potash Corp.(POT) Goes Back to Its Roots. Looking back on the historic events of the past week, Brad Wall says they represent a “new phase” for Canada, one in which we can say “No” to foreign investment on rare occasions, and still be a healthy free-trading country. That may be true. But one would have to assume executives at Potash Corp. of Saskatchewan Inc. took the Premier’s comments another way entirely. Especially those in Chicago who will need to either retire or tell their wives to start looking for Saskatoon real estate. To say Potash Corp. is set to go through a “new phase” would be an understatement. Assuming the dust clears and the takeover talk fades, the fertilizer giant is going to evolve into something completely new: a company retrenched in its home province that is immune to takeovers, and linked very closely to the provincial government that fought to protect it. In a sense, it is getting back to its Crown Corporation roots, minus the nationalization, and that rarely ends up being a good thing for investors.
Business Standard:
  • The Export-Import Bank of the U.S. will set up a $5 billion facility for Indian infrastructure investment, citing U.S. and Indian government sources. An announcement on investments will probably come during President Barack Obama's India visit.
China Securities Journal:
  • Inflation in China may exceed 3% this quarter driven by rising agricultural products prices, citing State Information Center Chief Economist Fan Jianping. Increasing global liquidity after policy easing in developed economies may push up commodity prices and excess funds in China may fuel speculation in agricultural products, Fan said.
China Securities News:
  • China's export industry may be able to withstand a 5% to 6% appreciation in the yuan next year, citing Li Jian, a researcher at the Ministry of Commerce. The magnitude of the yuan's gains next year "will not be very much higher" than this year's and should be done in a "gradual" manner as a one-time revaluation will "greatly hurt" the nation's economy and exporters, Li said. China's export growth may slow to about 20% next year as global demand is not optimistic, he said.
Weekend Recommendations
  • Made positive comments on (ANR), (JDSU), (GES) and (CCJ).
  • Reiterated Buy on (GR), raised target to $99.
  • Reiterated Buy on (GLW), target $22.
Night Trading
  • Asian indices are -.50% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 94.0 +1.0 basis point.
  • Asia Pacific Sovereign CDS Index 89.50 -4.25 basis points.
  • S&P 500 futures -.34%.
  • NASDAQ 100 futures -.29%.
Morning Preview Links

Earnings of Note
  • (SYY)/.51
  • (DYN)/-.01
  • (RAX)/.09
  • (SLXP)/-.14
  • (MDR)/.28
  • (WRC)/.95
  • (PCLN)/4.96
  • (MDRX)/.17
  • (GEOY)/.41
Economic Releases
8:30 am EST
  • None of note
Upcoming Splits
  • (RVBD) 2-for-1
Other Potential Market Movers
  • The Fed's Bullard speaking, Fed's Warsh speaking, Fed's Fisher speaking, $32 Billion 3-Year Treasury Auction and the (MON) yield data review luncheon could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.


Megan Greene said...


The Irish Independent misquoted me about an Irish sovereign default. I think Ireland has a liquidity and not a solvency problem, and that it will therefore be forced to access the EFSF. I do not think Ireland will default on its public debt.

Megan Greene
Economist Intelligence Unit

Gary said...

Thanks for clearing that up Megan.