Wednesday, November 10, 2010

Thursday Watch


Evening Headlines

Bloomberg:

  • Europe Swaps Diverge From U.S. as Default Concern Spreads: Credit Markets. The cost of insuring company bonds in Europe against default is the highest relative to the U.S. since May as concern rises that the euro-region’s most indebted governments may need a bailout, further damaging the economy. The Markit iTraxx Europe Index of 125 investment-grade companies climbed to 103 basis points this week, compared with 92 basis points for the Markit CDX North America Investment Grade Index, according to Markit Group Ltd. Credit-default swaps on Ireland’s two biggest lenders, Bank of Ireland and Allied Irish Banks Plc, are soaring on doubts about the ability of the nation to refinance in the bond market. European credit is being weighed down as governments struggle to convince investors they remain viable amid taxpayer resistance to budget cuts and after Goldman Sachs Group Inc. raised the prospect of Ireland and Portugal failing under the weight of “oversized” debt piles. “The focus is back on peripheral Europe,” said Mark Dowding, a senior money manager at BlueBay Asset Management Plc in London, where he helps oversee $22 billion of investment- grade assets. “Keep your eye on Italy and Spain. If we see any weakness there, that’s what will drive weakness elsewhere.” Contracts on Banco Espirito Santo SA, Portugal’s largest publicly traded bank by market value, rose the most in the Markit iTraxx Europe Index, climbing 125 basis points to 539.75, while energy company Energias de Portugal SA had the second- biggest increase, jumping 68 to 313.
  • Irish Bank Default Swaps Surge to Distress on Cost of Bailout. The cost of insuring the bonds of Irish banks soared to distressed levels amid concern that the government won’t be able to afford the cost of bailing out the nation’s banks.
  • China's Inflation Accelerates to 4.4%, Fastest Pace in Two Years. China’s inflation accelerated to the fastest pace in two years in October, building the case for the central bank to add to last month’s interest-rate increase. Consumer prices rose 4.4 percent from a year earlier, boosted by food costs, a statistics bureau report showed in Beijing today. That was more than the 4 percent median forecast in a Bloomberg News survey of 28 economists. None forecast such a large gain. In September, prices rose 3.6 percent.
  • Bomb Timed to Explode Over Eastern U.S., Police Say. A bomb in a printer cartridge sent from Yemen that was intercepted at the U.K.’s East Midlands airport was timed to explode over the U.S. East Coast, London’s Metropolitan Police said. “Forensic examination has indicated that if the device had activated,” it would have been at 5:30 a.m. New York time on Oct. 29, the police said in an e-mailed statement today. “If the device had not been removed from the aircraft, the activation could have occurred over the eastern seaboard of the U.S.”
  • California Budget Deficit May Swell to $25.4 Billion in Next 19 Months. California, the most populous U.S. state, may face a $25.4 billion budget deficit over the next 19 months, the fourth time in as many years the state has confronted a spending gap, its fiscal analyst said. The deficit includes $6.1 billion in the current fiscal year, which ends June 30, and about $19 billion the next year, according to a report released today by the nonpartisan Legislative Analyst’s Office. Governor-elect Jerry Brown, who will be sworn in Jan. 3, must propose a plan to erase the deficit by Jan. 10. The report warned against “patching over” shortfalls with temporary fixes. “Unless plans are put in place to begin tackling the ongoing budget problem, it will continue to be difficult for the state to address fundamental public-sector goals -- such as rebuilding aging infrastructure, addressing massive retirement liabilities, maintaining service levels of high-priority government programs and improving the state’s tax system,” the report said.
  • Oil Contango Poised to Diminish as Cushing Storage Grows: Energy Markets. The longest period of contango in the U.S. oil market may end as storage capacity expands by more than a quarter at Cushing, Oklahoma, the biggest U.S. crude- trading hub. Companies have announced plans to build about 14 million barrels of tanks by the end of 2011. That would boost capacity as much as 27 percent, based on an estimated 51 million to 52 million of existing storage according to Bob Levin, a managing director at CME Group, the owner of Nymex. The additional storage “limits the opportunity for contango,” said Stephen Schork, the president of the Schork Group Inc. in Villanova, Pennsylvania. “If you do have that ability now to put those barrels into storage, you will see a return back to fundamentals.”
  • China Has to Restrict Rare-Earth Exports to Protect Resources, Group Says. China, which produces more than 90 percent of the world’s rare earth metals, needs to control exports of the minerals to protect natural resources and cut pollution, said the Chinese Society of Rare Earths. Rare-earth prices have surged as much as sevenfold as China in July reduced its second-half export quota by 72 percent to ensure domestic supply of the mineral used in laptops, missile- guidance systems and hybrid cars.
  • China Said to Have Raised Reserve Ratio Twice for Some Banks. China raised reserve requirements on some banks twice yesterday, taking the total increase to 100 basis points for a few lenders, said two people with direct knowledge of the situation. China ordered some lenders, including Bank of Communications Co., to increase their reserve ratios by 50 basis points from Nov. 15, a person with direct knowledge of the matter said yesterday. This was on top of another half percentage point increase announced late yesterday by the Chinese central bank, effective Nov. 16., the people said today.

Wall Street Journal:
  • CME(CME) Raises the Cost of Trading. Commodities exchanges are raising the cost of trading everything from soybeans to silver, amid the wave of speculative money that has flooded into the markets, increased volatility and sent prices new highs. On Wednesday, CME Group increased "margin requirements," or the minimum deposit a trader is required to pony up, for trading soybeans futures contracts. This follows a similar move by the Chicago exchange late Tuesday on silver futures, triggering a broad selloff among all precious metals.
  • Blackstone(BX), Goldman(GS) Submit Withdrawal Notices to Harbinger. Some of the best-known investors in the hedge-fund world are lining up to withdraw money from a firm that once was among the biggest names in the business. Blackstone Group and Goldman Sachs Group Inc. are among investors who have submitted withdrawal notices to Philip Falcone's Harbinger Capital Partners LLC, according to people familiar with the matter.
  • G-20 Nears Pact but Tensions Still Fester. World leaders gathered for the Group of 20 summit neared an agreement that appears to paper over many of the differences that have roiled discussions and financial markets in recent days, but one that's unlikely to end tension over currency and trade policies.
  • Deficit Panel's Leaders Push Cuts. The leaders of a White House commission laid out a sweeping proposal to cut the federal budget deficit by hundreds of billions a year by targeting sacrosanct areas of U.S. tax and spending policy, such as Social Security benefits, middle-class tax breaks and defense spending.
  • 'QE2' in the Dock: Some Yields Are Going Up. The Fed's latest "quantitative easing" program is designed to bring down interest rates, but some are moving up instead. Rates, which rise as the price falls, have risen lately as investors avoid U.S. government debt—including a new 30-year bond auctioned on Wednesday. That has generated market anxiety that the Federal Reserve has lost control of rates and inflation expectations.
  • Iraq's Oil Patch Opens the Spigot. This dusty and ragged city in southern Iraq was notorious a couple years back for its vicious militia warfare and rampant smuggling. Today Basra has a very different rep: one of the world's newest oil boom towns. Some of the world's largest energy companies are ramping up drilling in Iraq. The drilling frenzy has triggered an investment and building boom in Basra itself.
  • Labor Board's Recent Decisions Tilt in Favor of Unions. Unions are increasingly looking to the National Labor Relations Board to seek favorable workplace rulings, and the agency is showing a willingness to reopen matters previously decided in favor of employers.
  • Health-Care Start-Ups Face Wobbly Investment Climate. Investing in Silicon Valley health-care start-ups appears to have cooled, at least temporarily. In the third quarter, venture-capital investment into closely held health-care-related companies in the Bay Area totaled $421.5 million, down 35% from $650.6 million in the same period a year earlier, according to research firm VentureSource.
CNBC:
  • Cisco(CSCO) Profit Tops Forecast, But Shares Slide Lower. Cisco Systems reported improved earnings, but the recovery was mostly as expected, and the company's shares retreated 4 percent as investors cashed in on their recent gains. The computer networking giant said it earned $2.4 billion, or 42 cents a share in its fiscal first quarter, excluding one-time items, against a profit of 36 cents a share during the same period last year. Sales rose to $10.75 billion in the most recent quarter, up from $9.021 billion last year. Analysts who follow Cisco predicted on average that the company would report a profit of 40 cents a share on sales of $10.74 billion.
  • China's SAIC Near GM IPO Stake Buy: Report. General Motors is in the final stage of talks to sell equity to long-time Chinese partner SAIC Motor in conjunction with its landmark initial public offering, two people familiar with the matter said. The two government-funded automakers are currently finalizing how much of a stake SAIC would buy in the top U.S. automaker after discussions involving technology sharing and SAIC's ambitions to move beyond the China market, the people said.
  • Obama's Asian Outreach Under Scrutiny at G20. U.S. President Barack Obama will hold delicate meetings with China and South Korea on Thursday as he seeks to advance key security issues while navigating tough talks on currencies and trade.
Business Insider:
Zero Hedge:
IBD:
Forbes:
Rasmussen Reports:
  • Most Voters Favor Investigation of Health Care Law's Potential Impact. A new Rasmussen Reports national telephone survey finds that 55% of Likely U.S. Voters favor having House Republicans investigate the projected costs and implications of the health care law passed by Congress earlier in the year. Thirty-two percent (32%) oppose such an investigation.
Politico:
  • Nancy Pelosi Faces New Resistance from Democrats. Nancy Pelosi is struggling to stand her ground as the effects of last week's Democratic debacle shift the political earth beneath her feet. Pelosi announced Friday that she’s running for minority leader in the new Congress, and her election still seems on track. But a movement by conservative Blue Dogs to block her ascent has picked up support from some liberals and even a handful of longtime Pelosi allies, who question whether she is the best person to lead the battered party in the House.
Reuters:
  • South Korea Central Bank Report: US Fed Move Poses May Risks. The U.S. Federal Reserve's latest move to buy more bonds to stimulate the U.S. economy poses many risks, not only for emerging-market economies but for U.S. policy as well, South Korea's central bank said in a report. In addition to swamping emerging markets with dollars, the Fed's move will also fan commodities prices, making it difficult for the Fed itself to implement an exit from stimulus later, it said in a report posted on its website late on Wednesday. If the Fed has to start selling off government bonds later to absorb liquidity or raise the benchmark interest rate, bond prices will fall sharply and incur huge losses for the Federal Reserve, which has greatly expanded bond holdings of late. If it delayed policy normalisation because of this fear, it would cause inflation to flare up, the Bank of Korea said.
  • Private Equity Deals Up for 5th Straight Quarter. The number of investments made by private equity firms rose in the third quarter, marking the fifth straight quarter of gains, with Europe marking the largest increase, according to data from Thomson Reuters released on Wednesday.
  • U.S. Pursuing Dollar Weakening Policy - Alan Greenspan. The United States is pursuing a policy of weakening its currency, driving up exchange rates in the rest of the world, former Federal Reserve Chairman Alan Greenspan warned on Wednesday. In a guest column for the Financial Times, Greenspan also said that as China holds down the renminbi, the upward pressure on other currencies risks a return to widespread protectionism. "America is also pursuing a policy of currency weakening. The suppression of the renminbi and the recent weakening of the dollar are, of necessity, producing firming exchange rates in the rest of the world," Greenspan wrote ahead of the Group of 20 summit in Seoul on Thursday. "Something has to give in this arena of zero-consolidated current account balances." Greenspan said while the global trading system can tolerate a modest amount of protection, "the flaws in the global trading system are large and worrisome."
  • 'Moderate' Evidence Backs Dendreon(DNDN) Vaccine - US CMS. All of the available data for Dendreon Corp's controversial Provenge prostate cancer vaccine shows 'moderate' support for its use, according to a government analysis by the nation's Medicare agency. The Centers for Medicare and Medicaid Services (CMS), which meets with outside advisers next Wednesday to discuss paying for the vaccine, analyzed all the available evidence for the therapy that has had drawn scrutiny for its large price tag amid praise from cancer advocates. Shares of Dendreon, which closed at $34.83, rose 5.4 percent to $36.70 in after-hours trading.
Financial Times:
Canadian Press:
  • 'Major' Human Smuggling Cell Busted in Arizona; 9 Arrested, Accused of Smuggling Thousands. Authorities have dismantled a major cell of a human smuggling ring that may be responsible for the transportation of thousands of illegal immigrants from the U.S.-Mexico border to Phoenix and other parts of the country, investigators said Wednesday. Nine people were arrested Wednesday after a yearlong investigation. They have not yet been charged but are accused of picking up illegal immigrants after they crossed the border by foot, and taking them to what are known as drop houses in Phoenix before they were distributed to other parts of the country.
People's Daily:
  • China should tighten money supply this year and in 2011 to stabilize economic growth and ease inflation pressures, Chen Jiagui, a researcher with the Chinese Academy of Social Sciences, wrote. The nation should maintain a proactive fiscal policy, Chen wrote.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (STWD), boosted target to $24.
  • Downgraded (GWW) to Sell, target $118.
  • Reiterated Buy on (CBI), target $36.
  • Reiterated Buy on (KSS), raised target to $72.
  • Reiterated Buy on (M), lowered target to $33.
  • Reiterated Buy on (CHKM), target $31.
Night Trading
  • Asian equity indices are -.75% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 101.0 -2.0 basis points.
  • Asia Pacific Sovereign CDS Index 97.0 +1.0 basis point.
  • S&P 500 futures -.26%
  • NASDAQ 100 futures -.69%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (VIA/B)/.70
  • (DIS)/.47
  • (SPWRA)/.12
  • (NVDA)/.14
  • (CPKI)/.19
Economic Releases
  • None of note
Upcoming Splits
  • (HCSG) 3-for-2
  • (WCN) 3-for-2
  • (RAI) 2-for-1
  • (AOS) 3-for-2
Other Potential Market Movers
  • The Fed's Lockhart speaking, BofA Merrill Global Energy Conference, BMO Capital Digital Entertainment Conference, CSFB Healthcare Conference, (OC) analyst meeting and the (AMP) financial community meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by financial 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 day.

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