Tuesday, November 09, 2010

Tuesday Watch


Evening Headlines

Bloomberg:

  • Euro Crisis Enters New Phase With Credit Squeeze: Daniel Gros. The life-support system for Greece, Ireland, Portugal and Spain is now under threat. The highly indebted nations of the euro area can’t survive the deficit crisis without access to central-bank credit. Last month’s Franco-German agreement at Deauville, France, and the statement of European leaders on Oct. 29 have changed the ground rules for euro-area debt. All 27 member states have now signed up to the need for a revision of the Lisbon Treaty in exchange for a permanent crisis-resolution mechanism. The key new element is that Europe’s leaders have specifically said that future rescues might involve private creditors. Nothing is known about the magnitude of their required contribution, but it’s now certain that they might be asked to participate. The agreement by European leaders is reinforced by two additional recent developments.
  • Crude Oil Stockpiles Increase in Survey, Threatening Rally: Energy Markets. U.S. crude-oil inventories probably increased to the highest level in 18 months, threatening a rally in futures prices, as refineries idled units because of lower profit margins, a Bloomberg News survey showed. Supplies rose 1.75 million barrels, or 0.5 percent, in the seven days ended Nov. 5 from 368.2 million a week earlier, according to the median of 10 analyst estimates before an Energy Department report tomorrow. That would leave stockpiles at the most since May 8, 2009. Crude demand has slumped as refiners reduced operating rates to the lowest level in eight months, according to the Energy Department. The profit from making crude into fuel, or the crack spread, has decreased 44 percent in the past six months, according to data compiled by Bloomberg. “The lack of physical tightness is leaving the market vulnerable to another downdraft like we saw in May,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Prices climb, climb, climb and then ultimately find it impossible to stay there.”
  • Netanyahu Says U.S. Must Show a Military Strike Against Iran is Possible. Israeli Prime Minister Benjamin Netanyahu said the U.S. and the international community need to convince Iran that a military strike is possible in order to prevent the Iranian government from developing nuclear weapons. “The simple paradox is this,” Netanyahu said in a speech yesterday to Jewish activists in New Orleans. “If the international community, led by the U.S., wants to stop Iran without resorting to military action, it will have to convince Iran that it is prepared to take such action.”
  • ETFs Riskier to Markets Than High-Frequency Trading, Kauffman Study Says. Exchange-traded funds, not high- frequency trading, pose the greatest danger to stock-market stability and may trigger more disruptions like the May 6 selloff, according to the Kauffman Foundation in Kansas City. The proliferation of ETFs presents “unquantifiable but very real systemic risks of the kind manifested very briefly during the ‘flash crash’” earlier this year, Harold Bradley and Robert E. Litan said in a research report published today. Potentially worse declines are “a virtual certainty” without ETF reforms, Bradley and Litan said. The U.S. Securities and Exchange Commission blamed a mutual fund’s routine hedge against losses for starting a chain of events that turned an orderly decline into a crash that erased $862 billion in equity value in less than 20 minutes. Regulators also are investigating whether trading formulas, or algorithms, could “cascade,” triggering further action by computerized trading systems that would exacerbate market disruptions, Andrei Kirilenko, a senior economist at the Commodity Futures Trading Commission, said last week.
  • World Bank Says Asia May Need Capital Controls to Curb Bubbles. Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said. Any curbs should be “targeted”, temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said in an interview. This could include countries tying up funds for as long as a year to help limit hot-money, she said.
  • Euro Falls to One-Week Low Versus Dollar on European Fund-Raising Concern. The euro declined to a one-week low against the dollar as speculation European nations will struggle to raise funds reduced demand for the region’s assets. The common currency weakened versus 14 of its 16 major counterparts as Portugal prepared to sell as much as 1.25 billion euros ($1.74 billion) of debt tomorrow as concerns about so-called periphery European nations caused their bonds to tumble. “You’ve got these rumblings over in Europe,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “It’s mainly Portugal, Ireland and Greece. There’s a downside risk for the euro.”
  • U.S. Bond Rating Upgrades Trounce Europe by Record Amount: Credit Markets. U.S. credit quality is improving relative to Europe at the fastest pace ever, underscoring greater economic growth in America and downgrades of nations from Ireland to Greece. The ratio of upgrades to downgrades by Standard & Poor’s in the U.S. this year is 1.07, compared with 0.46 in Europe, the widest gap ever, according to data compiled by Bloomberg. S&P lifted the ratings of 455 U.S. issuers including Starwood Hotels & Resorts Worldwide Inc. and lowered 427. In Europe, there were 102 upgrades including France’s second-largest automaker Renault SA, versus 224 cuts.
  • GE(GE) to Invest $2 Billion in China as Immelt Seeks Power, Rail Investments. General Electric Co. plans to invest $2 billion in China in technology and financial service ventures as well as research centers, adding 1,000 jobs in a country Chief Executive Officer Jeffrey Immelt is targeting for growth.

Wall Street Journal:
  • Hedge Funds Slow to Change Marketers' Pay Structure - Survey. Hedge funds are revising their infrastructure, staffing and compensation policies to attract the so-called "sticky money" from pension funds, endowments and other institutional investors, but change to the pay structure of marketing executives at hedge funds has been slow, according to a recent survey. As a result, marketers may not be in sync with hedge funds' desire to market to such institutions, according to the study conducted by hedge fund executive placement agent Alpha Search Advisory Partners.
  • New Push to Ban Earmarks in Senate. Lawmakers aligned with the tea party are moving quickly to show their strength by trying to ban budget earmarking in the Senate, where support is still strong for the practice critics deride as pork-barrel spending. South Carolina Sen. Jim DeMint on Monday was collecting signatures on a letter calling for a vote by his fellow Senate Republicans to ban earmarks, in which spending is channeled to projects favored by individual lawmakers, outside the competitive federal funding system.
  • Fed Global Backlash Grows. China and Russia Join Germany in Scolding; Obama Defends Move as Pro-Growth. Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism. Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed's decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.
Business Insider:
Zero Hedge:
Forbes:
CNN Money:
  • 10 Signs the Consumer is Not Dead. Americans are certainly strapped, but there is very convincing evidence that consumers are rebounding faster than most economists give them credit for.
Institutional Investor:
  • Large Hedge Funds Weave Through Volatility. Many of the largest, high-profile hedge funds lagged the broader market in October. Several of them are even behind for the year. And their investors think this is just fine. As most new money flowing into hedge funds these days has been headed for the largest funds — a trend we have chronicled in the past — those investors are seeking the comfort of relatively stable organizations that, for the most part, are not swinging for the fences.
Politico:
  • Darrell Issa Plans Hundreds of Hearings. California Rep. Darrell Issa is already eyeing a massive expansion of oversight for next year, including hundreds of hearings; creating new subcommittees; and launching fresh investigations into the bank bailout, the stimulus and, potentially, health care reform.
Reuters:
Chongqing Morning Post:
  • China's Chongqing city is ready to introduce a property tax, citing the municipality's housing bureau. The local authority will temporarily intervene in home prices and increase supply of affordable housing.
China Securities Journal:
  • Possible interest rate increases are the biggest risk for China's property loans, citing Chen Huai, a researcher at the housing ministry. About 70% to 80% of mortgage loans were lent in the last three years when interest rates were at the lowest in more than two decades, Chen said. Interest rate levels may at least double the current level in the next 5 to 10 years if the government continues efforts to keep inflation between 3% to 5% annually, Chen said.
Securities Times:
  • Chinese government departments are drafting rules to allow authorities to intervene in home prices. Local governments may be given the power to limit selling prices of homes and profits developers take.
Beijing Times:
  • China should return to a normal monetary policy regardless of the U.S.'s second round of quantitative easing, or QE2, Yi Xianrong, a researcher with the Chinese Academy of Social Sciences wrote. China should withdraw from the "abnormal" monetary policy which began from 2008, Yi wrote. The country's economy will face huge risks if it doesn't change the policy because of quantitative easing in the U.S., Yi wrote. China should prohibit hot money inflows into the domestic property market, Yi wrote.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (BZH), target $6.
  • Reiterated Buy on (XL), target $25.
  • Reiterated Buy on (PCLN), target $540.
Wells Fargo:
  • Rated (TRN) Outperform.
  • Rated (GBX) Outperform.
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 102.0 +8.0 basis points.
  • Asia Pacific Sovereign CDS Index 93.75 unch.
  • S&P 500 futures -.30%
  • NASDAQ 100 futures -.24%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (FOSL)/.74
  • (GBE)/-.23
  • (MMC)/.28
  • (ROK)/.91
  • (APP)/.00
  • (ASEI)/1.10
  • (PEGA)/.26
  • (EBIX)/.32
  • (IGT)/.19
  • (HGG)/.16
Economic Releases
7:30 am EST
  • The NFIB Small Business Optimism Index for October is estimated to rise to 90.0 versus a reading of 89.0 in September.
10:00 am EST
  • Wholesale Inventories for September is estimated to rise +.7% versus a +.8% gain in August.
Upcoming Splits
  • (RVBD) 2-for-1
Other Potential Market Movers
  • The $24 Billion 10-Year Treasury Bonds Auction, IBD/TIPP Economic Optimism Index for November, JOLTs Job Openings report for September, weekly retail sales reports, weekly ABC Consumer Confidence reading, (EGN) analyst meeting, (HAS) investor day, (NFG) financial analysts meeting, (TRMB) analyst day, (AMD) financial analyst day, Goldman Sachs Techtonics Conference, Wells Fargo Tech/Media/Telecom Conference, JPMorgan Ultimate Services Investor Conference and the Piper Jaffray Tech/Media/Telecom Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.

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