Wednesday, November 24, 2010

Wednesday Watch

Posted by Gary .....at 12:40 AM

Evening Headlines
Bloomberg:
  • Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's. Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs. “The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.
  • Portuguese Strike as Debt Contagion Spreads to Lisbon Streets: Euro Credit. Portuguese Prime Minister Jose Socrates is bracing for the country’s biggest strike in 22 years as fallout from Europe’s debt crisis spreads from bond markets to the streets. Workers are walking off the job today to protest government austerity measures as concern about Socrates’s ability to tame the euro-region’s fourth-biggest budget deficit pushed the cost of insuring Portugal’s debt against default to a record high. Credit default swaps climbed 23 basis points yesterday to 482.2, while the yield premium demanded to hold the country’s 10-year bonds over German bunds rose 28 basis points to 435. The backlash against wage cuts and tax increases to trim euro-region deficits is fueling political turmoil and undermining investor confidence.
  • Default Swaps Soar on 'Sacrosanct' Senior Europe Bank Debt: Credit Markets. The cost of protecting against defaults on senior notes of European banks is soaring on speculation bondholders will be forced to take losses as governments try to share the burden of taxpayer-funded bailouts. The Markit iTraxx Financial Index of credit-default swaps on senior debt increased 12 basis points, or 0.12 percentage point, to 152.9 basis points, the most since May. Contracts on Portugal’s Banco Espirito Santo SA are at a record, and Spain’s Banco Santander SA are at the highest level in five months. Europe’s debt crisis has spread to Ireland from Greece, and bond investors bet that Portugal and Spain may be next in line for a bailout from the European Union and International Monetary Fund. “Senior bondholders will most likely find themselves as potential burden-sharers, which is in stark contrast with the rules of engagement of the market,” said Roberto Henriques, a fixed-income analyst at JPMorgan Chase & Co. in London. “Even at the worst point of the current crisis, it was generally a given that senior debt was sacrosanct.” Subordinated bonds have largely borne the brunt of losses because they stop paying before senior bonds in case of a default or debt restructuring. Should banks be unable to pay senior bondholders, they may find it more difficult and expensive to raise money. Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt rose 3 basis points to 169 basis points, the highest since Oct. 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 4.25 basis points to a mid-price of 95.25 basis points as of 5:49 p.m. in New York, the highest since Oct. 22, according to index administrator Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings gained 2 basis points to 104.9. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 5 basis points to 114 as of 8:05 a.m. in Singapore, according to Credit Agricole CIB prices. Credit-default swaps on the senior debt of Ireland’s biggest lenders approached records highs. Contracts on Allied Irish Banks Plc climbed 103 to 954.5 while Bank of Ireland Plc jumped 89.9 to 735.7, according to CMA. The cost of insuring Ireland’s government debt climbed 47.5 to 574.85, while Portugal surged 28.6 to a record 486 and Spain was up 19 to an all-time high of 301.3, CMA prices show. That helped drive the Markit iTraxx SovX Western Europe Index of contracts on 15 governments to a record-high 182 basis points, shrinking the difference with the Markit iTraxx Financial Index to 29 basis points. The 750-billion-euro European Financial Stability Facility, created in May to support the region’s most indebted governments, won’t be big enough to rescue Spain, Citigroup’s Buiter said. A rise in Spanish bank risk could be the “tipping point” for the financial credit swaps gauge, according to JPMorgan. Credit-default swaps on Lisbon-based Banco Espirito Santo have climbed almost 300 basis points this month to 699, according to CMA. Contracts on Banco Santander are up about 80 to 232.
  • North Korean Attack Aimed at Restarting Nuclear Talks With U.S. North Korea’s attack on a South Korean island, along with its disclosure of nuclear advances, is part of a strategy to draw the U.S. back to the negotiating table, analysts in the U.S. and Asia say. It isn’t likely to succeed, and the result could be increased tension between the U.S. and China, North Korea’s closest ally, said the analysts, including Bruce Klingner, a former chief of the Central Intelligence Agency’s Korea branch. “If anything, it’s likely to have the reverse effect, in that Washington and Seoul are likely to be more determined to resist” North Korean tactics, said Klingner, now a senior fellow at the Heritage Foundation, a Washington research group.
  • China and Russia will drop the U.S. dollar for bilateral trade and use their own currencies for settlement, citing Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin.
  • Junk Bond Issuers Forced to Pull Deals as Ireland, Korea Roil Debt Markets. Junk bond issuers are canceling offerings and investors are demanding stronger protections as credit markets weaken amid growing concern over Europe’s debt crisis and increasing tensions on the Korean peninsula.

Wall Street Journal:
  • Trading Inquiry Widens to Big Firms. Federal authorities, intensifying an insider-trading investigation, are demanding trading and other information from some of the nation's most powerful investment firms. Hedge-fund giants SAC Capital Advisors and Citadel LLC, big mutual-fund company Janus Capital Group Inc. and Wellington Management Co., one of the nation's biggest institutional-investment firms, have received subpoenas from the Manhattan U.S. Attorney's office seeking trading, communications and other data as part of a broad criminal investigation, according to people familiar with the matter. The Federal Bureau of Investigation also recently questioned an account manager at Primary Global Research LLC, a California company that provides "expert-network" services to hedge funds and mutual funds, people familiar with the matter say. Such expert-network firms set up meetings and arrange calls between traders seeking an investing edge and current and former managers from hundreds of companies. The FBI is seeking information about a Primary Global consultant and his hedge-fund clients, these people say.
  • Fears of Domino Effect Pervade Europe. Loss of Confidence Extends From Ireland to Spain, Portugal; Bond Spreads Widen as Euro Tumbles. "People that are betting on contagion are probably making the right bet here," said David Gilmore, a strategist at Foreign Exchange Analytics. "There's not really anything to stop the markets from pushing the next domino over."
  • North Sparks Korea Crisis. Seoul, U.S. Ponder Response to Pyongyang's Deadly Artillery Barrage on Island.
  • Some Former RIM(RIMM) Enterprise Sales Staff Now Call Apple(AAPL) Home. Apple Inc. (AAPL) is not only poaching corporate customers from BlackBerry maker Research In Motion Ltd. (RIMM), it's poaching members of RIM's enterprise sales team. In the past 18 months, at least five members of RIM's enterprise-sales team have left the company to join Apple. This includes Geoff Perfect, who served as Head of Strategic Sales at RIM for nearly five years before leaving in April 2009 and joining Apple a month later as Head of Enterprise iPhone Sales, according to LinkedIn, the online networking service for professionals.
  • Dynegy(DYN) Buyout Rejected by Holders. Power producer Dynegy Inc. said it will restart efforts to sell itself following major shareholders' apparent rejection Tuesday of a buyout offer from private-equity firm Blackstone Group LP worth $605 million. The defeat came at the hands of activist investor Carl Icahn and hedge fund Seneca Capital LP, which recently bought a combined 22% stake in the Houston energy company and urged others to reject Blackstone's offer.
  • Axa, UBS Marketing a Synthetic Collaterialized Debt Obligation. In a sign that part of the securitization market may be thawing out, UBS is marketing a collateralized debt obligation backed by credit derivatives that are mostly tied to investment-grade corporate bonds.
  • Pentagon Warns House, Senate Defense Panels of More WikiLeaks Documents. The Pentagon warned Senate and House defense lawmakers that the website WikiLeaks could disclose a “tranche” of classified U.S. State Department cables as early as Nov. 26. The documents “touch on an enormous range of very sensitive foreign policy issues,” Assistant Secretary for Legislative Affairs Elizabeth King said in an e-mail today to the Senate and House Armed Services Committees. “We anticipate that the release could negatively impact U.S. foreign relations,” King wrote, telling committee staff, “we will brief you once we have a better understanding of what documents the WikiLeaks publication contains.” King said The New York Times, the U.K.’s The Guardian and Der Spiegel of Germany “are each currently working with WikiLeaks to coordinate the release of these State Department documents.”
  • Kucinich Calls QE2 Hearing. Rep. Dennis Kucinich, a consistant critic of the Federal Reserve, has scheduled a hearing next week to investigate the central bank’s latest round of debt buying, giving the Ohio Democrat an official forum to assail a policy backed by President Barack Obama.
  • Why We're Always Fooled by North Korea. The analysts who predicted North Korea's latest nuclear breakthrough were denigrated and ignored.
Bloomberg Businessweek:
  • ECB's Nowotny Says Makes Sense That Bondholders Also Contribute. European Central Bank Governing Council member Ewald Nowotny said that it would make sense for bondholders to contribute in case a state needs a bailout. While care must be taken not to “emotionally irritate” financial markets, “I believe that in principle everyone should contribute in some way in cases of very large disruptions,” Nowotny said in an interview broadcast live on Austrian state television ORF. This “only can happen in extreme cases and at the same time a safety net must be set up so the country can continue to function,” he said.
CNBC:
  • Seoul Threatens Retaliation in Event of Further Attacks. South Korea warned North Korea of "enormous retaliation" if it took more aggressive steps after Pyongyang fired scores of artillery shells a South Korean island in one of the heaviest attacks on its neighbour since the Korean War ended in 1953. And a senior finance official told an emergency meeting that South Korea's economy, Asia's fourth largest, could withstand any shock linked to the attack. Measures would be taken if needed, Vice-Finance Minister Yim jong-yong said.
Marketwatch.com:
Business Insider:
Zero Hedge:
Reuters:
Financial Times:
  • OPEC Warns on OTC Trading. The oil market risks “chaos” and global supplies could be disrupted unless tighter regulation is imposed on the trade in oil-based financial instruments, according to Opec’s secretary-general. In an interview with the Financial Times, Abdalla El-Badri said that rapid swings in oil prices had been exacerbated by the private, bilateral over-the-counter derivatives market which, he said, often exerted greater power than the physical realities of supply and demand.
  • US Group Gives China Details of Nuclear Technology. Westinghouse Electric has handed over more than 75,000 documents to its Chinese customers as the initial part of a technology transfer agreement that it hopes will secure the company’s place in the world’s fastest-growing nuclear market. The documents relate to the construction of the four third-generation AP1000 reactors that Westinghouse, a US nuclear company controlled by Toshiba of Japan, is building in China.
Der Spiegel:
  • Chancellor Merkel Faces Tough Sell on Irish Bailout. For the second time in just a few months, Angela Merkel will have to explain to voters why Germany must bail out a fellow euro-zone member state. Skepticism is growing -- amongst voters, in the media and within her party. Many want to see Dublin raise its low corporate tax.
China Business News:
  • China's price control measures can't curb consumer price increases in the long term because inflation is being caused by excess money supply, citing Liu Yuhui, a researcher at the Chinese Academy of Social Sciences. Inflationary pressure may continue for a long time, Liu said.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (AMZN), target $190.
  • Rated (TOWR) Buy, target $21.
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 114.0 +10.5 basis points.
  • Asia Pacific Sovereign CDS Index 110.25 +10.75 basis points.
  • S&P 500 futures +.51%
  • NASDAQ 100 futures +.38%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (TIF)/.36
  • (DE)/.97
  • (GMCR)/.20
Economic Releases
8:30 am EST
  • Durable Goods Orders for October are estimated to rise +.1% versus a +3.3% gain in September.
  • Durables Ex Transports for October are estimated to rise +.6% versus a -.8% decline in September.
  • Personal Income for October is estimated to rise +.4% versus a -.1% decline in September.
  • Personal Spending for October is estimated to rise +.5% versus a +.2% gain in September.
  • PCE Core for October is estimated unch. versus unch. in September.
  • Initial Jobless Claims for last week are estimated to fall to 435K versus 439K the prior week.
  • Continuing Claims are estimated to fall to 4275K versus 4295K prior.
9:55 am EST
  • Final Univ. of Mich. Consumer Confidence for November is estimated to rise to 69.5 versus a prior estimate of 69.3.
10:00 am EST
  • The House Price Index for September is estimated unch. versus a +.4% gain in August.
  • New Home Sales for October are estimated to rise to 312K versus 307K in September.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,000,000 barrels versus a -7,286,000 barrel decline the prior week. Gasoline supplies are expected to fall by -1,250,000 barrels versus a -2,657,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -1,110,000 barrel fall the prior week. Finally, Refinery Utilization is estimated to rise by +.4% versus a +1.6% gain the prior week.
Upcoming Splits
  • (MGA) 2-for-1
Other Potential Market Movers
  • The weekly MBA mortgage applications report and $29 Billion 7-Year Treasury Notes Auction could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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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