Monday, December 20, 2010

Monday Watch

Posted by Gary .....at 12:39 AM

Weekend Headlines
Bloomberg:
  • France's AAA Grade at Risk as Rating Cuts Spread. France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said. Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Credit default swaps show it’s more expensive to insure Belgian, French and Austrian bonds than lower-rated securities from Chile and the Czech Republic. “Every sovereign may get penalized in the year ahead,” said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London. “It would a big deal if France was to have its AAA rating stripped. I don’t think the likelihood of a downgrade is reflected in the market.” “If problems in the euro zone aren’t solved quickly, then the conditions of refinancing will be expensive for these countries and the ratings agencies will do more downgrades,” said Ralf Ahrens, who helps manage about $20 billion as head of fixed income at Frankfurt Trust. “We already see these dynamics in the market. I see France as a risk.”
  • Europe Company Debt Spreads Above U.S. as Growth Diverges: Credit Markets. European high-grade company bonds are trading at their cheapest levels ever relative to U.S. debt as the region’s deficit crisis widens at the same time borrowers in America are enjoying a resurgent economy. Investment-grade euro-denominated bond yields average 189 basis points more than government debt, compared with a spread of 169 for U.S. corporate debentures, Bank of America Merrill Lynch index data show. The 20 basis-point difference between Europe and the U.S. matches a record reached on Dec. 15. Investors are downgrading the outlook for European companies dependent on government spending as budget cuts and job losses increase at the same time retail sales, consumer confidence and industrial production rise in the U.S. Bonds of Italian utility Enel SpA are the worst performers this month among the 50 biggest issuers in Bank of America’s EMU Corporate Index. “The big change is that there’s a lot of fiscal tightening in Europe,” said Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co. in Newport Beach, California, manager of the world’s biggest bond fund. Europe will suffer “lower animal spirits, lower spending, lower hiring,” he said. The extra yield investors demand to own investment-grade bonds in euros widened 2 basis points this month, Bank of America Merrill Lynch’s EMU Corporate Index shows. In the same period, U.S. spreads tightened 13 basis points.
  • German Ifo Export Climate Index Fell in December, WiWo Says. The Ifo economic institute’s export climate index fell to its lowest in almost a year this month, Wirtschaftswoche magazine reported. While export contracts at goods-producing companies were “slightly” up, expectations had already “considerably” declined in November, the magazine said, citing the index it commissioned. The index fell for a seventh straight month, the magazine said.
  • Coffee Surges to 13-Year High in New York on Supply Concern, Fund Buying. Futures have surged 66 percent this year, heading for the biggest annual gain since 1994. “There is a lot of fund buying,” said Rodrigo Costa, the vice president of institutional sales at Newedge USA LLC in New York. “The fundamentals are very supportive.”
  • U.S. Sugar Corp. Says Florida Cane Crop Is 'Severely Damaged' by Freeze. U.S. Sugar Corp. said five nights of freezing Florida weather in the past 10 days “severely damaged” a cane crop already hurt by a “record-smashing” deep freeze in January. “These multiple hard freezes impacted 100 percent of our sugar cane crop,” Judy Sanchez, a spokeswoman at the Clewiston, Florida-based company, said today in a statement. “The impacts could be devastating, not only to U.S. Sugar, but also to the smaller, independent cane farmers in the area.” About 60 percent of the mature crop hasn’t been harvested, and new plants faced temperatures “significantly below” 28 degrees Fahrenheit (minus 2.2 Celsius) for four hours, Sanchez said. Most of the company’s 150,000 cane acres (60,700 hectares) were hit by temperatures of 32 degrees or lower for as long as 12 hours, according to the statement. Temperatures were below freezing in Palm Beach County, the state’s main sugar-producing county, for less than 12 hours, said David Salmon, a meteorologist at Weather Derivatives in Belton, Missouri.
  • Derivatives Rules Increase Risks in Nascent Market for Swaps: China Credit. Rules governing credit-default swaps in China are too narrow, hindering their growth and distorting prices at a time when the corporate bond market is expanding 45 percent, according to bankers. About 23 agreements covering a notional 1.99 billion yuan ($298 million) have been sold since China set up a credit derivatives market a month ago, according to the central bank.
  • New Jersey's Christie Says 'Day of Reckoning' Has Come for State Budgets. New Jersey Governor Chris Christie said U.S. states face a “day of reckoning” as they contend with looming budget deficits in the wake of the longest recession since the 1930s. Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be “unsustainable.” Benefits, education and health care will be reduced in many states, he said. “The day of reckoning has arrived, that’s it. And it’s going to arrive everywhere,” Christie, 48, a first-term Republican, said during an interview on CBS Corp.’s “60 Minutes” program. Areas such as education and pensions “were third rails of politics. We are now left with no alternatives.”
  • Hedge Fund Bullish Gas Bets Collide With Dropping Prices: Energy Markets. Hedge funds raised bullish bets on natural gas to a four-month high just as weather warmed, pushing heating fuel to its biggest weekly decline since August. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 7 percent in the seven days ended Dec. 14 to the highest level since August, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. While forecasts for cold weather in the eastern and central U.S. and dropping stockpiles drove futures up 4.9 percent to $4.606 per million British thermal units on Dec. 8, the outlook changed, causing prices to fall 8 percent for the week. Natural gas may fall again this week as warmer weather limits demand, a Bloomberg News survey showed Dec. 17.
  • China Stalls UN Efforts as South Korea Prepares Drill. United Nations Security Council efforts to calm tensions between North and South Korea were stalled as China refused to support a resolution condemning the North for a Nov. 23 attack on a South Korean-held island. China declines to join a majority of the Security Council members in condemning the North Korean attack, according to a diplomat present at the meeting who spoke with reporters on condition of anonymity.
  • Yields Flatten QE2 Critics With Curve Showing Fed End to Stimulus in Sight. Government bonds are falling the most in a year as the gap between yields on longer-term Treasuries show that the Federal Reserve’s second round of quantitative easing may be its last. The difference between 10- and 30-year yields shrank to 1.05 percentage points, or 105 basis points, on Dec. 15 from a record 1.60 points on Nov. 10, the fastest contraction since the 1980s, according to data compiled by Bloomberg. The shift in the so-called yield curve is taking place as Bank of America Merrill Lynch index data show U.S. bonds due in 10 years or more lost 4.64 percent this month, trimming 2010’s gain to 8.37 percent. Flattening usually foreshadows the end of Fed interest-rate cuts aimed at stimulating growth.
  • Aussie Leads 'Extreme' Currencies Deutsche Says Avoid. In the last two years there has been no better place for foreign-exchange investors than in nations whose economies are tied to commodities. Now the rally has left those currencies at least 9.5 percent overvalued based on the relative costs of goods and services as measured by the Organization for Economic Cooperation and Development.
Wall Street Journal:
  • The FCC's Threat to Internet Freedom by Robert M. McDowell.'Net neutrality' sounds nice, but the Web is working fine now. The new rules will inhibit investment, deter innovation and create a billable-hours bonanza for lawyers. Tomorrow morning the Federal Communications Commission (FCC) will mark the winter solstice by taking an unprecedented step to expand government's reach into the Internet by attempting to regulate its inner workings. In doing so, the agency will circumvent Congress and disregard a recent court ruling. How did the FCC get here?
  • Auditors Face Fraud Charge. New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books. New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.
  • Insider Trading Case Could Grow. A key cooperating witness working for the U.S. in a major insider-trading investigation made more than 60 calls with corporate managers, seeking to gather evidence for the government, a person familiar with the probe says. The activity by the witness—who was identified by prosecutors in a complaint unveiled Thursday only as "CW-2"—suggests that the insider-trading investigation could grow significantly from the initial charges.
  • Firing Drill Increases Tensions in Korea. South Korea on Monday morning prepared to test artillery from an island North Korea attacked last month, and ordered residents into bomb shelters in case the North carried out on threats to open fire at the drill.
  • The Weak Get Weaker as Muni Bonds Are Sold Off. Amid the recent selloff in the municipal-bond market, investors are increasingly differentiating between state and local governments with strong finances and those facing big fiscal woes. That trend could have significant implications for holders of bonds issued by weaker state and local governments, some of which are already paying higher interest rates and have seen the prices of their bonds decline in value. The growing gap between what the strongest and weakest government issuers pay to borrow brings unpleasant echoes of the European debt crisis.
  • 'Don't Ask' Vote Fallout.
CNBC:
 IBD:
 NY Post:
CNNMoney:
Business Insider:
Zero Hedge:
USA Today:
  • Tax Break May Spur Business Spending, Hiring. One small provision in the new tax law could spur big-ticket business spending — and if a government analysis proves correct, bolster hiring. The "100% expensing" policy allows businesses in 2011 to fully write off "productive capital investments" such as delivery trucks, machines and aircraft rather than depreciate the cost over a period of years. With the immediate write-off, firms will have lower taxable income and more money to spend. A Treasury Department analysis estimates 2 million companies will take advantage of it.
Financial Times:
Business Mirror:
Der Sonntag:
  • SNB President Philipp Hildebrand told the Swiss government during an annual confidential meeting that he's concerned over the euro crisis, citing people familiar with the talks. In a worst-case scenario, the euro could crash and the Swiss franc would soar, Hildebrand said. That could lead to "devastating" consequences for the Swiss export industry.
People's Daily:
  • China's inflation may exceed 5% to 6% in some months next year, citing Ba Shusong, a researcher at the State Council's Development Research Center.
The Standard:
  • Hong Kong Property Sales May Drop 20% Next Year. New applications and property sales are set to drop by 20% next year because of the cooling measures introduced by the government, citing Hang Seng Bank Ltd. Executive Director William Laung Wing-cheung.
Weekend Recommendations
Barron's:
  • Made positive comments on (ITW).
Citigroup:
  • Reiterated Buy on (CHKM), raised target to $32.
Night Trading
  • Asian indices are -1.25% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 106.0 +2.0 basis points.
  • Asia Pacific Sovereign CDS Index 105.0 -.5 basis point.
  • S&P 500 futures -.29%.
  • NASDAQ 100 futures -.26%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (JEF)/.32
  • (ADBE)/.52
  • (DRI)/.54
  • (JBL)/.54
  • (PAYX)/.35
Economic Releases
8:30 am EST
  • The Chicago Fed National Activity Index for November is estimated to rise to 0.0 versus -.28 in October.
Upcoming Splits
  • (AME) 3-for-2
Other Potential Market Movers
  • The (GENZ) Investor Event and (HANS) Investor Meeting could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and real estate shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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