Friday, January 21, 2011

Friday Watch

Posted by Gary .....at 12:41 AM

Evening Headlines
Bloomberg:
  • Campbell(CPB), General Mills(GIS) Credit-Default Swaps Advance on Higher Food Prices. The cost to protect food companies from Campbell Soup Co. to General Mills Inc. is climbing as record global food inflation eats away at profits. Credit-default swaps on Campbell’s debt increased to a record 70.8 basis points, according to data provider CMA. That’s up from as low as 31.9 basis points in March. Contracts on Yum! Brands Inc. jumped 13 basis points to 85.2, the highest since July, and those on General Mills Inc. gained 6.2 to 60.7. Rising food prices squeeze earnings, putting pressure on the stock, according to Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. A sinking share price may make a company’s management “more aggressive with financial engineering,” such as by boosting the stock with large share buybacks that may hurt its credit profile, he said. “If they can’t deliver on their earnings from operating performance, which is really what it’s all about, then they look to other measures,” Levington said. “From a creditor standpoint, it starts a troubling circular reference.”
  • China Swaps Climb to 2-Year High on Rate-Rise Prospects. China’s one-year interest-rate swaps climbed to the highest level since July 2008 as faster-than- forecast economic growth fueled speculation the central bank will raise borrowing costs in coming weeks. The contracts, which exchange the seven-day repurchase rate for fixed payments, gained 10 basis points to 3.64 percent as of 12:19 p.m. in Shanghai, according to data compiled by Bloomberg. The repo rate, a gauge of cash availability in the interbank market, almost tripled this week. The swaps market reflected bets for the benchmark one-year deposit rate to be raised by about a percentage point from 2.75 percent in 2011. The seven-day repurchase rate surged 4.74 percentage points in the past five days, the biggest weekly jump since October 2007. The rate climbed 1.27 percentage points to 7.3 percent today, according to the National Interbank Funding Center’s daily fixing in Shanghai. “Swaps will continue rising as money availability can only become tighter as the central bank seeks to drain liquidity by lifting banks’ reserve requirements to curb lending,” said Ye Yuzhang, an interest-rate trader at Industrial Bank Co. in Shanghai. “All Chinese officials are quite hawkish, acknowledging inflation concerns,” said Wee-Khoon Chong, a fixed-income strategist at Societe Generale in Hong Kong. He predicts benchmark rates will be raised by 50 basis points this quarter, 25 in the second and 25 in the final six months of 2011.
  • German Bond Yields Suffer as Bailout Costs Echo Reunification: Euro Credit. German yields are climbing as the potential cost of defending the euro project rises, mirroring the bond-market effects of reunifying the nation in the 1990s. “It’s impossible to say at this point how much Germany will have to pay but it could be large especially if our own cost of financing debt goes up,” said Oliver Holtemoeller, head of the macro-economic department at the Halle-based IWH institute. “If the crisis spreads to a larger country such as Spain, it’s going to be catastrophic.” European leaders are debating boosting the 750 billion-euro ($1 trillion) rescue fund used by Greece and Ireland as investors speculate more nations will need bailouts. “Germany is leading the bailout, and its contingent liabilities are increasing. It might not be the same magnitude in terms of costs, but there are likely to be big bills to pay.” Germany has pledged more cash than any other nation to bail out its debt-ridden neighbors. The country, which has one of the lowest deficits in the 17-member euro region, has earmarked 119.4 billion euros to the European Financial Stability Facility, amounting to 27 percent of the fund. With Europe’s debt crisis threatening to engulf Portugal and Spain, German Finance Minister Wolfgang Schaeuble, who headed the talks that led to German reunification, said this week that the euro area’s AAA rated states can’t be solely responsible for finding a solution. Kurt Lauk, president of the Christian Democratic Union’s Economic Council, said yesterday that European leaders should drop the “taboo” against debt restructuring. “Germany will end up paying for the vast majority of countries that are technically insolvent,” said Peter Geikie- Cobb, a portfolio manager at Thames River Capital. “I don’t think we say anything outrageous when we say European bondholders will ultimately have to take haircuts.” Thames River, part of London-based F&C Asset Management Plc which manages $172 billion of assets, began selling German bonds last month.
  • OPEC Pressured to Lift Output as Africa, Asia Oil at $100: Energy Markets. OPEC is facing growing calls to boost oil production as crude prices in Asia and Africa surpass $100 a barrel for the first time in two years. Nigeria’s Bonny Light grade, from which traders gauge the cost of West African oil, rose to $100.12 a barrel on Jan. 17, passing $100 for the first time since October 2008, according to data compiled by Bloomberg. Malaysia’s Tapis and Indonesia’s Minas breached that level a week ago, trading at $104.36 and $104.01, respectively this week. The International Energy Agency, an adviser to consuming nations, said Jan. 18 that “three-digit oil prices risk damaging” the economic recovery, signaling that the Organization of Petroleum Exporting Countries should raise output. With “some Asian crudes well above $100 a barrel, the risks of OPEC acting must be higher,” said Lawrence Eagles, New York-based head of oil research at JPMorgan Chase & Co. “We would not be surprised to see the public rhetoric from consuming countries accelerate in the coming weeks. Behind the scenes pressure will no doubt be mounting in parallel.” Oil producers as well as consumers may suffer if crude stays at about $95 to $100 a barrel, the Paris-based IEA said. Stockpiles held by companies in the most developed economies were at 2.742 billion barrels, “near the top of their five-year range,” it said.
  • Copper Set for Worst Week Since August on Concern China to Rein in Economy. The metal for three-month delivery on the London Metal Exchange traded at $9,372 a metric ton by 9:03 a.m. Singapore time. It is down 2.9 percent this week, heading for the worst weekly performance since August.
  • Hewlett-Packard(HPQ) Shuffles Board, Adds Whitman. Hewlett-Packard Co., the largest maker of computers, announced a board shake-up in the wake of criticism over the way it handled the departure of Chief Executive Officer Mark Hurd. Departing board members are Robert Ryan, John Joyce, Joel Hyatt and Lucille Salhany, Palo Alto, California-based HP said in a statement today. Directors joining the board are Shumeet Banerji, CEO of Booz & Co.; Patricia Russo, former CEO of Alcatel-Lucent SA; Dominique Senequier, CEO of AXA Private Equity; Meg Whitman, former CEO of EBay Inc.; and Gary Reiner, former chief information officer of General Electric Co.
  • Japan Set to Miss Bond Sale Target, Cabinet Office Report Shows. Japanese Prime Minister Naoto Kan is projected to break his fiscal promise of capping bond sales, adding to signs he is struggling to contain the world’s largest public debt burden. “I have to say that it’s highly likely Japan won’t be able to keep its pledges,” said Azusa Kato an economist at BNP Paribas in Tokyo. “Kan really has no vision to rein in the debt as he promised.”
  • LinkedIn Said to Be Worth Almost $3 Billion in Secondary Sale.

Wall Street Journal:
  • Power Shifts Atop Google(GOOG). Internet Giant Says Co-Founder Larry Page Will Replace CEO Eric Schmidt. Google Inc. surprised the technology world by naming co-founder Larry Page to replace longtime Chief Executive Eric Schmidt, the biggest management shake-up since the Internet search giant was an obscure California start-up.
  • From China, Signs That Gold's Rally Isn't Endless. The precious-metals selloff accelerated on Thursday amid worries the rally of the past few years may be petering out and concerns that China will slam the brakes on its economy.
  • EPA Loses in Bid to Delay Air Rules. A federal judge on Thursday rejected the Obama administration's request to delay by more than a year controversial new regulations targeting emissions of mercury and other hazardous air pollutants from industrial boilers. The ruling by U.S. District Judge Paul Friedman is a setback for the White House, which is trying to demonstrate to business leaders that it is prepared to moderate the pace of new regulation. The EPA proposal to curb emissions from the facilities has drawn fire from manufacturers and other industry groups concerned that the high costs of new pollution-control technology could force them to close operations and cut jobs. "We are extremely disappointed with the court's decision," the American Forest and Paper Association, one of several industry groups critical of the EPA's proposed regulation, said in a statement. "Today's decision invites more litigation, and ultimately everyone loses as a result of this short-sighted decision."
  • China Invests in Canadian Oil-Export Project. China is helping to finance the development of a proposed $5.51 billion dollar oil pipeline to Canada's West Coast that would open the Asian market to Canadian crude, which is now chiefly consumed by the U.S. State-owned China Petroleum & Chemical Corp., or Sinopec, is among a consortium of Canadian oil producers and Asian refiners investing $100 million in Enbridge Inc.'s proposed Northern Gateway pipeline, Enbridge Chief Executive Pat Daniel said during a Web cast investor conference Thursday.
  • Lenders See Little Choice: Layoffs. The banking industry, racked by the financial crisis and facing slower revenue growth, is starting to cut costs—increasingly at the expense of jobs.
  • GE's(GE) Immelt to Head New White House Jobs Panel. President Barack Obama will announce Friday that Jeffrey Immelt, chief executive of General Electric Co., will head a new White House board aimed at finding ways to foster private-sector job growth. The board will replace an existing panel called the President's Economic Recovery Advisory Board, led by former Federal Reserve chairman Paul Volcker. The name of the new panel stresses competitiveness and job creation, which are expected to be themes of Mr. Obama's State of the Union Address next week. It will be called the President's Council on Jobs and Competitiveness.
Bloomberg Businessweek:
  • Verizon(VZ) Asks Court to Reject FCC's Open Internet Rules. Verizon Communications Inc. asked a court to overturn open-Internet rules adopted last month by a U.S. agency, saying regulators lack authority over how companies provide Web service. The so-called net-neutrality rules set by the Federal Communications Commission would bar Internet-service providers including Verizon, AT&T Inc. and Comcast Corp. from blocking or slowing Web content sent to homes and businesses. “We are deeply concerned by the FCC’s assertion of broad authority for sweeping new regulation of broadband networks and the Internet itself,” Michael Glover, deputy general counsel for New York-based Verizon, said in a statement today. “We believe this assertion of authority goes well beyond any authority provided by Congress.”
  • Indonesia, Philippine Stocks Drop 10% From Highs on Inflation. Stocks in Indonesia and neighboring Philippines slid, driving their benchmark indexes more than 10 percent below recent highs, on concern inflation will lead to higher borrowing costs and pare corporate earnings. The Philippine Stock Exchange Index fell 1.2 percent to 3,956.74 as of 11:34 a.m. in Manila, a decline of 10 percent from its all-time high of 4,397.30 on Nov. 4. The Jakarta Composite index fell 3.1 percent to 3,347.66, extending its tumble to 12 percent since its Dec. 9 record. Indonesia and the Philippines are set to join China and India in sliding more than 10 percent from their peaks, a level signifying a so-called correction to some analysts and investors. Emerging markets are in retreat as central banks from China to India act to stem price gains. “Inflation is the biggest threat and concern in the market now,” said Julian Tarrobago, who helps oversee $200 million in assets at ATR KimEng Asset Management Inc. in Manila. “The market is well aware that inflation will come after rapid growth and it has now reached a point that it has become an issue.”
CNBC:
MarketWatch:
  • Regulators Raise Hackles With Down-Payment Rule. Possible 20% down-payment rule could hurt first-time borrowers. Bank regulators may be leaning toward requiring a high down payment for mortgages exempt from a new mortgage-securitization rule, a Washington analyst said Thursday. That would frustrate consumer groups and community bankers who believe it would tighten mortgage-credit availability to all borrowers, particularly first-time homeowners.
Business Insider:
  • Here is the New MTV Show That Might Be Breaking Pornography Laws. Is MTV's new show "Skins" breaking porn laws? That's the question Brian Stelter asked in his New York Times piece on the British export about teenagers that shows "simulated masturbation, implied sexual assault, and teenagers disrobing and getting into bed together." Most of the actors on "Skins" are first time actors, in their teens, and the youngest is 15 years old, raising concerns that the show may violate federal child pornography statutes.
Zero Hedge:
New York Times:
  • Warner Music(WMG) Puts Itself on the Block.
  • For Small Hedge Funds, Success Brings New Headaches. The hedge fund manager Grange Johnson of LaGrange Capital Partners had a banner year in 2010. But those gains will bring new challenges this year. With his total assets now above $150 million, Mr. Johnson will have to register with the Securities and Exchange Commission under a new rule created to increase industry oversight. While the cost of compliance will barely make a dent at multibillion-dollar firms like SAC Capital Advisors or Eton Park Capital Management, small players like LaGrange could face a significant financial burden. Even money managers winding down their operations will have to comply if their assets are above the $150 million threshold. “The $150 million number is so arbitrary,” Mr. Johnson said at a basic conference table in his modest Midtown Manhattan office. “What possible risk could a $150 million hedge fund pose to the system? We’re the guppies of the industry.” Under the Dodd-Frank regulatory overhaul, hedge funds large and small face a spate of new bureaucratic mandates that take effect in July. Although not all of the details have been completed, firms will probably have to maintain records of e-mails and investments, disclose details like their prime brokers and auditors, and set up a compliance program, including an executive to oversee the process.
  • SEC Approves New Rules for Asset-Backed Securities. The Securities and Exchange Commission approved new regulations on Thursday aimed at curbing the risks posed by asset-backed securities.
  • China Seizes Rare Earth Mine Areas. A Chinese government agency has taken steps to more tightly manage the production and export of rare earth minerals, crucial materials used in a wide range of technologies and products vital to the West. The agency, the Ministry of Land and Resources, invoked a seldom-used mining law to take direct control of 11 rare earth mining districts in southern China. The ministry said in a statement, posted on its Web site Wednesday and briefly mentioned Thursday by the state media, that rare earth mining in those districts, all at the southern end of Jiangxi Province, had been placed under its national planning authority.
  • Path Is Sought for States to Escape Debt Burdens. Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign. But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
  • Banks Want Pieces of Fannie-Freddie Pie. As the Obama administration prepares a report on the future of Fannie Mae and Freddie Mac, some of the nation’s largest banks are offering a few suggestions. Wells Fargo(WFC) and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.
CNN Money:
  • Debt Crosses $14 Trillion Mark. The amount of U.S. debt subject to the country's legal maximum has topped $14 trillion for the first time. On Wednesday, the amount of debt subject to the cap hit $14.001 trillion at the close of trade, according to the daily Treasury statement released on Thursday. That means the country is less than $300 billion away from the $14.294 trillion debt ceiling, which is a cap on how much the federal government can legally borrow.
Washington Examiner:
  • House GOP Begins Long Drive to Dismantle Obamacare. Everyone knows House Republicans (along with three Democrats) voted Wednesday to repeal Obamacare. But fewer people know what those same House Republicans -- this time, with 14 Democrats -- did Thursday. By a vote of 253 to 175, the GOP directed key House committees to report on ways to lower health care premiums, allow patients to keep their current health plans, increase access to coverage for those with pre-existing conditions, and decrease the price of medical liability lawsuits. In other words, the committees are beginning work on replacing the House-repealed Obamacare with Republican health policies. Repeal got a lot of press coverage. Replacement got far less.
The Detroit News:
  • Feds Grant $25M for Downtown Light Rail. Federal officials today announced a grant agreement has been signed for $25 million for a proposed light rail project downtown. U.S. Transportation Secretary Ray LaHood announced the deal was signed by the Federal Transit Administration, city of Detroit and Michigan Department of Transportation for the first phase of the M-1 rail, a 3.4-mile, 12-station line from downtown to New Center.
The Business Journal:
  • Chinese Firm Eyes Fresno for High-Speed Facility. California's high-speed rail project got good reviews from Chinese rail officials during a high-profile meeting in Fresno on Saturday. Now, members of the China Railway Construction Company (CRCC) have entered into an agreement with Fresno County to pursue development on the system.
Office of Governor Jerry Brown:
  • Governor Brown Issues Proclamation Reaffirming Fiscal Emergency. Governor Jerry Brown today issued a proclamation reaffirming the fiscal emergency declared by the previous administration on December 6, 2010. This proclamation underscores the need for immediate legislative action to address California’s massive budget deficit. Text of the proclamation:
Politico:
  • Abortion Interjected into Health Care Reform Repeal. The No Tax-Payer Funding for Abortion Act, introduced Thursday as H.R. 3, aims to codify the Hyde Amendment, which has long barred federal funding for abortion and must currently be renewed every year. The legislation was introduced in tandem with the Protect Life Act, sponsored by Energy & Commerce Health Subcommittee Chair Joseph Pitts (R-Pa.), that would specifically bar any federal funding for abortion under the health reform law.
Reuters:
  • Slot Machine Maker IGT(IGT) Q1 Revenue Slips, Shares Fall. Quarterly profit at International Game Technology rose slightly, but shares of the slot machine maker fell nearly 6 percent as demand from its casino customers remained weak, driving revenue down a disappointing 10 percent.
  • Jones Group(JNY) Sees Costs, Promotions Weigh on Q4 Margins. Jones Group Inc forecast fourth-quarter earnings below Wall Street expectations as higher costs, coupled with an aggressive promotional retail environment, pulled down margins during the key holiday selling season. The apparel, footwear and accessories company added that while it would try and protect margins in 2011 through price increases and cost reduction initiatives, continued cost inflation is expected to keep 2011 margins at 2010 levels. The New York-based company's inability to manage rising cotton and other raw material costs had already taken a toll on its third-quarter results.
  • Intuitive Surgical(ISRG) Profit Exceeds Street View, Shares Jump. Intuitive Surgical Inc on Thursday reported far better-than-expected fourth-quarter profit on strong demand for its da Vinci surgical robots and an increase in procedures using the high priced systems, and its shares jumped nearly 12 percent. The company said net profit rose 56 percent to $121.2 million, or $3.02 per share, from $77.5 million, or $1.95 per share, a year ago, sailing past analysts' average expectations by 77 cents, according to Thomson Reuters I/B/E/S. Revenue for the quarter rose 21 percent to $389 million, exceeding Wall Street estimates of $369.9 million. "It was a very strong quarter. And this happened in face of what people consider to be a relatively weak Capex spending environment," said Les Funtleyder, portfolio manager for Miller Tabak & Co. The company forecast 2011 revenue growth of 16 percent to 20 percent and procedure growth of 25 percent to 28 percent. Despite continued spending constraints in Europe, business appears to be picking up there. The company sold 28 new systems in Europe in the quarter and saw a 42 percent jump in procedure growth. "We're starting to see some nice procedure momentum" in Europe, Chief Executive Gary Guthart told analysts on a conference call. Instruments and accessories revenue rose 33 percent to $151 million for the quarter, driven by a 35 percent jump in da Vinci surgical procedures, as the surgical robots are being used for a broader range of procedures, the company said. Intuitive said it has seen increasing adoption of da Vinci use for colon, thoracic and lung cancer procedures, with the fastest growing newer segment being head and neck procedures, which more than tripled in 2010. Japan remains an area expected to provide significant future growth for Intuitive, but the company does not expect necessary widespread reimbursement for the robotic procedures to be approved in Japan this year. Intuitive shares rose 11.8 percent to $324 in extended trading from their Nasdaq close at $289.93.
  • North America December Chip-Gear Orders Rise 1.4% vs. November.
  • Intrepid Potash(IPI) Sees Q4 Sales Volume Up. Fertilizer maker Intrepid Potash Inc (IPI.N) expects fourth quarter sales volume to rise 40-47 percent, but forecast lower price band for the quarter.
Financial Times:
  • Lisbon Move Points to End of Risk-Free Sovereigns.
  • Orszag Warns Debt Could Derail US Recovery. The US economic recovery is at risk of being derailed this year by a “homegrown fiscal crisis”, Peter Orszag, former budget director in the Obama administration, has warned. In an opinion piece for the Financial Times, Mr Orszag, now a senior executive at Citigroup, said international investors should “pay close attention to the fiscal trends in the US”, noting that the political system has so far failed to tackle the country’s bleak long-term budgetary outlook. “If policymakers won’t act before we have a fiscal crisis at the federal level, a fiscal crisis we will ultimately have,” said Mr Orszag.
Telegraph:
  • Rosneft Could Raise 5% BP(BP) Stake. Kremlin-backed oil company Rosneft has admitted it could raise its 5pc stake in Britain's BP if the new relationship between the parties is successful.
  • The Bear Case: Why Top Investors are Betting Against China. While the official data continues to paint a picture of an economic powerhouse, some of the most respected financial brains in the world are doing everything they can to “short China”. Jim Chanos, the hedge fund manager who famously made millions by uncovering and betting on the demise of Enron, has said he is now betting against China. His view is that China’s growth is based on a huge credit bubble backed by inflated property prices - and that the bubble is now so big that the Chinese government will not be able to engineer a soft landing. He backed by Mark Hart, of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the “key engine for global growth”, China is an “enormous tail-risk”. In London, Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management. As The Sunday Telegraph reported, the key argument is that China’s ferocious consumption is not drive by demand. For instance, Corriente’s research has found that China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world’s next seven largest producers combined. It has 200m tons of excess capacity. There’s an excess of 3.3bn square metres of floor space in China – yet 200m square metres of new space is being constructed each year. And behind it all, the bears say, is a looming banking crisis. Professor Victor Shih of Northwestern University, Illinois, estimates that Chinese banks have lent $1.7 trillion (£1.1 trillion) to businesses which are not commercially viable. Experts around the world. have dismissed the hedge funds as short-term speculators or even trouble-makers. But on Tuesday Goldman Sachs, the Wall Street trail blazer, issued a short-term alert on China, as well as the other BRIC countries. Tim Moe, the bank’s chief Asia-Pacific strategist, told at conference in London: “To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight.
China Business News:
  • China's central bank will be responsible for new lending management this year instead of the China Banking Regulatory Commission. CBRC managed the country's new loans during 2009 and 2010.
China Securities Journal:
  • China may raise interest rates around the Chinese New Year if the nation's consumer price situation remains "not optimistic" in the first quarter, the China Securities Journal said in a front-page editorial today. There's still room for an increase in the reserve requirement ratio. The yuan will continue to appreciate this year. Chinese New Year eve is Feb. 2 and Chinese New Year day is Feb. 3.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (TEL), target $46.
  • Downgraded (FCX) to Hold, target $118.
Night Trading
  • Asian equity indices are -1.75% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 110.0 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 116.50 +3.5 basis points.
  • S&P 500 futures -.13%.
  • NASDAQ 100 futures -.05%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (APD)/1.34
  • (ARG)/.79
  • (BAC)/.14
  • (BBT)/.26
  • (GE)/.32
  • (SLB)/.77
  • (STI)/.07
Economic Releases
  • None of note
Upcoming Splits
  • (SKT) 2-for-1
Other Potential Market Movers
  • The (WPI) Investor Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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