Friday, February 18, 2011

Friday Watch

Evening Headlines


  • G-20 Stung by Faster Inflation as Dispute Rages on Imbalances. Group of 20 policy makers, at odds over smoothing over global economic imbalances, confront a new threat as higher inflation ripples from emerging markets to advanced economies. A report of greater-than-expected U.S. inflation yesterday followed a jump in the European cost-of-living index to a two- year high and a pickup in Chinese prices, further fraying a tentative global consensus over how to sustain the recovery. “We clearly need to keep inflation at bay,” French Finance Minister Christine Lagarde, host of today’s G-20 meeting in Paris, told Bloomberg Television’s Francine Lacqua. “Too much inflation is not going to be conducive to growth."
  • Libya's 'Day of Anger' Protest Reported to Leave at Least 19 People Dead. Libya’s “Day of Anger” protests against Muammar Qaddafi, in power for 41 years, led to clashes with pro-government forces in which at least 19 people were reported killed. An opposition website and an anti-Qaddafi activist said violence broke out during marches yesterday in five Libyan cities, according to the Associated Press. The 19 deaths were in the second- and third-largest cities, Benghazi and Beyida, according to Al Arabiya television. An opposition website said some demonstrators were killed by snipers from the internal security forces, according to AP. There is an absence of independent reporting due to Libya’s tight press restrictions.
  • U.S. Credit-Default Swaps Approach Year Low on Economic Data. The cost of protecting U.S. investment-grade corporate bonds from default approached a one- year low as an index of U.S. leading indicators rose in January and manufacturing in the Philadelphia region accelerated. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.2 basis points to a mid- price of 79.3 basis points as of 5:02 p.m. in New York, according to index administrator Markit Group Ltd.
  • Fed's Hoenig Says Farmland Boom May Be 'Unsustainable Bubble'. Federal Reserve Bank of Kansas City President Thomas Hoenig said soaring farmland prices may be the result of an unsustainable bubble that could damage the U.S. economy when it bursts. “My nagging concern remains that current distortions in financial markets are increasing the risk that imbalances in asset markets will catch agriculture -- and the U.S. economy more generally -- by surprise once again,” Hoenig told the Senate Agriculture Committee today, according to his prepared testimony. Hoenig spoke after a report today from the Chicago Federal Reserve showed Midwest farmland values rising 12 percent in the fourth quarter from a year earlier. In Hoenig’s district, the Kansas City Fed has recorded cropland prices nearly 20 percent above year-earlier levels in Kansas and Nebraska, Hoenig said. “This run-up in farmland values has occurred, however, amid financial markets characterized by high levels of liquidity and unusually low interest rates,” he said. “It is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions.” Hoenig said that an increase in borrowing costs could cause a drop in land prices. “Rising interest rates often coincide with falling farm revenues and higher capitalization rates, a depressing combination for farmland values,” he said. “Even if crop prices remain high but capitalization rates return to their historic average, farmland values could fall by as much as a third.”
  • Debit-Card 'Swipe' Fee May Be Delayed as Lawmakers Assess Industry Impact. A proposed cap on debit-card ‘swipe’ fees scheduled to take effect in July may be delayed or revised amid questions about its impact raised by the financial industry, regulators and lawmakers. Federal Reserve Chairman Ben S. Bernanke, Fed Governor Sarah Bloom Raskin and Federal Deposit Insurance Corp. Chairman Sheila Bair, who testified at two congressional hearings today, aired concerns that could slow down the schedule for implementing the new rules.
  • JPMorgan(JPM) Boosts Dimon's Stock Pay 22% to $17.4 Million. JPMorgan Chase & Co., the second- largest U.S. bank by assets, boosted Chief Executive Officer Jamie Dimon’s 2010 restricted stock payout by 22 percent to $17.4 million. The board awarded Dimon 251,415 restricted shares valued at about $12.1 million based on yesterday’s closing price, according to a filing today with the U.S. Securities and Exchange Commission. He also received 367,377 options valued at $5.3 million, based on Bloomberg calculations. That compares with 195,704 restricted shares valued at $7.95 million and 563,562 options valued at $6.24 million awarded last year for his work in 2009, according to disclosures by the New York-based company. Dimon, 54, may have also received a cash bonus for 2010 as well that hasn’t yet been disclosed. He took a salary of $1 million and gave up bonuses for 2008 after receiving $49.9 million in total compensation for 2007, which included cash and restricted stock bonuses of $14.5 million each. JPMorgan awarded Dimon’s top 15 executives more than $73 million in restricted shares, plus stock options, for their performance in 2010, according to Jan. 21 SEC filings. That compares with $64.2 million in stock granted to his top 16 executives a year ago, filings at the time show.
  • North Korea May Attack Again in 'Months,' U.S. Says. North Korea may stage another attack “in months and not years,” said Navy Admiral Robert Willard, the top U.S. commander in the Pacific. North Korean leader Kim Jong Il appears to be training his son “on a compressed timeline” in “coercive measures” like the attacks last year that killed 46 sailors on the South Korean Cheonan warship and four people on the island of Yeonpyeong, Willard told a forum sponsored by the Asia Society in Washington today. “We may very well be facing the next provocation in months and not years,” Willard said in remarks that also touched on China and Southeast Asia.
  • German Banks' Debt Downgraded By Moody's on Restructuring Act. German banks’ subordinated debt securities valued at 24 billion euros ($33 billion) were downgraded by Moody’s Investors Service on the prospect that new legislation will increase the risk of losses among debt holders. “The new regulatory tools allow authorities to impose losses on debt holders without necessarily placing the entire bank into liquidation,” the ratings firm said yesterday in a statement. “Moody’s considers subordinated debt to be most at risk under the new law.”
  • China January Home Prices Defy Curbs, Rising in 68 or 70 Cities. rose from a year earlier in all but two of the 70 cities monitored by the government, defying property curbs to keep housing affordable. China’s January new home pricesNew home prices in the capital Beijing advanced 6.8 percent in January from last year, while Shanghai climbed 1.5 percent, the statistics bureau said on its website today, initiating a new method of calculating prices. Haikou had the biggest gain, surging 21.6 percent, and 10 cities had increases exceeding 10 percent. “The new data clearly shows home prices are still rising and the government curbs only suppressed transaction volumes,” said Jinny Yan, Shanghai-based economist at Standard Chartered Plc. “The ultimate problem is monetary policy -- the government should at least raise interest rates two more times this year because if the liquidity is not tightened, it would be impossible for home prices to fall.” China stopped releasing national average property prices and changed the methodology of the survey starting this year, the statistics bureau announced Feb. 16, to more accurately reflect price gains.
Wall Street Journal:
  • Splits Emerge Among Egypt's Young Activists. Egypt's youth activists and opposition leaders are beginning to jockey for position, jousting over their revolutionary credentials and firing off accusations of going soft on the military, as the camaraderie that united them at the height of the uprising is replaced by rough-and-tumble politics.
  • Spy Feud Hampers Antiterror Efforts. Ties between U.S. and Pakistani intelligence agencies have deteriorated sharply in recent months, compromising cooperation on a range of critical counter-terrorism efforts, including U.S. drone strikes targeting top militant leaders, current and former officials say. Some U.S. officials describe relations between the two spy agencies as the worst since the Sept. 11, 2001 attacks. One senior official said the tensions have cost the U.S. the chance to strike at some senior terrorists in the region. The state of relations, while never perfect, is now alarming counter-terrorism and military officials, who say close cooperation between the Central Intelligence Agency and Pakistan's Inter-Services Intelligence is essential to the campaign against al Qaeda and the war against the Taliban and its allies in Afghanistan.
  • Wisconsin Union Fight Heats Up. Democratic lawmakers fled the state Thursday in an effort to torpedo a closely watched vote on what would be the nation's first major overhaul of union laws in years, as government workers flooded the statehouse for a third day seeking to block passage of the bill.
  • Banks Find Loophole on Capital Rule. Some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law. In November, Barclays PLC quietly changed the legal classification of the U.K. bank's main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.
  • Regulators Eye Apple(AAPL) Anew. U.S. antitrust enforcers have begun looking at the terms Apple Inc. set this week for media companies who want to sell their content on its popular iPad and other devices, according to people familiar with the matter.
  • Banks To Be Among Winners Of OTC Derivatives Overhaul - Report. Banks will be among the biggest winners in the new regime global regulators are writing for the $583 trillion market for privately traded derivatives, while swaps users will see "very little change in overall economics," according to a report released Thursday from Morgan Stanley and consultancy Oliver Wyman. The assessment runs counter to earlier speculation that banks' revenues would suffer in the wake of the overhaul, with regulators trying to break the grip derivatives dealers have on the market and drive prices lower for the benefit of corporations hedging legitimate business risks. Dealers make $30 billion to $40 billion in revenue globally each year making markets in over-the-counter swaps, said Robert Urtheil, partner at Oliver Wyman in Frankfurt, compared with $3 billion to $4 billion each year on exchange-traded futures. While the overhaul may erode margins on OTC contracts by 5% to 10% annually--an estimate based on interviews and analysis of other markets that underwent similar changes--this will likely be offset by increasing volumes resulting from more efficient execution and new entrants, the report added. "The threat that was coming was huge, so we see [banks] as winners, preserving the market structure," said Urtheil. "The effect of regulation will probably not be as dramatic over time."
  • Mutual Funds' Muni-Debt Prices Are Questioned. The Securities and Exchange Commission is investigating whether some mutual funds have overstated the value of risky municipal bonds that are thinly traded, according to people familiar with the matter. The SEC probe, which is part of the agency's broader effort to investigate possible abuses in the municipal-bond market, comes at a time of concern about financial stresses on municipal borrowers. The agency's concern is that investors in high-yield muni-bond mutual funds could be misled about the true value of their investment, according to people familiar with the matter.
Business Insider:
New York Times:
  • Alaska Governor Refusing to Enact Health Care Law. Alaska Gov. Sean Parnell took a defiant stand against the federal health care overhaul passed by Congress last year, declaring Thursday that he will refuse to implement a law he views as blatantly unconstitutional. Parnell is the latest Republican governor to lash out against the law as the courts weigh the constitutionality of the overhaul. At least half of all states, including Alaska, have sued the government over the health care plan pushed by President Barack Obama.
  • Believe It: Nanomesh Straw Turns Sewage Into Drinkable Water.
  • The Looming Failure of Obamacare, Part 2: Incentives. Last week, I discussed information problems that were fundamental to third-party payer health care systems like Obamacare. By eliminating the prosaic act of shopping, the government has cut themselves off from critical information about the preferences and tradeoffs made by three hundred million Americans. As a result, any attempts to set pricing top-down are doomed to failure, as evidenced by the impossibility of implementing the “doc fix” to change Medicare reimbursement rates for doctors. But eliminating shopping, or the process of individuals making price-value-feature tradeoffs in purchasing medical care, has more downsides than just making pricing impossible. It also creates terrible incentives that have tended to push every single state health care system towards bankruptcy.
CNN Money:
Insider Monkey:
The Detroit News:
  • While Obama is Spinning, Michigan's Snyder Leads. For those interested in comparing bold leadership to the wishy-washy variety, the release today of Gov. Rick Snyder's first budget is perfectly timed, coming as it does just four days after President Barack Obama gave the federal deficit disaster another big kick down the road. Obama's budget is a fraud. It continues manic deficit spending. The cuts it contains are mostly pretense, while the tax hikes are real and destructive. It avoids the two major threats to the nation's fiscal stability, Social Security and Medicare. And it leaves most of the tough decisions to Republican lawmakers, who will be demonized by the president and his political allies if they dare to make them. It's the work of a president who lacks the courage to lead. It also exposes the reality that Obama's objective is to increase the size and reach of the federal government, not shrink it, and nothing that happened in the November elections will move him off that mission.
  • House Votes to Overthrow 'Czars'. The House voted Thursday to dethrone nine White House “czars.” Republicans successfully added an amendment to the continuing resolution that would leave President Barack Obama’s senior advisers on policy issues including health care, energy and others out of a job. The vote was 249-179. Rep. Steve Scalise (R-La.) offered the amendment that blocks funding for various policy advisers to combat what he called “a very disturbing proliferation of czars” under Obama. “These unappointed, unaccountable people who are literally running a shadow government, heading up these little fiefdoms that nobody can really seem to identify where they are or what they’re doing,” Scalise said Thursday. “But we do know that they’re wielding vast amounts of power.”
Financial Times:
  • Private Recovery Can Create Growth Potion. Critics of the UK government calling for new growth strategies miss the point. Growth is not something concocted by the state, like a health potion at the chemist. Our job is important but modest: to create an environment for business to expand, invest and innovate; reviving what John Maynard Keynes called “animal spirits”. Some commentaries assume that achieving financial stability through fiscal discipline is a simple problem. It is not, but tackling it in an orderly way is far better than being dragged kicking and screaming by the bond markets, like some of our European neighbours.
Hindustan Times:
  • US Announces $150 Million For Egypt to Help With Transition. US has announced $150 million in aid to Egypt in support of its transition process towards democracy following the ouster of President Hosni Mubarak. The Obama administration is also dispatching William Burns, the undersecretary of state for political affairs, and David Lipton, a senior White House adviser on international economics, to Egypt next week to talk with the interim military government on the issues related to transition. An announcement in this regard was made by Secretary of State Hillary Clinton after she briefed the US lawmakers in a classified setting on the current situation in Egypt after the fall of the Mubarak regime. "It's very clear that there is a great deal of work ahead to ensure an orderly democratic transition. It's also clear that Egypt will be grappling with immediate and long-term economic challenges," Clinton told reporters. The United States stands ready to provide assistance to Egypt to advance its efforts, she added. "I'm pleased to announce today we will be reprogramming $150 million for Egypt to put ourselves in a position to support the transition there and assist with their economic recovery. These funds will give us flexibility to respond to Egyptian needs moving forward," she said.
  • Japan will raise its assessment of the economy in a monthly report next week, noting improvement in exports and production.
Shanghai Daily:
  • About 29% of Shanghai people say they received a pay increase in 2010, and 61% said they expect a raise this year, citing the Shanghai Statistics Bureau. Fewer than 10% of people were satisfied with their salaries, with 33% "not content" and 34.4% "very dissatisfied."
Evening Recommendations
  • Reiterated Buy on (H), raised estimates and boosted target to $59.
  • Reiterated Buy on (TER), raised estimates, boosted target to $24.
Night Trading
  • Asian equity indices are -.50% to +1.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 105.50 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 118.0 -3.0 basis point.
  • S&P 500 futures +.08%.
  • NASDAQ 100 futures +.08%.
Morning Preview Links

Earnings of Note
  • (CRMT)/.59
  • (AGP)/1.12
  • (B)/.24
  • (CPN)/.09
  • (CPB)/.72
  • (HMSY)/.42
  • (PGN)/.44
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking and Treasury's Geithner speaking could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial 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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