Thursday, June 02, 2011

Thursday Watch


Evening Headlines


Bloomberg:

  • Greece Default Risk Raised to 50% at Moody's as EU Readies Second Bailout. Greece’s risk of default was raised to 50 percent by Moody’s Investors Service as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region. Moody’s downgraded Greece to Caa1 from B1, putting it on a par with Cuba, according to a report published late yesterday. The move came after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature. Twelve years after the currency was started, European leaders are trying to prevent the euro area’s first sovereign default. A 110 billion-euro ($158 billion) rescue in 2010 failed to prevent an investor exodus from Greece, and the country now faces a funding gap of 30 billion euros of bonds next year with yields on its 10 year bonds above 16 percent. “Taken together, these risks imply at least an even chance of default over the rating horizon,” Moody’s said in a statement.
  • Yellen Says Fed Watching Rise in Leveraged Loan Demand for Imbalance Risk. Federal Reserve Vice Chairman Janet Yellen said an increasing demand for leveraged loans warrants monitoring as a possible emerging “imbalance” that the Fed would curb if necessary through regulation. The central bank will “continue to watch conditions in the leveraged loan market closely in the coming months, and we will speak out forcefully if we perceive pressures continuing to build,” Yellen said today in a speech in Tokyo. “Strong demand has been pushing prices higher in the syndicated loan market” and “inflows into this asset class have indeed been robust and prices have been rising quite rapidly.”
  • China Lending-Binge Hangover Looms in 2013 as Wen Spurs Low-Income Housing. Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that will see 2 trillion yuan ($307 billion) added to local government borrowing by 2012, bringing it to a total 12 trillion yuan, Standard Chartered Plc estimates. The surge of loans to local authorities may spark a wave of bank bailouts that hobble economic growth. “We’re going to see more financial shenanigans, we’re going to see more money pushed off balance sheets” as banks seek to mask the extent of their lending to local governments, said Singapore-based Fraser Howie, who co-wrote “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” and has been an investment banker in Asia for almost two decades. “We’re going to see some major recapitalization coming at some point” in the banking system, he predicted.
  • Wien Buying in S&P 500 Decline Where Birinyi Sees Chance of 10% Correction. The biggest retreat in the Standard & Poor’s 500 Index since August is creating a buying opportunity for investors willing to withstand declines that may reach 10 percent, according to Blackstone Group LP’s Byron Wien.
  • Fukushima Radiated Water May Breach Storage Trenches in 5 Days. Radioactive water accumulating in Tokyo Electric Power Co.’s crippled Fukushima Dai-Ichi nuclear plant is set to start overflowing from storage trenches in five days, data provided by the company show. To prevent leakage into the ocean, the utility has poured concrete and gravel to seal off storage trenches closest to the sea containing water from the No. 3 and No. 4 reactors, according to Hikaru Kuroda, a nuclear facility maintenance official at the company. “Even as we have sealed these trenches, there is still the risk of radioactive water leaking into the sea,” he said to reporters after a media conference yesterday. The contaminated water is a “massive problem,” Tetsuo Iguchi, a specialist in isotope analysis and radiation detection at Nagoya University, said in a phone interview on May 27. Tepco has to ensure the contaminated water doesn’t get into the soil, Iguchi said. The rate of increase in water level quickened because of three days of rain from typhoon Songda that weakened as it swept pass Japan earlier this week. Namie, a town near the Fukushima Dai-Ichi station, had 112 millimeters of rain on May 30, according to the Japan Meteorological Agency. Japan is regularly buffeted by typhoons and tropical storms during the northwestern Pacific cyclone season, adding another risk to containing the radiated water at the Fukushima station.
  • Oil Drops a Second Day as Global Manufacturing Slows; U.S. Supplies Rise. Oil declined for a second day in New York after reports showed U.S. crude supplies rose, companies added fewer jobs than forecast and global manufacturing slowed, stoking speculation fuel demand may falter. Futures fell as much as 0.7 percent after the biggest drop in three weeks yesterday. Crude stockpiles climbed the most in more than a month, according to the American Petroleum Institute. Employment rose by 38,000 in May, the smallest gain since September, ADP Employer Services said. The industry-funded American Petroleum Institute said U.S. crude supplies rose 3.5 million barrels last week to 371.6 million. Gasoline inventories climbed 1.5 million barrels to 212.7 million, the American Petroleum Institute said. “The American Petroleum Institute crude inventory data looked negative, with a surprising rise in crude and gasoline stockpiles,” Pervan said. If Energy Department data “confirms today’s bearish numbers, prices could remain under pressure.” A purchasing managers’ index for China showed the slowest expansionary pace in nine months, while the equivalent measure for the euro area fell to a seven-month low. Russia’s index signaled “near stagnation,” and reports from Poland to Hungary also showed a loss of manufacturing momentum.
  • Copper, Nickel Drop as Weaker Data Drive Speculation Recovery May Falter. Copper, nickel and aluminum declined in London for a second straight day on mounting concern that the global economic recovery may be faltering as manufacturing slows from China to the U.S. Three-month copper on the London Metal Exchange fell as much as 0.7 percent to $9,035 a metric ton, and was at $9,050 at 10:54 a.m. in Singapore. Nickel dropped as much as 1.3 percent to $22,950 per ton and aluminum lost as much as 1.4 percent to $2,630 per ton while tin, lead and zinc also retreated. “If you knock out employment gains, you really take back this idea that we’ve entered a sustainable recovery,” James Paulsen, chief investment strategist at Wells Capital Management, said in a Bloomberg Television interview. “If we’re no longer in a sustainable recovery, then investors get much more anxious.”
  • Acer Tumbles After Audit Finds Abnormalities. Acer Inc. (2353), the world’s second-largest maker of laptops, tumbled by the 7 percent daily limit in Taipei trading after the company said an audit found abnormalities in its inventory and account receivables.
  • Indian Equities to Trail Emerging Markets. Indian stocks will continue to lag behind emerging-market equities as rising borrowing costs and inflation squeeze profits, Morgan Stanley said. Overseas investors may continue to remain net sellers of Indian equities this year, Jonathan Garner, the investment bank’s chief Asian and emerging-market equity strategist, told reporters in Mumbai yesterday. The strategist reduced his recommendation on Indian equities to “underweight” from “equal weight” in March. The Bombay Stock Exchange Sensitive Index has fallen 10 percent this year as the Reserve Bank of India boosted interest rates to curb price increases.
Wall Street Journal:
  • Delta(DAL) Probed on Union Drive. The National Mediation Board said Wednesday it will conduct a full-blown investigation into allegations by a flight attendants union that Delta Air Lines Inc. interfered in last year's fractious organizing drive at the world's second-largest airline by traffic. The investigation is expected to shine a spotlight on labor relations at the Atlanta-based carrier, which has denied interfering with the hotly contested union votes in which its workers rejected union representation.
  • SEC Weighing Whether to Accept Hedgies' Invite. In January, a hedge-fund industry group asked SEC Enforcement Chief Robert Khuzami to address its members in a special forum on insider trading, a topic of renewed interest among financial regulators. Four months later, the SEC is still weighing whether Khuzami should accept the offer, a commission spokesman said today.
  • Big Banks Cash In on Commodities. Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks' profits. A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks.
  • Auto Bailout Cost $14 Billion. The White House said Wednesday that taxpayers could lose roughly $14 billion of the money spent on auto industry bailouts, despite the industry's recent recovery.
  • The Economy is Flying Without Instruments Because of the White House's Policy Choices.
CNBC:
  • China Land Price Fall Threatens Local Finances. If recent land auctions across China are anything to go by, then Beijing’s efforts to cool the country’s sizzling residential property market are finally beginning to work after a year of moral suasion and threats to local governments, banks and developers. For some, including China’s cash-strapped local authorities, they may be working too well. The average transaction price for land sales across the country fell 32 percent in April from a month earlier and has dropped 51 percent since the start of the year, according to government data published by Credit Suisse. In some cases, local government land auctions have failed as bids fell short of the minimum level required. For local governments with stretched finances that rely on land sales for the bulk of their revenues, the tumble in land prices could spell disaster. Furthermore, their vulnerability underscores the extent to which China relies on property as a source both of growth and of revenue to finance its sparkling infrastructure. From nothing 10 years ago, the contribution of land sales to local government revenues has soared, and last year total land transfer revenue nearly doubled from 2009 to about Rmb3,000 billion ($464 billion), according to CEIC, the data provider. That amounts to more than 70 percent of total local government revenues, according to data from HSBC. This year, by contrast, analysts at HSBC expect the figure to be less than Rmb2,000 billion. Following tax reforms in the 1990s, local governments receive only 46 percent of all tax receipts, with most going to Beijing. But at the same time, they account for 77 percent of public spending and their responsibilities are growing, according to research from the U.S.-based Lincoln Institute of Land Policy. Now that land sales are being discouraged as a source of finance, Beijing may have to rework all public finances and come up with another formula for paying for infrastructure and the social safety net that the country so desperately needs. “Local officials are all complaining about the restrictions. If land sales stop completely, debt service may become a problem,” says Helen Qiao, chief China economist for Goldman Sachs in Beijing. “There is a lot of debate about who will get into trouble first.”
  • Fears of Slowdown Send 10-Year Yield Below 3%.
Business Insider:
Zero Hedge:
NY Times:
  • SAC Capital Said to Face Insider Trading Inquiry. The Securities and Exchange Commission is investigating whether trades in health care stocks by the hedge fund SAC Capital Advisors as recently as last year were made using inside information, a person briefed on the matter said Wednesday.
San Jose Mercury News:
  • Google(GOOG) Gmail Accounts Hacked From China. Google (GOOG) disclosed Wednesday that hundreds of Gmail accounts, including those of senior U.S. officials and Chinese political activists, were targeted in a concerted hacking campaign originating from Jinan, China. Unlike a series of cyber attacks from China last year, Google said the goal this time was not its own central systems, but the individual accounts of users of its e-mail service. The attacks, which Google said also targeted government officials in South Korea and other Asian nations, military personnel and journalists, were likely the result of "phishing" attempts, in which the attacker dupes users into sharing passwords. There were no indications Wednesday that the latest round of attacks would prompt any change in Google's operations in China. Nor was there evidence of Chinese government involvement, although some analysts speculated Chinese officials could be indirectly involved.
Real Clear Politics:
  • Boneheaded Stimulus Never Works by Larry Kudlow. We're learning that the Fed's QE2 has actually done more harm than good. All that money-printing stimulus worked to depreciate the dollar and jack-up commodity prices, especially oil and gasoline, but also food. So both companies and consumers have been punished. Some demand-side boneheads on Wall Street want the Fed to move to QE3, allegedly to fight a stalling economy. But if the central bank prints another $600 billion or so, all that will do is sink the greenback another 10 percent and drive oil and gasoline prices higher and higher. And that, in turn, will slow business and consumers even more.
Politico:
Reuters:
Xinhua:
  • The number of Chinese local government financing vehicles increased more than 25% last year from 2008 to more than 10,000 units, citing a central bank report. Borrowing by the financing vehicles accounted for as much as 30% of banks' outstanding yuan-denominated loans.
  • China's Xinjiang region has raised the minimum wage by 20% on rising living costs and labor shortage concerns, citing the region's human resources and social security bureau.
Shanghai Securities News:
  • Chinese regulators have suspended property businesses at 10 domestic trust companies, citing a person familiar with the situation. The trust companies involved have large property trust businesses. Other trust firms were told to limit the size of their property businesses. Property companies have been borrowing funds from trust companies as banks tighten lending.
Securities Times:
  • China's property market curbs including home purchase limits and a property tax trials are long-term policies, citing Qin Hong, deputy director of the Ministry of Housing and Urban-Rural Development's policy research center.
21st Century Business Herald:
  • China's passenger car sales excluding minivans, dropped 1% in May from a year earlier to 850,000 units, citing the country's Passenger Car Association. Sales fell 11% last month from April, citing the association.
China Daily:
  • Iran, Pakistan and India will start talks to become full members of the Shanghai Cooperation Organization following the expected passing of a memorandum at the group's summit in June, citing Muratbek Sansyzbayevich Imanaliev, the organization's secretary-general.
  • Expectations for yuan gains by non-resident holders of the Chinese currency may result in more problems for China and reverse the success of the yuan's internationalization, Yu Yongding, a former Chinese central bank adviser, wrote in a commentary.
China Securities Journal:
  • China's economic growth may slow to about 9% this year from 10.3% last year, China Securities Journal wrote in an editorial today. Rising pork, egg and seafood prices have stoked inflation in May and June and may prompt the central bank to raise interest rates, according to the newspaper.
International Oil Daily:
  • OPEC may boost oil supply by as much as 1.5 million barrels a day to offset the loss of Libyan production. OPEC will discuss an increase of 500,000 to 1.5 million barrels a day to add to the estimated 29 million its 12 member currently produce. The group is scheduled to meet June 8 in Vienna.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (BAC), target $17.
Night Trading
  • Asian equity indices are -2.0% to -.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 109.50 +2.5 basis points.
  • Asia Pacific Sovereign CDS Index 113.25 -.25 basis point.
  • S&P 500 futures -.05%.
  • NASDAQ 100 futures -.14%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (JOYG)/1.35
  • (UNFI)/.48
  • (COO)/.93
  • (DMND)/.48
  • (PAY)/.43
  • (ZQK)/.07
Economic Releases
8:30 am EST
  • Final 1Q Non-farm Productivity is estimated to rise +1.7% versus a prior estimate of a +1.6% gain.
  • Final 1Q Unit Labor Costs are estimated to rise +.8% versus a prior estimate of a +1.0% gain.
  • Initial Jobless Claims for last week are estimated to fall to 417K versus 424K the prior week.
  • Continuing Claims are estimated to fall to 3675K versus 3690K prior.
10:00 am EST
  • Factory Orders for April are estimated to fall -1.0% versus a +3.0% gain in March.
11:00 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,600,000 barrels versus a +616,000 barrel increase the prior week. Distillate supplies are estimated to fall by -250,000 barrels versus a -2,040,000 decline the prior week. Gasoline inventories are expected to rise by +900,000 barrels versus a +3,794,000 barrel gain the prior week. Natural gas supplies are expected to rise by 93 bcf versus a 105 bcf injection the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus a +3.1% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The ICSC Chain Store Sales for May, RBC Consumer Outlook Index for June, weekly Bloomberg Consumer Comfort Index, CSFB Engineering/Construction Conference, (PRXL) investor day and the (FEIC) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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