Thursday, June 30, 2011

Thursday Watch

Evening Headlines


  • Papandreou Seeks to Turn Budget Enforcer. Greek Prime Minister George Papandreou may struggle to persuade investors he can implement a $112 billion austerity plan as it reaches a final vote in Parliament in the teeth of violent street protests. Having clinched victory on a bill setting out his strategy for budget cuts, Papandreou must today win a second ballot to execute measures ranging from tax increases to asset sales. That may be easier than inflicting the plan on an economy mired in recession whose population is already enduring an income squeeze to curb the nation’s record budget deficit. A general strike and protests of more than 20,000 people have paralyzed central Athens for the past two days in a standoff focused on Parliament as lawmakers deliberate on Papandreou’s proposals. While approval today would pave the way for Greece to secure a fifth tranche of money from the European Union to prevent a default, the yield on the country’s two-year bond is still above 27 percent. “There is a real risk that, given the political problems, given the process, that at some stage it’s the Greeks who give up on the program,” Andrew Balls, Pacific Investment Management Co.’s head of European portfolio management, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The EU partners are spectators when it comes to the Greek political dynamics.”
  • German Banks Near Greek Plan. German financial companies pushed toward an agreement to roll over their Greek debt holdings as Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann predicted banks would contribute to help avert a “meltdown.” Representatives of German banks and insurers hammered out a draft proposal to present at a meeting today with Finance Minister Wolfgang Schaeuble and top industry executives, including Ackermann. The German firms, which are using a French proposal as a blueprint for discussions, are likely to commit to contributing to the Greek rescue, while calling for a Europe- wide solution, said people familiar with the plan.
  • Dealmaking Hits Bump as Market Slump Prompts Lowest Takeovers in 8 Months. Concerns about a declining global stock market and slowing economic growth are taking a toll on dealmaking, with takeovers in June tumbling to the lowest level in eight months. The total value of takeovers announced so far this month fell 22 percent from May to about $178 billion, leaving second- quarter volume little changed from the previous three months, according to data compiled by Bloomberg.
  • Visa(V), MasterCard(MA) Surge as Fed Lifts Caps. Visa Inc. (V) and MasterCard Inc. (MA), the world’s biggest consumer-payment networks, surged more than 10 percent after the Federal Reserve relaxed restrictions on debit- card transaction fees. Visa advanced $11.29, or 15 percent, to $86.57 at 4 p.m. in New York Stock Exchange composite trading, the most since March 2008. MasterCard rose 11 percent to $309.70, the biggest gain since February 2009. The Fed voted today to cap debit-card swipe fees, also called interchange, at 21 cents a transaction, lifting the limit from an earlier proposal of 12 cents. The caps are mandated by the Dodd-Frank Act. San Francisco-based Visa and MasterCard, based in Purchase, New York, set interchange fees that are paid by merchants and pass the money to card issuers including Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC).
  • Institutional Investors Pull Most From Prime Money Funds Since March 2010. Institutions pulled out of U.S. prime money-market funds at the fastest pace in 15 months, shifting to funds that invest only in U.S. government-backed securities out of concern the European debt crisis would worsen. Institutional funds eligible to buy corporate debt lost $39 billion to net withdrawals in the week ended June 28 and $75 billion in the past two weeks, falling to $1.04 trillion, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits, rising to $599 billion. “No doubt there was some shifting over European concerns,” said Peter Crane, president of Crane Data LLC, also in Westborough. Investors pulled $15 billion from institutional prime funds on June 24, his data showed.
  • South Korea Raises Inflation Forecast to 4% While Cutting Growth Estimate. South Korea’s inflation will exceed President Lee Myung Bak’s target this year and growth will be slower than previously forecast after global demand weakened and energy costs climbed, Finance Ministry forecasts showed today. Consumer prices are expected to rise 4 percent, the ministry said in a statement, exceeding its initial 3 percent projection. The government also lowered its estimate of economic growth to 4.5 percent from the 5 percent it projected last December.
  • Why China's Heading for a Hard Landing, Part 4: A. Gary Shilling.
  • Samsung Sues Apple(AAPL) Over iPhone, iPad, iPod.
  • RBA's McKibbin Sees Greece in Fiscal 'Train Wreck'. Greece is one of several nations that will need to cut spending and boost taxes, slowing global growth even as low interest rates raise the risk of inflation, Australian central bank board member Warwick McKibbin said. The fiscal outlook “is what I call the slow motion train wreck -- the first carriage to break is going to be the Greek economy, but we have a series of economies facing very serious fiscal adjustment,” McKibbin, a professor at Australian National University whose board term ends July 30, said in a speech in Melbourne.
  • Rice Supplies Tightening in China May Increase Imports, Bolster Inflation. Rice supply in China, the world’s biggest grower and consumer, may decline after drought and floods damaged crops, potentially boosting inflation and increasing imports. The harvest of the early indica crop may drop in some areas, said eight of 12 officials, traders and farmers surveyed by Bloomberg News in Hunan and Jiangxi provinces, the top producers of the variety which represents 17 percent of annual output. The crop may increase or be about the same as last year, said four of those surveyed from June 21 to June 25. Output of this type already dropped last year to the lowest level since 2003, according to statistics bureau. Lower production may bolster rice futures in China that jumped 29 percent in the past year and increase imports that doubled in the first five months. Surging food costs because of drought and floods helped lift inflation to 5.5 percent last month, the fastest pace in almost three years. The rate may quicken to more than 6 percent in June, adding pressure on the central bank to increase interest rates, some economists said.
  • China's inflation rate may jump to 6.5% this month, exceeding a near three-year high and spurring the central bank to raise interest rates for the first time since April, according to Shenyin & Wanguo Securities Co. Consumer prices may accelerate in June because of the rising cost for pork, Li Huiyong and Meng Xiangjuan, analysts at the brokerage, wrote today. The People's Bank of China may increase borrowing costs around the time of the release of the economic data, scheduled for July 15, they wrote. "Higher pork prices will boost the possibility of seeing higher-than-expected inflation for the third quarter and full year," said the analysts at Shenyin & Wanguo, ranked China's most influential research provider by New Fortune magazine last year. "Investors should pay attention." The nation's pork prices surged 40% in May from year-ago levels and may have jumped 55% this month, Bank of America-Merrill Lynch said in a report to clients yesterday.
  • Iran Again Arming Iraqi Groups Attacking U.S. Troops, Gates Says. Iran is furnishing new, more deadly weapons to Shiite militia groups targeting U.S. troops in Iraq as part of a pattern of renewed attempts to exert influence in the region, Defense Secretary Robert Gates said. About 40 percent of the deaths of American soldiers since the official end of U.S. combat operations almost 10 months ago have occurred in the past few weeks as a result of the attacks, Gates said yesterday in a Bloomberg News interview at the Pentagon that also touched on Iran’s nuclear program.
Wall Street Journal:
  • Vote Calms Markets - For Now. Financial markets breathed a sigh of relief Wednesday after the Greek Parliament approved a five-year austerity plan demanded by international creditors, but investors remain wary that the fix fails to resolve problems facing Greece—and Europe—in the long run. The measures, which were demanded by international creditors as a condition of a new bailout, eased fears of an imminent default, but market reaction was muted by gains over the past two days, partly on expectations the budget-cutting package would pass.
  • Obama's Real Revenue Problem. Tax receipts are low because of the mediocre economic recovery.
  • ObamaCare Doesn't Add Up. A new CBO report finds that the costs of Medicare and Medicaid will drive federal spending to all-time highs in coming decades. Remember the much ballyhooed ObamaCare promise to "bend the health care cost curve down"? Well, a new Congressional Budget Office report on the long-term trend in the federal budget finds that the costs of Medicare and Medicaid will drive federal spending and debt to all-time highs in coming decades. In one scenario, federal health-care spending doubles over the next 25 years, to 11% of GDP in 2035 from 5.6% this year. In another scenario, the debt eclipses 100% of GDP by 2021 and 190% of GDP by 2035. That's higher than where Greece is right now, and we see what the bond vigilantes are doing there.
  • IMF Said to Raise Flags Over Two Afghan Banks. The International Monetary Fund has expressed concerns to Afghanistan that the government isn't thoroughly investigating widespread alleged graft at Kabul Bank, the country's largest lender, according to people familiar with the matter. The IMF also said the Afghan government hasn't conducted a proper forensic audit into a second, possibly unhealthy Afghan bank, these people say.
  • FDA Panel Votes Down Avastin Breast Cancer Use. A Food and Drug Administration advisory panel voted decisively on Wednesday to withdraw approval for Avastin to treat breast cancer over concerns about side effects and a lack of effectiveness.
  • Solar Industry Facing Supply Bubble: Analyst. The world is facing a massive over-supply of solar panel capacity, and one analyst says that’s likely to lead to big declines in solar panel prices and the stocks of solar companies this year. Gordon Johnson, Managing Director and senior equity research analyst at Axiom Capital says global solar capacity will jump from roughly 40 gigawatts in 2010 to about 61 gigawatts by the end of 2011. According to him, even by the most bullish of estimates, demand is only going to be 20 gigawatts this year. As a result, he’s predicting big declines in earnings for the sector and recommends selling solar stocks.
  • US Enters Next Round of Public Pensions Fight.
  • Bad Old Habits Plague Economic Forecasting. Three years after the Great Recession ought to have challenged even the most basic assumptions made by economists, they have instead settled back into the costly habits of old.
Business Insider:
Zero Hedge:
Rasmussen Reports:
  • 24% Says U.S. Heading in Right Direction. Sixty-eight percent (68%) of voters say the country is heading down the wrong track, up three points from last week and the highest level of pessimism since mid-April.
Financial Times:
  • Pakistan Shuts US Out of Drone Base. Pakistan has called a stop to US drone flights from a base that has launched strikes against Taliban and al-Qaeda militants on its border with Afghanistan. In the latest sign of US-Pakistan tensions, Chaudhary Ahmed Mukhtar, defence minister, said on Wednesday that Islamabad had ended US operations at the Shamsi airbase in Baluchistan.
  • China should raise taxes on imported luxury goods because imposing taxes on wealthy people is beneficial for "social fairness", Liu Shangxi, a deputy director of the Ministry of Finance's research institute for fiscal science said. Domestic companies' competitiveness will be harmed if China expands consumption demand for imported products, Liu said.
Global Times:
  • Second-Child Policy to Stay in Place. The latest proposal advocating for a loosening on the Chinese mainland's second-child policy has been rejected by local authorities, who say that allowing married adults – who are not themselves only children – to have more than one child is not in the best interests of Shanghai, nor its aging population. The Shanghai Municipal Population and Family Planning Commission said on Wednesday that allowing married adults, who both have at least one sibling, to have more than one child of their own, would put added strains on the system, which is already struggling to solve the problem of the city's rapidly increasing aging population. "More children would mean fewer resources for seniors, and that would not bode well for the city's aging population," Wu Xiangbing, a press officer for the commission, told the Global Times on Wednesday, declining to disclose the number of married only-children adults, who have had two children since the option was allowed in 2004.
Evening Recommendations
  • Upgraded (EBAY) to Buy, target $38.
  • Reiterated Buy on (PCLN), target $650.
  • Rated (QCOM) Positive, target $70.
Night Trading
  • Asian equity indices are +.25% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 114.0 -2.5 basis points.
  • Asia Pacific Sovereign CDS Index 122.0 -2.0 basis points.
  • S&P 500 futures +.21%.
  • NASDAQ 100 futures +.12%.
Morning Preview Links

Earnings of Note
  • (SCHN)/1.20
  • (STZ)/.37
  • (AZZ)/.63
  • (DRI)/1.00
  • (APOL)/1.30
  • (MKC)/.54
  • (WOR)/.55
Economic Releases
8:30 am EST
  • Initial Jobless Claims for last week are estimated to fall to 420K versus 429K the prior week.
  • Continuing Claims are estimated to fall to 3690K versus 3697K prior.
9:45 am EST
  • The Chicago Purchasing Manager Index for June is estimated to fall to 54.0 versus a reading of 56.6 in May.
Upcoming Splits
  • (MMS) 2-for-1
  • (AMX) 2-for-1
Other Potential Market Movers
  • The Greece vote on austerity implementation, Fed's Bullard speaking, NAPM-Milwaukee report, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index and the (NTAP) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and financial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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