Friday, July 22, 2011

Friday Watch

Evening Headlines


  • EU Leaders Offer $229 Billion in New Greek Aid. Euro-area leaders redoubled efforts to end the 21-month sovereign bond crisis as they erected a firewall around Spain and Italy and risked temporary default to lighten Greece’s debt burden. After eight hours of talks in Brussels, leaders announced 159 billion euro ($229 billion) in new aid for Greece late yesterday and cajoled bondholders into footing part of the bill. They also empowered their 440-billion euro rescue fund to buy debt across stressed euro nations after a market rout last week sparked concern the crisis was spreading. The fund can also aid troubled banks and offer credit-lines to repel speculators. The euro strengthened as officials drew concessions from Germany, the European Central Bank and investors for a twin- track strategy to support Greece and ensure its woes don’t spread.
  • Spies in China Said to Be Behind IMF Hacking. Investigators probing the recent ransacking of International Monetary Fund computers have concluded the attack was carried out by cyber spies connected to China, according to two people close to the investigation. Evidence pointing to China includes an analysis of the attack methods, as well as the electronic trail left by hackers as they removed large quantities of documents from the IMF’s computers. The multistaged attack, which used U.S.-based servers as part of their equipment, ended on May 31, people involved in the investigation said on the condition they not be identified because they aren’t authorized to speak about it. Their conclusion is likely to be a major test for the new IMF chief, Christine Lagarde, who this month appointed Chinese economist Zhu Min as deputy managing director, giving China a much expanded role in the institution. “There are some very big questions about the role that China wants to play in the global economic system and what role it can play given some of its behavior,” said C. Fred Bergsten, who heads the Washington-based Peterson Institute for International Economics. The timing of the attack and China’s lobbying for more influence at the Fund appear to overlap, creating a potentially embarrassing situation for China among the IMF’s 186 other members, including the U.S. “As an intelligence professional, I stand back in absolute awe and wonderment at the Chinese espionage effort against the United States of America,” Gen. Michael Hayden, the former CIA director, said at cyber security conference last year. “It is magnificent in its breath, its depth and its efficiency.”
  • Democrats Balk at Potential U.S. Debt-Limit Deal. Democrats reacted angrily to reports that the White House is cutting a deal with House Republicans to boost the U.S. debt ceiling and reduce deficits by about $3 trillion over 10 years without immediate revenue increases. The officials, who described outlines of the plan on condition of anonymity, said the leaders were told it would cut spending while calling for a future tax overhaul that could raise $1 trillion in additional revenue. Obama met with Democratic leaders from the House and Senate at the White House for about two hours. The administration and House Republicans remain divided over the fate of the cuts for top earners passed during President George W. Bush’s administration and how much revenue would be raised to trim the long-term federal deficit, said two Democratic officials familiar with the negotiations. Obama wants spending cuts to be gradual, with the fullest effects not felt until 2014 and beyond, to avoid shaking the still-fragile recovery, the officials said, briefing reporters on condition of anonymity to discuss the closed-door talks. While discretionary spending cuts could be immediate, changes in the tax code and entitlement programs would be worked out over the next year, the officials said.
  • Qaddafi Increases Chances He Could Stay. The U.S., the U.K., Italy and France now say they’re willing to accept an outcome in Libya that would allow Muammar Qaddafi avoid exile or a trial on war crimes charges. After conducting four months of daily bombings, NATO-led allies are willing to let Qaddafi stay in Libya on the condition that he gives up power.
  • Shrinking Cattle Herd Signals Beef Rising to Record, Higher Wendy's Costs. The U.S. cattle herd as of July 1 probably shrunk to the smallest on record, signaling tightening beef supplies and higher costs for shoppers and companies from Tyson Foods Inc. (TSN) to Wendy’s Co. Ranchers held 99.39 million head of cattle as of July 1, down 1.4 percent from a year earlier, according to the average estimate of nine analysts surveyed by Bloomberg News. That would be the smallest July herd since at least 1973, when the U.S. Department of Agriculture data begins. The government plans to release its semiannual report on the herd at 3 p.m. today in Washington. “If you’ve got fewer cattle, ultimately you’re going to have less beef,” Ron Plain, a livestock economist at the University of Missouri in Columbia, said yesterday in a telephone interview. “We’re going to have new record cattle and beef prices in 2012.”
  • H-P(HPQ) Authorizes $10 Billion in New Stock Buyback. Hewlett-Packard Co. (HPQ), the world’s largest computer maker, plans to buy back $10 billion of its stock, part of an effort to buoy its languishing shares. The plan comes in addition to the an earlier buyback plan announced last year, Palo Alto, California-based Hewlett-Packard said today in a regulatory filing.
  • Morgan Stanley(MS) Banking, Debt Trading Surpass Goldman First Time. Morgan Stanley (MS)’s second-quarter revenue from both investment banking and fixed-income trading beat Goldman Sachs Group Inc. (GS)’s for the first time on record. Fixed-income trading generated $2.09 billion for Morgan Stanley and investment banking brought in $1.47 billion, while Goldman Sachs reported $1.6 billion and $1.45 billion, respectively. New York-based Morgan Stanley has never outperformed its larger rival in both those businesses simultaneously in the 11 years it’s reported fixed-income trading results, company filings show.
  • Goldman(GS) Model Championed by Blankfein Planted Seeds of Distress. Bungled public relations and a thirst to find a scapegoat for the worst U.S. economic crisis since the Great Depression may explain some of the shift in the firm’s reputation under Chairman and Chief Executive Officer Lloyd C. Blankfein. The mistrust and waning investor faith in the company’s prospects are rooted in something more fundamental: Blankfein’s reliance on trading and investing the bank’s own capital to reap profits, even if that meant sometimes competing with clients.
  • Express Scripts's(ESRX) Bid for Medco(MHS) Will Get Close Scrutiny From Regulators. Express Scripts Inc.’s bid to buy Medco Health Solutions Inc. may undergo an extended antitrust review at the U.S. Federal Trade Commission, where close examination of companies that manage prescription-drug benefits stretches back more than a decade.
  • Apple(AAPL) Said to Consider Making Bid for Hulu. Apple Inc. (AAPL), with $76.2 billion in cash and securities on its books, is considering making a bid for the Hulu online video service, two people with knowledge of the auction said. Apple, the world’s second-most-valuable company, is in early talks that may lead to an offer for Hulu, said the people, who weren’t authorized to speak publicly. Hulu would give Apple a new subscription service and represent a possible challenge to Netflix Inc. (NFLX) Hulu’s media- company owners, Walt Disney Co. (DIS), News Corp. (NWSA) and Comcast Corp. (CMCSA)’s NBC Universal, are offering suitors a five-year extension of program rights, including two years of exclusive access, people familiar with the matter said earlier this week. “Part of the ecosystem of Apple’s future is to include more video,” said Scott Sutherland, Wedbush Securities Inc. analyst in San Francisco who recommends buying the stock. “It’s something they are focused on.” Hulu’s price tag could exceed $2 billion, according to data compiled by Bloomberg and SNL Kagan.
  • China One-Year Swap Jumps to Record as Maturing Debt Declines.
  • NFL Owners Vote to End Four-Month Lockout, Pending Players' Ratification. National Football League owners voted 31-0 for a new 10-year labor agreement and now await players’ approval so the league can reopen for business next week after a four-month shutdown. The vote, taken today in Atlanta, moved the NFL closer toward ensuring that the regular season of the richest and most-watched U.S. sport will begin on time on Sept. 8.
  • Emerging-market equity funds reported withdrawals of $1.1 billion in the week ended July 20, snapping three straight weeks of new inflows, Citigroup Inc.(C) said in a report today.
Wall Street Journal:
  • Europe Launches a Massive Greek Bailout. Euro-zone leaders agreed Thursday on a new €109 billion ($157 billion) bailout for Greece and new steps to prevent its debt crisis from metastasizing across the Continent—in a plan expected to trigger the first debt default by a nation using the common currency. The meeting also produced a stark and open-ended declaration: The wider euro zone is committed to financing countries that take bailouts—thus far, Greece, Ireland and Portugal—for as along as it takes them to regain access to private lenders. The move is a bold bid by Europe's leaders to corral an 18-month-old debt crisis that is veering dangerously out of control. Still, it remains to be seen whether the tourniquet will hold. Even after the new plan, Greece will have a staggering load of debt.
  • A Guide to the New Deal in Athens: How a 'Selective Default' Works.
  • Uncle Sam Weighs Landlord Role to Ease Housing Slump. The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter. While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.
  • Justice Department Prepares Subpoenas in News Corp.(NWSA) Inquiry. The Federal Reserve Bank of New York again is facing scrutiny over stockholdings held by a senior official during the 2008 financial crisis. Then-New York Fed President Timothy Geithner issued a waiver that allowed William Dudley—executive vice president of the regional Fed bank's markets group—to work on the controversial bailout of American International Group Inc. even though he held shares in the company, according to a congressional audit report released Thursday.
  • Google+ Pulls In 20 Million In 3 Weeks. When Google Inc.(GOOG) launched its Google+ social-networking site three weeks ago, executives handed out sailor hats to the hundreds of employees working on the project, symbolizing their year-long journey to that point. So far, the sailing has been mostly smooth. On Wednesday, Web-traffic watcher comScore Inc. estimated Google+ has had 20 million unique visitors since its launch, including five million visitors from the U.S. A Google spokeswoman declined comment.
Business Insider:
Zero Hedge:
Hedge Fund Law Blog:
Neal Boortz:
  • The Economy Stalled After Obamacare Passed. A few reasons as to why ObamaCare discourages employers from hiring: Businesses with fewer than 50 workers have a strong incentive to maintain this size, which allows them to avoid the mandate to provide government-approved health coverage or face a penalty; Businesses with more than 50 workers will see their costs for health coverage rise—they must purchase more expensive government-approved insurance or pay a penalty; and Employers face considerable uncertainty about what constitutes qualifying health coverage and what it will cost. They also do not know what the health care market or their health care costs will look like in four years. This makes planning for the future difficult.
The Blaze:
Financial Times:
  • European Banks Could Face $23 Billion Writedown on Greece.European banks would need to write down as much as $23 billion on holdings of Greek debt should they have to take a 20% haircut on the bonds, citing its own analysis of the 90 banks recently subjected to stress tests. Auditors have warned banks to make provisions for losses on Greek bonds in their second-quarter results, arguing lenders should absorb losses now because almost any proposals for dealing with Greek restructuring would lessen the value of their bondholdings.
  • Bond Swap Plan Is For Greece and Greece Only. Private creditor participation in Greece’s latest rescue programme will be very strictly limited to the Greek crisis and will be specifically excluded as a model for any other eurozone country in financial difficulties.
  • European Deal Could Lead to Two-Speed Europe. European leaders thrashed out an agreement to save the stricken euro last night, with a major step towards a full economic union in which taxpayers in rich nations would cover the spending of poorer ones. The attempt to bail-out Greece and other struggling eurozone countries raised the prospect of a two-speed European Union with far closer ties between countries using the euro compared with those, such as Britain, that remained outside. Nicolas Sarkozy, the French president, said the deal had pulled the eurozone back from the brink of disaster and laid foundations for the creation of an EU “economic government”. He hailed it as “a historic moment” that would provide “bold and ambitious” plans for the creation of an embryonic EU treasury in the form of a European Monetary Fund. “By the end of the summer, Angela Merkel and I will be making joint proposals on economic government in the eurozone. Our ambition is to seize the Greek crisis to make a quantum leap in eurozone government,” he said. Even large euro countries such as Italy and Spain have seen their borrowing costs jump, raising fears of a financial crisis that could destroy the single currency. In response, eurozone leaders meeting in Brussels were drawing up a deal that would effectively use money from successful northern economies such as Germany to support the budgets of indebted nations in southern Europe. The agreement being discussed last night will hugely expand the role of a €440  billion (£389 billion) eurozone emergency bail-out fund, effectively creating a European Monetary Fund. The fund will be able to make “precautionary” loans to eurozone members, which they could use instead of borrowing money from the markets. It will also be able to make loans to recapitalise banks in the weaker economies and buy back government bonds from private investors. Angela Merkel, the German Chancellor, was forced to cave in to French demands to significantly extend the role of the EFSF, to which Germany provides more than a quarter of the funding. German officials said Mrs Merkel was braced for a major political row as taxpayers in Germany recoiled from a step that will redistribute their money to highly indebted Mediterranean countries.
  • Bank of China Ltd. may be selected by the Basel Committee on Banking Supervision as one of the world's systemically important banks and face higher capital requirements, citing a person close to the Chinese lender.
South China Morning Post:
  • SMEs Heading for Financial Collapse, Beijing Warned. A leading Chinese business lobby on the mainland has raised the alarm over the looming failure of the nation's small and medium-sized private enterprises, urging the central government to take concrete measures to help the ailing sector.
China Daily:
  • China's export growth will "decelerate" in coming months which may cause some factories to close, citing Zhang Ji, director general of the Ministry of Commerce's mechanical, electronic and high-tech industries department. As domestic and global business conditions deteriorate, some manufacturers and exporters might struggle and some will go bankrupt, Zhang was quoted as saying. Factors including rising labor and raw material costs, yuan appreciation and tighter monetary policy will continue to hurt China's exports, the official said.
Evening Recommendations
  • Reiterated Buy on (GR), raised estimates, boosted target to $118.
  • Reiterated Buy on (NUE), target $53.
  • Reiterated Buy on (CBE), target $71.
Crowell, Weedon:
  • Reiterated Buy on (CAKE), target $36.
Night Trading
  • Asian equity indices are unch. to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 115.0 -4.0 basis points.
  • Asia Pacific Sovereign CDS Index 119.25 -3.75 basis points.
  • S&P 500 futures +.25%.
  • NASDAQ 100 futures +.13%.
Morning Preview Links

Earnings of Note
  • (MCD)/1.28
  • (APD)/1.46
  • (STI)/.31
  • (IDXX)/.72
  • (VZ)/.55
  • (COL)/1.04
  • (CAT)/1.74
  • (FLIR)/.35
  • (HON)/.98
  • (SLB)/.85
  • (GE)/.32
  • (CKH)/.68
Economic Releases
  • None of note
Upcoming Splits
  • (CLH) 2-for-1
Other Potential Market Movers
  • None of note
BOTTOM LINE: Asian indices are higher, boosted by commodity and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

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