Friday, July 29, 2011

Friday Watch

Evening Headlines


  • Obama and Geithner May Regret Threats of Default: Caroline Baum. For Washington’s part, the short-term focus on raising the $14.3 trillion debt limit by the Treasury’s Aug. 2 deadline has become a diversion from the nation’s long-term fiscal problems. The federal government has to rein in the growth of its debt so that it becomes manageable in relation to the size of the economy. You wouldn’t know it from listening to the lecturer in chief Monday night. In his address to the nation, President Barack Obama resorted to many of his favorite divide-and-conquer techniques, more suited to warfare than politics, in an attempt to demonstrate he is rising above the fray.
  • Greek Investors May Shun Bailout as Losses Top 21%: Euro Credit. Greek bondholders may resist pressure to reinvest in the nation's securities as part of a bailout agreement as potential losses exceed the 21 percent estimated by the Institute of International Finance. JPMorgan Chase & Co. calculates the bonds may lose as much as 34 percent of their value, while Rabobank International anticipates losses of as much as 50 percent. That may be high enough to deter money managers from aiding the rescue, leaving European leaders to either foot a bigger share of the bill or compel private investors to chip in to meet a 90 percent participation goal. "Our view is that IIF yield assumption in calculating this is too low," said Pavan Wadhwa, JPMorgan's global head of interest-rate strategy in London. "As the market stands right now, the haircut banks will take if they sign up to the IIF proposal would be much higher than 21 percent. The plan might fail as it's going to be difficult to achieve the required 90 percent rollover rate that the IIF is hoping for."
  • China Regulator's Bad Loan Provision Inadequate. China’s banking regulator told lenders they haven’t set aside sufficient funds to cover losses on loans to local governments and ordered them to accelerate debt collection, a person with knowledge of the matter said. The lenders were told this month that they are lagging behind the China Banking Regulatory Commission’s schedule for revising the loan agreements on infrastructure projects, the person said, declining to be named because the information is confidential. The agency had asked banks to collect two repayments a year after construction is completed. The comments reflect persistent concerns that $1.7 trillion of lending to local governments may spur a wave of bad debts that could lead to the nation’s third banking bailout in less than two decades. As much of 30 percent of the credit may sour, Standard & Poor’s estimates, after a surge in lending that powered China’s recovery from the global financial crisis. “Concerns over China’s local government financing vehicle loans have resurfaced in recent weeks,” analysts at UOB Kayhian Investment Co. led by Sheng Nan in Shanghai, wrote to clients July 25. “There have also been talks of local governments overvaluing the land used as collateral for their LGFV loans.” Loans to local government financing vehicles, set up mainly to fund infrastructure projects such as roads and airports, may sour and become the biggest contributor to banks’ bad debts, Liao Qiang, a Beijing-based director of financial institution ratings for S&P, said in April. Standard Chartered Plc, which gets more than half its income from Asia, estimates that at least 4 trillion yuan of the loans -- and possibly much more -- will ultimately not be repaid by cash flows generated by the infrastructure projects, according to a June 29 report.
  • Crude Oil Falls, Heads for Weekly Decline, on U.S. Debt Ceiling Dispute. Oil fell, headed for the first weekly decline in five, on concern a failure to reach a deal on raising the U.S. debt limit may cause the nation to default, threatening the economy of the world’s biggest crude consumer. “We did see a build in inventories. If it becomes more of a trend rather than a one-off, that’s a worry.” Crude for September delivery fell as much as 50 cents to $96.94 a barrel in electronic trading on the New York Mercantile Exchange, and was at $97.08 at 11:35 a.m. Sydney time.
  • Bank of America(BAC) Sued by BlackRock(BLK), Calpers Over Countrywide Fraud Claims. Bank of America Corp. (BAC), the biggest U.S. lender, faces a new securities-fraud lawsuit filed by former Countrywide Financial Corp. investors including BlackRock Inc. that opted out of a $624 million settlement last year. Countrywide, acquired by Bank of America in 2008, misled shareholders about its finances and lending practices, according to the complaint filed today in federal court in Los Angeles. Plaintiffs including the California Public Employees’ Retirement System and funds managed by BlackRock, T. Rowe Price Group Inc. and TIAA-CREF are the largest group of those who rejected the deal, saying the terms were inadequate. “These prominent institutional investors made every effort to amicably resolve their claims for recovery of damages caused by the massive and pervasive fraud at Countrywide without filing formal litigation, but were unsuccessful,” their attorney, Blair Nicholas, a partner at Bernstein Litowitz Berger & Grossmann LLP, said in an e-mail. The investors hope to “maximize” their returns in a jury trial, he said.
  • Golden Era of Rock Star Traders Concludes. Over the past four decades no one has made more of a spectacle of risk than George Soros, whose Quantum fund famously bet $10 billion that the Bank of England would be forced to devalue the pound. Soros earned $1 billion on that trade and incalculable legend points. Now, Soros is going to stop risking other people’s money. By the end of this year, his Soros Fund Management LLC will have no outside customers for the first time in 42 years. The shift concludes a process that began in 2000, when Soros stopped accepting new investments, Bloomberg Businessweek reports in its Aug. 1 issue. Four years later he turned management of the company over to his sons Robert and Jonathan. On July 26, after months of debate, the three men decided to return the less than $1 billion of outsiders’ money Quantum still oversees and convert the firm into a family office to manage almost $25 billion for George, his family, and foundations. There’s a two-word explanation for closing what was once one of the world’s biggest hedge funds and consistently one of the best-performing --- with returns of about 30 percent annually in its first 30 years: Dodd-Frank. The law requires hedge funds to register with the Securities and Exchange Commission and provide information about customers, employees and assets. By returning outsiders’ money, Soros Fund Management escapes that rule and the loss of privacy that goes with it.
  • Libya Rebel Military Chief Younis, Qaddafi Defector, Is Killed, Jalil Says. Libyan rebel military chief Abdel Fattah Younis was shot and killed yesterday along with two of his aides, rebel president Mustafa Abdel Jalil said. Speaking in the rebel stronghold of Benghazi, Jalil told reporters in a televised news conference that a suspect had been arrested and an investigation is under way. He provided few details in a statement that left unclear whether the killings were the work of the Qaddafi regime or the result of a rift among the rebels. Earlier yesterday, rebel security had arrested Younis and two of his aides and brought them back from the front lines to Benghazi to be questioned about suspicions his family still had ties to Libyan leader Muammar Qaddafi, the Associated Press reported. Younis and his two aides, both colonels, were shot before they arrived for questioning, Jalil said, according to AP. Younis, Qaddafi’s former security minister, defected to the rebels in February and was leading the rebels’ military efforts.
  • Black Swan Crash Draws China Growth Questions: William Pesek. Here are five things Saturday’s tragedy says about China:
  • Perth's Falling Home Prices Outpace Australia. Property prices in Perth, the center of Australia’s mining boom, may fall further this year after slumping the most out of any state capital in the past 12 months, an Australian Property Monitors economist said. Perth home prices fell 5.8 percent in the 12 months to June to a median A$535,617 ($588,750), compared with the 2.4 percent national decline to A$546,121, Wilson said in a report yesterday. The city’s home prices fell 1.5 percent in the three months to June, compared with the national average of a 0.6 percent decline. Unit prices in the city have fallen 6.1 percent in the past 12 months. Perth property prices have stalled after doubling between 2004 and 2007 even as the economy booms on the back of the resource-rich Pilbara region.
  • Japan Industrial Output Rose Less Than Expected. Japan’s industrial production rose less than expected as companies from Nissan Motor Co. to Toyota Motor Corp. warned that a yen close to a post World War II high threatens to drag down exports. Factory output increased 3.9 percent in June from May, when it rose 6.2 percent, the biggest gain since 1953, the Trade Ministry said in Tokyo today. The median estimate of 31 economists surveyed by Bloomberg News was for a 4.5 percent gain.
  • Groupon May Cause 'Digestive Problems' at SEC, Ex-Official Says. Groupon Inc.’s approach to accounting may be “causing digestive problems” with the U.S. Securities and Exchange Commission, possibly delaying the initial public offering by one month, said Richard Sauer, a former official at the government agency. “It does sound like it’s getting some resistance and it sounds like it’s because of the pro forma number that the company is pushing so hard,” Sauer, who served as assistant director at the SEC from 1990 to 2003, said yesterday in a televised interview with “Bloomberg West.”
  • Debt Plan 'Triggers' Have History of Failure. As they struggle to reach an agreement over how to extend the nation’s debt limit and trim budget deficits, Republicans and Democrats are turning to an enforcement tool, called a “trigger,” with a history of failure.
Wall Street Journal:
  • Starbucks(SBUX) Beats Expectations, Raises Outlook. Starbucks raised its fiscal year forecast above analysts' estimates as customers visited stores more often and shook off price increases in the latest quarter.
  • Investors Lift Equities, Shun Euro Zone. Investors raised their exposure to equities for the second month in a row in July, taking on some risk in their portfolios despite worries about both euro zone and U.S. debt stability, Reuters polls showed on Thursday. They also showed, however, that appetite for equities in the euro zone fell to levels not seen for at least a year, with Britain and Asia being the main beneficiaries. Surveys of 57 leading investment firms in the United States, Europe excluding the UK, Japan and Britain showed an average balanced portfolio holding 52.1 percent in stocks, up from 51.5 percent in June.
Business Insider:
Zero Hedge: IBD:
Washington Post:
  • The Great Divide by Charles Krauthammer. Obama faces two massive problems — jobs and debt. They’re both the result of his spectacularly failed Keynesian gamble: massive spending that left us a stagnant economy with high and chronic unemployment — and a staggering debt burden. Obama is desperate to share ownership of this failure. Economic dislocation from a debt-ceiling crisis nicely serves that purpose — if the Republicans play along. The perfect out: Those crazy Tea Partyers ruined the recovery!
House Energy & Commerce Committee:
  • Lawmakers Introduce Bipartisan Legislation to Prevent U.S. Cement Plant Shutdowns and Job Losses. To protect thousands of American jobs and preserve domestic cement manufacturing, bipartisan members of the U.S. House of Representatives today introduced H.R. 2681, the Cement Sector Regulatory Relief Act of 2011. The proposal directs EPA to develop achievable and workable standards for the nation’s cement manufacturing facilities, replacing a series of complex rules affecting the sector that are projected to impose significant costs, and force plant shutdowns and job losses.
The Blaze:
  • Senator Shelby Says Soros Hypocrite for Reforms Dodge. Prominent Republican Senator Richard Shelby accused billionaire investor George Soros of hypocrisy on Wednesday for evading new hedge fund regulations he once publicly backed. Soros recently said he would return money to outsider investors and only manage his own family's funds to escape the Securities and Exchange Commission's new hedge fund adviser registration rules. "It appears that Mr. Soros talked up financial reform only to sell it short," Shelby told Reuters in a statement. "Don't be surprised to see his fellow Wall Street financiers follow suit. They'll use their political clout and legal muscle to sidestep Dodd-Frank, while their smaller competitors and businesses take the hit." The exemption allows family offices not only to avoid the registration requirements, but also to dodge a greater disclosure burden that requires big fund managers to turn over confidential data to help the SEC police systemic risk. Soros has been a staunch Democratic Party supporter who was among the earliest big-name supporters of President Barack Obama's presidential bid. Shelby's statement on Wednesday referred specifically to testimony Soros provided to Congress in November 2008 in which he said: "The entire regulatory framework needs to be reconsidered, and hedge funds need to be regulated within that framework." When pressed for details by lawmakers, Soros said he believed some hedge funds pose systemic risk and should be required to report additional information to regulators.
  • Samsung Profit Outlook Weakens on Chips, Mobiles Strong. Samsung Electronics Co is relying on the smartphone market to boost group profits after its flat screen unit reported a second quarter of losses and the mainstay chip business struggled. The South Korean technology conglomerate joins a host of global companies in warning that fragile consumer demand is hurting sales of TVs, flat screens, computers and semiconductors.
  • Nintendo Shares Dive on Crumbling Profit Outlook. Nintendo Co Ltd's shares plunged on Friday, wiping off as much as $5 billion of the videogame maker's market value, after it slashed its full-year profit forecast to the lowest level in 27 years.
  • Vistaprint(VPRT) Sees F12 Below Estimates, Shares Fall. Vistaprint NV forecast 2012 profit below market expectations citing higher investment expenses, sending the online design company's shares down about 30 percent in after-market trade.
  • Cerner(CERN) Q2 Profit Beats on Record Bookings. Health information technology company Cerner Corp posted a second-quarter profit that narrowly beat expectations, helped by strong bookings, and raised its full-year outlook.
  • Global Slump Warnings if US Triggers 'Insane' Default. (US CDS Graph) A chorus of global banks has warned that Washington risks triggering a global slump and may suffer permanent loss of credibility by flirting with default on America's $14.3 trillion (£8.8 trillion) federal debt. "Default would be an act of collective insanity," said Willem Buiter, Cititgroup's chief economist. "Even if a default were cured promptly, it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency. There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit, and funding markets in the US and the world as a whole would likely suffer and a global recession would likely result, centred in the US, but not restricted to it." Mr Buiter said brinkmanship on the US debt ceiling had reached a point where tail risk had "morphed" into a serious possibility, with a 5pc likelihood that Washington will pull the trigger on a technical default.
  • China's Economic Miracle May Be About To Come Off The Rails by Jeremy Warner.
  • China Banking Regulatory Commission Chairman Liu Minkang said banks can take a 30% to 50% decline in property prices, according to a report on the website.
21st Century Business Herald:
  • China's railway ministry plans to withdraw from regional rail investments partly because of heavy debt, citing three people familiar with the situation. The ministry had a debt-to-equity ratio of 58.24 percent as of the first quarter of the year, compared with 46% in 2008. Tight credit and the removal of preferential interest rate loans may also cause the ministry to pull out of investments.
China Daily:
  • Adidas, Nike and Louis Vuitton were the biggest victims of trademark infringement among foreign brands in China based on a crackdown on intellectual property violations from October to mid-June, China Daily cited Fu Shuangjian, deputy director of the China's State Administration for Industry and Commerce, as saying. Trademark infringement at home and abroad has continued unabated after the nation's largest crackdown on intellectual property violations, citing the administration.
Evening Recommendations
  • Reiterated Buy on (IM), target $24.
  • Reiterated Outperform on (POT), raised estimates, boosted target to $74.
Night Trading
  • Asian equity indices are -1.0% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 116.50 -1.5 basis points.
  • Asia Pacific Sovereign CDS Index 117.50 -.5 basis point.
  • S&P 500 futures -.56%.
  • NASDAQ 100 futures -.45%.
Morning Preview Links

Earnings of Note
  • (AMGN)/1.28
  • (NEM)/1.00
  • (MRK)/.95
  • (WY)/.08
  • (ACI)/.58
  • (AB)/.40
  • (B)/.36
  • (NWL)/.42
  • (ITT)/1.16
  • (HMSY)/.40
  • (AXL)/.44
  • (CVH)/.76
  • (PPC)/-.21
Economic Releases
8:30 am EST
  • Advance 2Q GDP is estimated to rise +1.8% versus a +1.9% gain in 1Q.
  • Advance 2Q Personal Consumption is estimated to rise +.8% versus a +2.2% gain in 1Q.
  • Advance 2Q GDP Price Index is estimated to rise +2.0% versus a +2.0% gain in 1Q.
  • Advance 2Q Core PCE is estimated to rise +2.3% versus a +1.6% gain in 1Q.
  • The 2Q Employment Cost Index is estimated to rise +.5% versus a +.6% gain in 1Q.
9:45 am EST
  • The Chicago Purchasing Manager for July is estimated to fall to 60.0 versus 61.1 in June.
9:55 am EST
  • Final Univ. of Mich. Consumer Confidence for July is estimated to rise to 64.0 versus 63.8 in June.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, NAPM-Milwaukee report and the (CA) investor day could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and industrial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

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