Monday, July 11, 2011

Monday Watch

Weekend Headlines


  • Euro Drops as European Leaders to Meet Amid Contagion Concerns. The euro fell to a two-week low against the dollar and yen after a meeting of the chiefs of the European Union and European Commission was enlarged amid concern Italy may be engulfed in the region’s sovereign debt crisis. The meeting today will now include European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean- Claude Juncker and European Economic Commissioner Olli Rehn, ahead of a monthly gathering of euro-area finance ministers, according to the European Union President’s office. “Italy is a very large economy, and if indeed we do see contagion spread toward Italy, then the ECB, EU and IMF will need to come up with a totally different plan to deal with it,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. News of the meeting has “got the market off to a nervous and risk-off start and we’re seeing the euro decline.” The 17-nation euro fell 0.4 percent to $1.4208 as of 8:09 a.m. in Tokyo from $1.4265 on July 8, after earlier touching $1.4198, the lowest level since June 27.
  • Italy Moves to Curb Short Selling After Contagion Concerns Slam Markets. Italy’s financial-market regulator moved to curb short selling after the country’s benchmark stock index fell the most in almost five months and bonds tumbled on investor concern Italy would be the next victim of the region’s debt crisis. The regulator known as Consob ordered last night that short sellers must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make additional filings for each additional 0.1 percent. The measure takes effect today and lasts until Sept. 9. Consob’s commissioners held the emergency meeting yesterday after the country’s benchmark FTSE MIB index (FTSEMIB) plunged 3.5 percent on July 8, led by a decline in UniCredit SpA (UCG) and other bank shares that are the among the largest holders of the country’s debt. The yield on Italy’s 10-year bond rose to a nine-year high of 5.27 percent, driving the premium investors demand to hold the country’s debt over German bunds to a euro-era high of 244 basis points. UniCredit, the country’s largest bank, plunged 7.9 percent and Banca Intesa SpA, the second-biggest lender, dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.
  • China Inflation Surging Past 6% Leaves Wen With 'Delicate' Balancing Act. China’s inflation accelerated to the fastest pace in three years, highlighting the challenge for policy makers of sustaining growth while taming prices. The consumer price index increased 6.4 percent in June, the National Bureau of Statistics said yesterday, exceeding the 6.2 percent median estimate of economists surveyed by Bloomberg News. The world’s second-biggest economy is already cooling after the government curbed lending by boosting lenders’ reserve requirements to a record and raising interest rates five times since September, most recently on July 6. A deeper-than- anticipated slowdown in China would curtail a global expansion imperiled by a potential default by Greece and signs the U.S. recovery is faltering. China “is in a delicate position right now,” said David Cohen, a Singapore-based economist for Action Economics Ltd. who previously worked at the U.S. Federal Reserve. The government “wants to remain vigilant on inflation, but they don’t want to slam on the brakes too hard,” Cohen said. Inflation was mainly driven by a 14 percent gain in food costs and also pushed up by an unfavorable base for comparison a year earlier. Pork, a Chinese staple, rose 57 percent. Producer prices rose 7.1 percent in June from a year earlier, the statistics bureau said yesterday, compared with 6.8 percent in May and the 6.9 percent median estimate in a Bloomberg News survey. Consumer-price inflation compared with 5.5 percent in May. Non-food consumer prices climbed 3 percent, the biggest gain since at least 2005, yesterday’s report showed. Housing- related costs rose 6.2 percent. “China’s inflation pressures remain strong,” said Liu Li- Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank is likely to raise interest rates again by the end of September, as “very high” producer-price inflation “implies that China’s inflation is unlikely to peak this month,” he said.
  • PBOC Adviser Says China Needs Prudent Policy, Securities Reports. Chinese central bank adviser Xia Bin said the nation needs to maintain prudent monetary policy during the next several years, the China Securities Journal reported. The central bank should continue using open market operations and reserve requirement ratio increases to drain "unreasonable" additional cash from the economy, citing Xia. China should also keep the yuan's exchange rate flexible to some extent and gradually push real interest rates toward positive territory, Xia said. The country should introduce taxes on capital inflows and also institute reserve requirements for capital inflows, for which there are no interest payments, to deter "hot money," Xia said.
  • ECB Seeks Expansion of Euro-Rescue Fund to Help Italy, Welt Says. The European Central Bank is seeking to have the euro-rescue fund expanded to include help for Italy, Die Welt reported, citing unidentified “high ranking” people at central banks. The fund may have to be doubled to 1.5 trillion euros ($2.14 trillion) to cover a crisis in Italy, the ECB said according to the German newspaper. Central banks are no longer ready to buy government debt, so the rescue fund should take on that task instead, according to the bankers, Die Welt said preview of an article for tomorrow's edition.
  • Gillard Sets A$23 Carbon Tax to Reduce Australia’s Fossil Fuel Dependence. Prime Minister Julia Gillard unveiled Australia’s first tax on greenhouse gas emissions from July 2012 to reduce dependence on fossil fuels and encourage renewable energy in the world’s biggest-coal exporting country. Australia expects to raise some A$27.8 billion ($30 billion) in three years by making polluters pay an initial charge of A$23 ($24.74) a ton of carbon dioxide, then lifting the price by 2.5 percent a year, plus inflation, Gillard said today in Canberra. The tax will switch to a cap-and-trade system in 2015, while the plan provides about A$47 billion through 2020 to help households and industries and spur renewable energy. Gillard, Australia’s least popular prime minister for 13 years, wants to cut emissions in the developed world’s biggest per-capita polluter to at least 5 percent below 2000 levels by 2020. She already has support from the Greens party and the three independent lawmakers needed to pass the program after plans to price carbon and tax profits of miners cost her predecessor, Kevin Rudd, his job.
  • Iron Ore Imports by China Decline as Monsoon Rains in India Slow Shipments. China, the world’s biggest buyer of iron ore, cut purchases by 4 percent in June from the previous month as India’s wet season curbed shipments and as Chinese mills sought supplies from domestic mines. Imports were 51.09 million metric tons last month compared with 53.3 million tons in May, according to China’s General Administration of Customs. That’s 8 percent higher than 47.2 million tons a year earlier, according to data compiled by Bloomberg.
  • Investors Cut Bullish Agriculture Bets to One-Year Low on Supply Outlook. Funds trimmed bets on rising agriculture prices for a third straight week, sending holdings to the lowest in a year as supply concerns eased. Speculators reduced their net-long position in 11 U.S. farm goods by 6.6 percent to 564,174 futures and options contracts in the week ended July 5, government data compiled by Bloomberg show. That’s the lowest since July 6, 2010. Investors more than doubled their net-short bets for wheat. Corn holdings slumped 16 percent.
  • Qaddafi Threatens Europe, Vows Regime Won't Fall. Libyan leader Muammar Qaddafi said his regime won’t fall and threatened to retaliate against Europe for its involvement in attempts to overthrow him. “Libyans will advance toward Europe willing to commit suicide, for we will go to heaven and they will go to hell,” Qaddafi said, according to a recording of his speech that was aired yesterday on Al Arabiya television. “Tens, hundreds or thousands of Libyans might die in Europe. We will raid their houses, women and children, like they raided us, and I told you an eye for an eye, a tooth for a tooth,” Qaddafi said. “We are threatening them now.”
  • Big Companies 'A Bit Wary' on Technology Spending, HP Chief Says. Large corporations are exercising caution about large-scale information technology spending amid concerns about global economic growth and fiscal uncertainty, Hewlett-Packard Co. (HPQ) Chief Executive Officer Leo Apotheker said. While technology upgrades are under way at many companies, “everybody’s a bit cautious in an environment like this,” Apotheker said today on the sidelines of the Rencontres Economiques conference in Aix-en-Provence, France. “People are still a bit wary.”
  • Kiplinger Warns Customers Hackers Got Account, Credit Card Information. Kiplinger Washington Editors Inc., the publisher of Kiplinger’s Personal Finance, warned customers that hackers breached its computer network at least as early as June 25 and stole account data, including credit card numbers. Doug Harbrecht, the company’s director of new media, said the attackers stole user names, passwords and encrypted credit card numbers from as many as 142,000 subscribers to the magazine or the company’s various newsletters, including the Kiplinger Letter.
  • Asia Doubles Silicon Factories, Pursues Gain Through Glut as Prices Dive. Asia’s largest makers of silicon for solar panels are almost doubling their factory size this year just as surplus production sends prices tumbling for the main raw material for the $35 billion industry. Korea’s OCI Co. and GCL-Poly Energy Holdings Ltd. (3800) of China said they’ll increase capacity to a combined 88,000 metric tons a year from 48,000 tons. Global demand for the material, known as polysilicon, is growing at less than a third of that rate, and spot prices fell 32 percent in the second quarter, Bloomberg New Energy Finance estimated. Asians are deploying equipment to refine silicon crystals more quickly than Western competitors. They anticipate gaining share from the world’s largest suppliers, Hemlock Semiconductor Corp. of the U.S. and Germany’s Wacker Chemie AG (WCH), as customers increasingly demand lower prices for the key material used in panels to convert sunlight into electricity.
  • Best Currency Forecasters Say Dollar Slump Over as Index Tumbles. The best currency forecasters say that the dollar’s 13 percent slide over the past year is coming to an end as Europe’s deepening debt crisis discourages bets against the world’s reserve currency.
  • Fed on Hold Longest Since 1940s as Curve Shows Slower Growth. The Federal Reserve may keep interest rates at record lows for the longest period since World War II as the economic slowdown that sparked a four-month bond rally worsens, according to Treasury market signals. The 3 percentage point gap between yields for three-month and 10-year Treasuries indicates the economy may grow 1.1 percent in the 12 months ending June 2012, a study by the Federal Reserve Bank of Cleveland says. That’s less than half the central bank’s current forecast, and may delay any rate increase from the zero-to-25 basis point range held since December 2008.
  • China Three-Year Local Government Debt Fails. China’s finance ministry failed to sell all of the three-year debt offered at an auction on behalf of local governments as a cash crunch curbed demand. The ministry sold 23.9 billion yuan ($3.7 billion) of bonds at a yield of 3.93 percent on behalf of 11 provinces and municipalities, falling short of its 25 billion yuan target, said a trader at a finance company required to bid at the auction. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans, was fixed at 6.24 percent today, near a record high of 6.46 percent reached on June 28. “While the interbank borrowing cost is so high, investors won’t spend money on local government debt,” said Huang Yanhong, a bond analyst at Bank of Nanjing Co. in Nanjing. “Demand is low also because the debt’s secondary-market trading isn’t active. After you buy it, you can only hold it till maturity.”
Wall Street Journal:
  • Deficit Negotiators Hit Reset. President Barack Obama and Republican leaders in Congress clashed Sunday over the scope of an effort to cut the federal deficit, one that could be shorn of its most ambitious elements, including revamping the tax code and significantly reducing growth in benefit programs.
  • Little Hiring Seen by Small Businesses. The U.S. labor market could stay sluggish for a while, with small-business executives reluctant to hire amid the murky economic outlook. Almost two-thirds—64%—of small-business executives surveyed said they weren't expecting to add to their payrolls in the next year and another 12% planned to cut jobs, according to a U.S. Chamber of Commerce report to be released Monday. Just 19% said they would expand their work forces. This comes after a Labor Department report Friday showed employers added few jobs in June, and unemployment rose to 9.2%.
  • A Falling Dollar Pushes Exports, Draws Risks. Since hitting a peak in February 2002, the dollar is down about 28%, according to an inflation-adjusted index from the Federal Reserve based on the values of a wide variety of other currencies. Aside from making U.S. products cheaper for foreigners, a weaker dollar raises the cost of imported items Americans want or need. Worse, if the dollar falls too far or too fast, foreign investors and creditors will lose confidence in the U.S. economy. "We shouldn't think that driving the dollar to the bottom of the sea is the answer to all our problems," said Robert Dye, a senior economist at PNC Financial Services Group Inc.
  • Monsanto(MON), Sinochem in Deal Talks. Chemicals conglomerate Sinochem Corp. is in advanced discussions with Monsanto Co. to deepen their ties significantly, people familiar with the discussions said, an important sign of China's growing appetite for U.S. crops and biotechnology. The two companies have been in talks for months, the people said. It was unclear what form an agreement might take, though arrangements could include a large joint venture, the sale of a minority stake or Sinochem assuming a larger role marketing Monsanto products in China.
  • Taxes Upon Taxes Upon... Obama wants $1 trillion in taxes on top of what he's already signed.
NY Times:
  • U.S. Is Deferring Millions in Pakistani Military Aid. The Obama administration is suspending and, in some cases, canceling hundreds of millions of dollars of aid to the Pakistani military, in a move to chasten Pakistan for expelling American military trainers and to press its army to fight militants more effectively. Coupled with a statement from the top American military officer last week linking Pakistan’s military spy agency to the recent murder of a Pakistani journalist, the halting or withdrawal of military equipment and other aid to Pakistan illustrates the depth of the debate inside the Obama administration over how to change the behavior of one of its key counterterrorism partners. Altogether, about $800 million in military aid and equipment, or over one-third of the more than $2 billion in annual American security assistance to Pakistan, could be affected, three senior United States officials said.
  • Summer Camps Make Shift to Build Competitive Skills.
  • Shelia Bair's Bank Shot. ‘They should have let Bear Stearns fail,” Sheila Bair said. It was midmorning on a crisp June day, and Bair, the 57-year-old outgoing chairwoman of the Federal Deposit Insurance Corporation — the federal agency that insures bank deposits and winds down failing banks — was sitting on a couch, sipping a Starbucks latte. We were in the first hour of several lengthy on-the-record interviews. She seemed ever-so-slightly nervous. Long viewed as a bureaucratic backwater, the F.D.I.C. has had a tumultuous five years while being transformed under Bair’s stewardship.
Business Insider:
Zero Hedge:
Boston Herald:
  • Fukushima Government Eyes Drastic Measure on Cattle After Cesium Scare. As excessive levels of radioactive cesium have been detected in beef cattle shipped from near the Fukushima No. 1 nuclear power plant, the Fukushima prefectural government is considering asking livestock farmers to voluntarily stop shipping cows, officials said Saturday. The request would apply to cattle in areas that have been designated as "emergency evacuation preparation zones," which lie mostly between 12.42 and 18.64 miles from the nuclear plant.
Washington Post:
  • Short-Termism and the Risk of Another Financial Crisis. The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help.
  • Many Concerned About Impact of Proposed New Rule to Boost Mortgage Down Payments to 20%. When legislators passed the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year, they intended sweeping reform of the financial system, including unscrupulous mortgage practices responsible for the subprime meltdown. Many say they did not, however, have any intention of requiring 20 percent down payments on residential mortgages. Earlier this year, the regulatory agencies responsible for interpreting the Dodd-Frank mandates proposed some specific rules regarding mortgages, among them a requirement for larger down payments for the vast majority of loans. The proposal has spurred a vociferous reaction from some lawmakers, consumer organizations, lenders, real estate professionals and insurers, who say it would stifle the housing recovery and prevent a majority of buyers from obtaining loans.
  • CNBC Names Carl Quintanilla, Melissa Lee New 'Squawk on the Street' Anchors. CNBC has decided on its new anchors for the 2-hour “Squawk on the Street” morning show. The business channel is tapping several veterans to fill the seat left vacant following the death May 25th of longtime anchor Mark Haines and the departure three weeks earlier of co-anchor Erin Burnett, now at CNN. CNBC SVP Nik Deogun announced that starting tomorrow, Melissa Lee and Carl Quintanilla will co-anchor the show, with contributions from Jim Cramer, Simon Hobbs and David Faber.
Baltic Economy Watch:
  • Smoke On The East European Horizon? With so much emphasis being placed on what has been happening farther to the South, economic realities on Europe's Eastern periphery have largely been escaping the close scrutiny of media and analyst attention.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty percent (40%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).
  • EU Protectionism Blocking Bank Recapitalisation - Zhu. Protectionism in Europe is hampering the recapitalisation of the region's banks and the stabilisation of the financial sector, IMF adviser Min Zhu said on Sunday. "The key issue to stabilise the financial sector is to raise capital," Zhu told a conference in southern France. "The capital raising process in the banking sector in this region is being left behind the other countries in the world. Why? Because there is still protectionism." He cited state ownership of banks and barriers to cross-border mergers and acquisitions as two significant obstacles to recapitalisation. "If we can solve this issue, then the banking sector will be able to raise money from the private sector and raise their capital ratios," he said. IMF sources told Reuters this week that Zhu, a Chinese national who was a special adviser to former IMF Managing Director Dominique Strauss-Kahn, was expected to fill a new deputy managing director post to be created by the Fund's new chief, Christine Lagarde.
Financial Times:
  • Europe May Accept Greek Bond Defaults in Bailout Plan. European leaders are prepared to accept that Greece should default on some of its bonds as part of a new bailout plan for the country that would put its total debt levels on a sustainable footing, citing unnamed senior officials. The new plan, to be discussed at a meeting of euro area finance ministers tomorrow, could also include new concessions by European lenders to reduce Greece's debt, including further lowering interest rates on bailout loans and a broad-based bond buyback program, the FT said.
  • US Retail Industry Embraces Alternative Strategies.
  • Hedge Fund Industry Faces Shake-Up. By 2013, a volley of regulatory missiles will descend on hedge funds, imposing considerable constraints on a once-unconstrained industry. The impact of Dodd-Frank, the Alternative Investment Fund Managers Directive , the Foreign Account Tax Compliance Act and others could see some smaller funds squeezed out. Funds of any size operating at marginal levels of profitability are also at risk. In addition, there is also a possibility that part of the industry currently domiciled in Europe and the US could migrate to Asia.
  • US Hedge Funds Bet Against Italian Bonds. US hedge funds are placing large bets against the value of Italian government debt, directly shorting the bonds of the eurozone’s third-largest economy. The funds have increased the size of short positions in the last month, speculating that investor concerns over the country’s ability to fund itself may spread from Europe’s periphery to Italy, according to investors in the funds briefed on the strategy.
  • US Banks Set for Lackluster Reporting Season. Tepid trading activity, low interest rates and mounting legal costs have all weighed on the profitability of US banks such as JPMorgan Chase and Bank of America, leaving investors in search of fresh signs of optimism as the big banks’ quarterly reporting season kicks off on Thursday.
Sunday Times:
  • The U.K.'s economy may have shrunk by as much as .2% over the past three months, citing estimates by Citigroup Inc. and Scotia Capital.
Corriere della Sera:
  • Italian Finance Minister Giulio Tremonti said a political attacks leading to his resignation may damage both Italian bonds and the euro, citing an interview. Such an attack may "bring the euro down," citing Tremonti.
El Economista:
  • Regulation and supervision of bond rating companies is an "urgent" priority because of the "distortion" they create, Francisco Luzon, head of Banco Santander SA's Latin American business, was quoted as saying. Spain needs to complete its overhaul of the financial system and address regional financing and collective-wage bargaining to reduce borrowing costs, he said.
  • China may halt banks from packaging loan-based assets, including trust and entrusted loans, in their wealth management products, citing an internal meeting by the China Banking Regulatory Commission.
Financial News:
  • It is "difficult" to loosen monetary policy now as asset price bubbles including real estate and investment products are still "relatively serious," the Financial News newspaper reported today on its front page.
  • China should cut public infrastructure investments as many projects yield low returns and fuel cost increases, citing Liu Yuhui, a researcher with the Chinese Academy of Social Sciences.
People's Daily:
  • China's consumer prices will increase at a more than 5% pace in the third quarter, citing Ba Shusong, a researcher at the State Council's Development Research Center. Recently high levels of inflation don't mean that government polices to rein in prices are yet to take effect, Ba said. There is still the possibility of raising the reserve requirement ratio one or two more time in the second half, Ba said.
  • Chinese local government officials may face monetary penalties for allowing "excessive" debt in their administration, citing Yuan Shuhong, deputy director of the State Council's Legislative Affairs Office.
  • China Oil Imports Fall to Eight-Month Low. Beijing: China's net imports of crude oil fell to an eight-month low in June amid refinery maintenance and slowing energy demand in the fastest-growing major economy. Net imports last month fell 10 per cent from a month earlier and 12 per cent from a year earlier to 19.43 million metric tonnes, or about 4.7 million barrels a day, according to Bloomberg calculations based on data released Sunday by the General Administration of Customs. That's the lowest since October, the data show, as the nation imported 19.7 million tonnes and exported 270,000 tons of crude.
Weekend Recommendations
  • Made positive comments on (RUTH) and (ELY).
  • Made negative comments on (SYT).
Night Trading
  • Asian indices are -1.25% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 115.0 +3.5 basis points.
  • Asia Pacific Sovereign CDS Index 118.0 +1.5 basis points.
  • S&P 500 futures -.58%.
  • NASDAQ 100 futures -.61%.
Morning Preview Links

Earnings of Note
  • (AA)/.32
  • (NVLS)/.76
Economic Releases
  • None of note
Upcoming Splits
  • (LULU) 2-for-1
  • (OKS) 2-for-1
  • (TGI) 2-for-1
Other Potential Market Movers
  • The 3-Month/6-Month Treasury Bill Auctions could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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