Monday, July 18, 2011

Monday Watch

Posted by Gary .....at 1:03 AM

Weekend Headlines
Bloomberg:
  • EU Summit Looms to Snap Debt Crisis Deadlock as Contagion Threat Persists. European leaders will this week seek to revamp their debt crisis-fighting strategy and snap a deadlock that is spooking investors and prompting warnings of contagion from the International Monetary Fund. With European Central Bank President Jean-Claude Trichet reiterating opposition to any Greek debt restructuring, government chiefs convene July 21 in Brussels to discuss “the financial stability of the euro area as a whole and the future financing of the Greek program,” European Union President Herman van Rompuy said in a July 15 statement. Among topics for the talks is a potential overhaul of the 440-billion euro ($623 billion) rescue fund to enable Greece to better pay its bills. The second summit in a month follows an intensification of the debt crisis that thrust Italy to the attention of investors and pushed bond yields to euro-area records across Europe’s most debt-laden nations. Delay in finding a solution combined with discord among policy makers on whether bondholders should share the burden if Greece defaults has unnerved financial markets. “This crisis has clearly taken on more systemic risk,” said Laurent Bilke, head of inflation strategy at Nomura International Plc in London and a former European Central Bank economist. “It’s crucial at the current juncture for policy makers to get the right things done.”
  • EU: Stress Tests Fail to Convince Analysts. European banks may have to raise as much as 80 billion euros ($113 billion) of additional capital as the stress tests failed to allay investor concern about a Greek default and governments’ ability to bail out their lenders. The eight out of the 90 banks that failed the July 15 tests had only a combined capital shortfall of 2.5 billion euros, the European Banking Authority said July 15. As many as 20 banks need to bolster capital, JPMorgan Cazenove analysts led by Kian Abouhossein wrote in a report after the results were published. Regulators didn’t include a Greek default in the tests even though credit default swaps indicate investors see an almost 90 percent chance of one. The EBA included a 25 percent writedown on 10-year Greek government bonds held in banks’ trading books even as the securities trade at about 51 cents on the euro. The exams won’t succeed in reassuring investors until governments put in place a mechanism to stop failing banks weighing on public funds, said Gary Greenwood, an analyst at Shore Capital. “The EBA are stress-testing the wrong thing,” said Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London in a telephone interview. “They need to be testing the ability of the euro zone to support its banks. It’s firstly a question of the ability of the sovereign to bail out the banks, and then who is going to bail out the sovereign.”
  • Italian, Spanish, Irish, Portuguese Bonds Decline as Debt Crisis Spreads. Italian two-year note yields surged the most in over a year, as the nation’s borrowing costs rose at a debt sale and contagion from Greece’s debt crisis spread across the 17-nation euro region. Yields on notes from Ireland, Portugal and Greece soared to euro-era records, while German bunds advanced for the fifth time in six weeks as Europe’s politicians clashed over how to craft a new rescue plan for Greece involving private bondholders. Spanish and Italian 10-year bonds slumped, sending yields to the most since the euro’s inception in 1999, as borrowing costs rose to a three-year high at a sale of five-year Italian securities. France, Spain and Germany plan to sell debt next week. “The market isn’t looking at fundamentals, it is just worried about contagion,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “There’s been growing infection across most of the euro-region issuers and it’s hard to see what the catalyst is going to be to get confidence back into the markets with all the issuance next week.” Italy’s two-year yield climbed 75 basis points over the week to 4.26 percent as of 4:40 p.m. in London yesterday. That’s the biggest weekly increase since the five trading days ending May 7, 2010, the week before Europe’s leaders announced a $1 trillion backstop for the euro. Yields on 10-year notes advanced 48 basis points to 5.75 percent. They reached 6.02 percent on July 12, the most since 1997. Ireland’s two-year bonds plunged after Moody’s Investors Service cut the nation to Ba1 from Baa3 on June 12, saying it is likely to need a second bailout. The country’s two-year yields climbed 6.9 percentage points to a record 23.12 percent, while its 10-year bond yields advanced 1.13 percentage points. Greek 10-year yields climbed 71 basis points over the week, while the nation’s two-year bond yields soared 2.69 percentage points. Spain’s 10-year bonds dropped, pushing the yield up 39 basis points to 6.06 percent. Spanish debt may continue to fall next week as the nation prepares to auction 5.5 percent securities maturing in 2021 and 2026 on July 21. It will also sell 12- and 18-month bills on July 19.
  • ECB's Liikanen Says Indebted Nations Must Balance Budgets to Avert Crisis. Developed nations with unsustainable debt must balance their budgets to prevent the outbreak of a new financial crisis, European Central Bank Governing Council member Erkki Liikanen said. “Government debt is a problem for all developed countries,” Liikanen, who began his second term as governor of the Bank of Finland this week, said at a seminar in Kokkola, western Finland, today. “We must stop it from coming to a head, to prevent the financial crisis starting again. All countries need a credible program to balance public finances to help stabilize the situation gradually.” Investors are concerned that indebted developed countries can no longer drive economic growth by boosting public spending, Liikanen said. The only choice for nations with unsustainable debt burdens is to balance their budgets, he added. “The crisis cannot be resolved in an economically or morally sustainable way without the participation of all those involved,” Finnish Finance Minister Jutta Urpilainen said at the seminar today. “Making taxpayers liable for debts that they haven’t decided to take is causing the formation of a new crisis.”
  • Obama to Eliminate Warren as Consumer Head. President Barack Obama has chosen a candidate other than Elizabeth Warren as director of the new Consumer Financial Protection Bureau, according to a person briefed on the matter. The president’s choice is a person who already works at the consumer agency, the person said yesterday. Obama may make the nomination as soon as next week, another person briefed on the administration’s plans said.
  • Obama's 2012 Campaign Fundraiser List Shows Large Donations Play Major Role. President Barack Obama’s 2012 re- election campaign has stressed the importance of relatively small donations from hundreds of thousands of people. The list of fundraisers it voluntarily released yesterday underscores the significance of those who write checks for up to $35,800. The campaign released a list of 244 individuals and couples who have raised $50,000 or more so far for Obama’s re-election bid, showcasing his support from Wall Street to Hollywood. The group can account for at least $34.95 million of the more than $86 million raised through June 30. The so-called bundlers, people who solicit campaign contributions from their personal networks and communities, include Jon Corzine, a former Goldman Sachs Group Inc. chief executive officer and New Jersey governor; Hollywood producer Jeffrey Katzenberg; Blair Effron, co-founder of investment bank Centerview Partners; and Vogue magazine editor Anna Wintour. Also on the list are Ari Emanuel, the brother of Chicago’s Mayor Rahm Emanuel and a Hollywood talent agent; Comcast Corp. (CMCSA) executive David Cohen; and Orin Kramer of Boston Provident Partners LP. Obama’s list of fundraisers includes 27 individuals and couples who have already brought in $500,000 or more for the campaign, or a joint committee with the DNC that is designed to boost his re-election efforts. In Chicago, Obama’s hometown and the location of his re- election headquarters, fundraisers include Les Coney, an executive vice president at Chicago-based Mesirow Financial; John Rogers, chairman of Chicago-based Ariel Investments LLC; Chicago billionaire Neil Bluhm, managing principal of Chicago- based Walton Street Capital LLC and chairman of a new casino operation opening this month in suburban Chicago; entrepreneur and philanthropist Fred Eychaner, who supported Hillary Clinton in 2008 and is one of the nation’s top Democratic donors; and Penny Pritzker, who led Obama’s 2008 fundraising efforts. By the end of his last campaign, about 560 people had raised at least $50,000 for Obama, according to a list kept by the Washington-based Center for Responsive Politics. In the 2008 campaign, California was home to the largest number of Obama bundlers, according to data from the Center for Responsive Politics. There were 97 from California, 86 from Illinois and 82 from New York. An Upper West Side zip code in Manhattan, 10024, was Obama’s top overall fundraising zip code in 2008, accounting for $2.8 million, followed by the $2.5 million from Chicago’s 60614 zip code, which includes the city’s Lincoln Park neighborhood on the north side, according to the center’s data. Obama, 49, has maintained a fundraising schedule that has included almost 30 donor events since January for his campaign, his party, or both, as he tries to balance partisanship with the presidency at a time when the nation faces 9.2 percent unemployment, a debate over the nation’s $14.3 trillion debt limit, and military action in Iraq, Afghanistan and Libya.
  • Bank Yield Spread Quadruples on Bad-Debt Risk: China Credit. The premium investors demand to hold bonds issued by Chinese banks that lend to promote official policies quadrupled in the past eight months as Moody's Investors Service said local governments may owe more than was estimated in a national audit. The gap between yields on the lenders' five-year notes and ministry of finance debt reached 83 basis points last week, the widest it's been since June 2008, according to Chinabond, the nation's biggest clearing house. The spread was 22 basis points on Nov. 11, the least in the past year. So-called policy banks, such as China Development Bank Corp., are "major providers" of loans to local government finance units, according to a central bank report.
  • Investors Boost Bullish Commodity Bets. Funds boosted bets on rising commodity prices by the most in almost a year as traders snapped up gold amid escalating debt woes in the U.S. and Europe. Speculators raised their net-long positions in 18 commodities by 15 percent to 1.09 million futures and options contracts in the week ended July 12, government data compiled by Bloomberg show. That’s the biggest gain since early August. Gold holdings surged the most since September 2009 as prices climbed to a record last week. A measure of bullish agriculture bets climbed the most in 11 months.
  • Libyan Rebels Get U.S. Recognition Without Keys to Qaddafi's Frozen Cash. Leaders of the Libyan rebels’ Transitional National Council flew to Istanbul seeking legitimacy and money. They will leave with the official recognition of the U.S. and 31 other nations. As for the cash, they will have to wait.
  • U.K. Economy to Grow Less Than Previously Forecast on Consumer, Greek Risk. Ernst & Young LLP’s Item Club will cut its U.K. economic growth forecasts for the second time this year as weak consumer spending and Europe’s sovereign-debt crisis cloud the outlook for the recovery. Gross domestic product will increase 1.4 percent in 2011, compared with an April projection of 1.8 percent, the London- based Item Club, which uses the same forecasting model as the U.K. Treasury, will say in a report to be published in London tomorrow.
  • French Socialists Harden Deficit Pledge. French Socialist Party leaders are hardening their commitment to cut the nation’s budget deficit as Europe’s sovereign-debt crisis creeps into the campaign for next year’s presidential elections. “We have to balance the public accounts without delay” and cut the deficit to 3 percent of gross domestic product by 2013, Francois Hollande, the leading contender to become the Socialist candidate for president, said in an interview with yesterday’s Le Monde newspaper. “Debt is the enemy of the left and of France.”
  • Tepco Coveres Fukushima Building as Typhoon Nears. Tokyo Electric Power Co. is rushing to install a cover over a building at its crippled Fukushima Dai-Ichi nuclear plant to shield it from wind and rain as Typhoon Ma-on approached Japan’s coast from the south. The cover will be placed over the turbine building of the No. 3 reactor “momentarily,” Hajime Motojuku, a Tepco spokesman, said yesterday. The utility also detached a hose from a barge docked near the plant that stores contaminated water, he said, without elaborating. Tepco is struggling to contain radioactive emissions after the March 11 earthquake and tsunami knocked out cooling systems and explosions damaged containment structures. The eye of Ma-on was about 600 kilometers (370 miles) east-southeast of the city of Kagoshima at 8 a.m. today, about 1,300 kilometers from the Fukushima plant, according to Japan’s Meteorological Agency. The storm was moving north at 19 kilometers per hour with winds blowing at 157 kph. Ma-on is forecast to head north and be close to the coast of the southwestern island of Kyushu after 6 a.m. tomorrow. A forecast track issued by the U.S. Navy Joint Typhoon Warning Center indicates the storm may pass over the Fukushima plant by July 21.
  • Nine Dragons, GCL-Poly May Struggle for Finance. Nine Dragons Paper Holdings Ltd. (2689), GCL-Poly Energy Holdings Ltd. (3800) and China Medical Technologies Inc. (CMED) are among some 35 Chinese companies that may find capital markets closed to them due to escalating corporate governance concerns, according to Fitch Ratings. High levels of cash and external valuations of reserves which can mask accounting issues, teamed with concentrated private ownership and independent directors who stay on boards for longer than five years are traits investors should be alert to, the ratings company said in a report released today. “International investor interest in Chinese companies driven by the search for yield is coinciding with limited access to information at key issuing entities,” said John Hatton, Asia-Pacific corporates group credit officer at Fitch. Companies with a “blemished reputation” can’t raise funds, especially if there’s an accompanying deterioration in investor sentiment. China’s reputation among investors has been strained after short sellers said companies from Longtop Financial Technologies Ltd. to Sino-Forest Corp. (TRE) were exaggerating operations. Moody’s Investors Service last week cited five Chinese companies as having more “red flags” on corporate governance than others, sending shares of West China Cement Ltd. to a record decline.
  • Syrian Troops Expand Protest Crackdown, 30 Die. Syrian troops expanded their crackdown yesterday against protesters seeking to oust President Bashar al-Assad, and more than 30 people died in a fight between pro- and anti-government activists. Tanks rolled into the central city of Homs and the town of Zabadani near the border with Lebanon, Al Arabiya television reported, citing unidentified activists. Troops opened fire at civilians in the city of Deir Ezzor, injuring 10, Al Jazeera television reported, citing activists. In Homs, a fight between civilians loyal to and opposed to the Assad regime killed more than 30 activists in the past 24 hours, said Rami Abdulrahman, head of the Syrian Observatory for Human Rights, in a telephone interview.
  • China Underreports Annual Steel Output, MEPS Says, FT Reports. China produces about 40 million metric tons of steel a year more than it reports, which may be contributing to higher iron ore prices, the Financial Times reported, citing research by U.K. steel consultancy, MEPS (International) Ltd. Chinese steel production last year was 672 million metric tons, while the Chinese government reported the country made 627 million metric tons of steel, the FT said. The higher steel output has created additional demand for iron ore, the main constituent of steel, the FT said, citing MEPS.
  • FX: Long Euro Positions at Risk of Unwinding, Citigroup Says. Citigroup's so-called PAIN index on hedge fund positioning in the euro has risen sharply in the past week, approaching the record high seen in 2009, writes Todd Elmer, head of G-10 currency strategy for Asia ex-Japan, in a note today.
  • HTC Shares Fall After ITC Ruling on Apple(AAPL) Patents. HTC Corp. (2498) shares slumped to the lowest level in six months in Taipei trading after the U.S. International Trade Commission ruling it infringed two of 10 Apple Inc. (AAPL) patents originally asserted in a case. Asia’s second-biggest maker of smartphones dropped 4.1 percent to NT$870 as of 9:43 a.m. local time.
Wall Street Journal:
  • Senate Debt Plan Promises Months of Budget Wrangling. With few signs of movement over the weekend on negotiations to raise the federal borrowing limit, Senate leaders are planning this week to unveil a back-up plan that would force more budget wrangling before the end of the year. Washington seems rudderless just two weeks before an Aug. 2 deadline for Congress to increase the $14.29 trillion borrowing authority or risk having some government bills go unpaid.
  • Get Ready for a 70% Marginal Tax Rate. Some argue the U.S. economy can bear higher pre-Reagan tax rates. But those rates applied to a much smaller fraction of taxpayers than what we're headed for without spending cuts.
Marketwatch.com:
  • Scotland Yard Chief Resigns in Hacking Probe. The widening News Corp. phone-hacking scandal produced a busy Sunday in London as the chief of the Metropolitan Police stepped down under pressure just hours after his Scotland Yard detectives began questioning the former editor of the tabloid at the center of the affair.
CNBC:
NY Times:
  • Fast Traders, In Spotlight, Battle Rules. For years they have operated in the shadows, often far from Wall Street, trading stocks at warp speed and reaping billions while criticism rose that they were damaging markets and hurting ordinary investors. Now high-frequency trading firms, normally secretive, are stepping into the light to buff their image with regulators, the public and other investors. After quietly growing to account for about 60 percent of the seven billion shares that change hands daily on United States stock markets, the firms are trying to stave off the regulators who are proposing to curb their activities.
Business Insider:
Zero Hedge:
Washington Post:
Forbes:
Washington's Blog:
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Saturday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).
Politico:
  • China Slams Dalai Lama Meeting. China on Sunday slammed President Barack Obama’s meeting with the Dalai Lama as an act that has “grossly interfered in China’s internal affairs” and damaged Chinese-American relations. The strident statement from China’s Foreign Ministry came hours after Obama met with the Tibetan spiritual leader and Nobel Peace Prize laureate, who was in Washington for an 11-day Buddhist ritual.
USA Today:
  • Automakers Will Air Ads Attacking Obama's 56.2 MPG Rule. In the new ads, an ominous voice will warn that "after tough times, today's auto industry is on the road to economic recovery," but that the proposed, much higher 56.2 mpg fuel economy requirement "threatens that progress" and will cause job losses, less choice and higher prices for vehicles -- and an "electric vehicle mandate." The effort is part of a broad national campaign that the automaker trade group hopes will rally consumers against the 56.2-mpg rule the White House has demanded.
Reuters:
Financial Times:
  • ECB and Merkel Clash Over Greece. The head of the European Central Bank placed a major obstacle on the path to a new agreement on a Greek financial bail-out, saying the bank could not accept defaulted bonds as collateral, potentially cutting off fundng from the Greek banking system.
Telegraph:
Sunday Times:
  • Singapore's growth will be affected by a slowing global economy in the coming months and "mini shocks from time to time" will hurt confidence, citing Deputy Prime Minister Tharman Shanmugaratnam.
Kathimerini:
  • Greek Prime Minister George Papandreou said Europe needs to "wake up" and take brave decisions on a second aid program, citing an interview. Papandreou said calls for elections at such a critical time were irresponsible.
Independent.ie:
  • Euro Crisis Flashes Red for Irish Companies. After the banks, who is next for a good kicking? Irish companies should start to feel worried as a rash of debt contagion is going to hammer business very hard, writes Louise McBride.
RTENews:
Focus:
  • Wolfgang Franz, head of German Chancellor Angela Merkel's council of economic advisers, said it's "unavoidable" that investors in Greek debt will have to forfeit some repayments and interest, citing an interview.
Euro am Sonntag:
  • German lenders should write down the value of Greek bonds in their first-half earnings reports, citing Klaus-Peter Feld, a member of the executive board of the Institute of Public Auditors in Germany. "Extraordinary writedowns of Greek bonds in the first half of 2011 would follow a cautious assessment," Feld said. "Current discussions are showing increasing signs that a haircut or a participation of private creditors in another form have to be expected."
Hamburger Abendblatt:
  • Thomas Straubhaar, head of the HWWI economic institute, said it is "out of the question" that a country like Greece will be able to exit its crisis on its own and that a rescheduling of the country's debt is unavoidable, citing Straubhaar.
Bild Zeitung:
  • Hans-Peter Keitel, head of the BDI federation of German industry, said Greece needs a reduction of its debt and an aid program comparable with the one Germany got after the Second World War, citing a letter from Keitel to German industrial managers. A "haircut" and the participation of private creditors would be "indispensable" in the process of rebuilding the Greek economy, the letter said.
Expansion:
  • Codere SA, Spain's only publicly traded gambling operator, has seen its sales fall more than 15% this year as austerity measures curbed spending, company executive Rafael Catala said in an interview. Revenue at the company's bingo halls has slipped 20% while sales at its gambling-machine business have fallen 15%, citing Catala.
Hong Kong Economic Times:
  • China's local administrations may struggle to fund the construction of affordable housing as part of the central government's plan to provide low-cost homes, citing Zhang Xueqin, deputy head of the Department of Housing Security at the Ministry of Housing and Urban-Rural Development.
Xinhua:
  • China's underground lending is spreading to Inner Mongolia and other inland regions from coastal areas, citing Guo Tianyong, head of banking research at the Central University of Finance and Economics. Sluggish stock markets and home purchase limits have caused funds to flow to underground lending markets and costs for such borrowing are rising, according to the report.
Economic Information Daily:
  • China's fixed-asset investment growth will likely slow as infrastructure projects under the stimulus program wind down, local financing vehicles face tightening and government curbs depress property investment, Ba Shusong, a researcher at the State Council's Development Research Center, wrote in a commentary published today. Monetary tightening may also affect investment growth, Ba said. A risk of overtightening may occur if investment to affordable housing in the fourth quarter doesn't offset the decline in other property investment, Ba wrote.
China Business News:
  • China's housing ministry plans to make a list of smaller cities that will be required to limit home purchases by families, citing a person close to the Ministry of Housing and Urban-Rural Development. The State Council last week said second and third-tier cities which have seen excessive price gains should restrict the number of homes each family is allowed to buy.
Shanghai Securities News:
  • A plan to expand China's resources tax has been submitted to the State Council, citing Guo Xiaolin, deputy head of the general office at State Administration of Taxation. The tax will be expanded to include resources other than oil and gas, according to the report.
Beijing News:
  • Average land prices in major Chinese cities rose 8.9% to 3,000 yuan per square meter in the second quarter from the same period a year earlier, citing the Ministry of Land and Resources.
Weekend Recommendations
  • None of note
Night Trading
  • Asian indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 123.0 +2.5 basis points.
  • Asia Pacific Sovereign CDS Index 125.50 +1.25 basis points.
  • S&P 500 futures -.52%.
  • NASDAQ 100 futures -.50%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (MTG)/-.11
  • (GCI)/.56
  • (PETS)/.24
  • (LNCR)/.51
  • (STLD)/.39
  • (MOS)/1.39
  • (SWK)/1.26
  • (IBM)/3.02
  • (PKG)/.35
  • (BRO)/.31
  • (ZION)/-.01
  • (WYNN)/1.02
  • (HAS)/.38
  • (HAL)/.74
  • (SCHW)/.19
Economic Releases
9:00 am EST
  • Net Long-Term TIC Flows for May are estimated to rise to $40.0B versus $30.6B in April.
10:00 am EST
  • The NAHB Housing Market Index for July is estimated to rise to 14.0 versus 13.0 in June.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The (ALKS) analyst day and the (SNAK) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly 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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