Thursday, August 25, 2011

Thursday Watch

Evening Headlines


  • Steve Jobs Resigns as Apple(AAPL) CEO. Apple Inc. (AAPL) Chief Executive Officer Steve Jobs, who transformed the company he started at age 21 from a personal-computer also-ran into the world’s largest technology company, resigned. Jobs, who will become chairman, was on medical leave since Jan. 17 after combating a rare form of cancer since 2003 and surviving a liver transplant in 2009. He is succeeded by Chief Operating Officer Tim Cook, 50, who has been running day-to-day operations. “I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know,” Jobs, 56, said in a statement yesterday. “Unfortunately, that day has come.” Under Jobs, Apple became the second-most valuable company in the world, after Exxon Mobil Corp. (XOM), by introducing devices that revolutionized the computer, music and mobile phone industries. “He’s always going to be remembered, maybe for the next 100 years, as the greatest technology business leader of our time,” Steve Wozniak, who co-founded Apple with Jobs, said in an interview on “Bloomberg West.” “Company culture doesn’t change overnight. He’s got tens of thousands of employees. The quality of the products reflects how good they are, too.”
  • Bernanke Signaling No QE Backed by Data. Federal Reserve Chairman Ben S. Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus. He has little choice, given rising consumer prices and a U.S. economy that is still growing. Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago at the annual Fed symposium in Jackson Hole, Wyoming. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production. Policy makers, who said Aug. 9 they’ll use additional tools “as appropriate,” probably don’t expect a recession or rapid disinflation, making a signal of bond buying premature, said Roberto Perli, managing director at International Strategy & Investment Group in Washington. Instead, Bernanke will probably detail options for further stimulus and clarify how much the Fed’s reduction in its outlook this month stems from long-term obstacles to growth, said Keith Hembre, a former Fed researcher. “Conditions are substantially different today” compared with last year, especially inflation, said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion. “First and foremost, that would be the reason I think that any sort of major asset purchase announcement is unlikely,” he said.
  • Derivatives 'Data Gaps' May Hide Threats to Stability of Financial Markets. Regulators said they might not have enough information to assess the threat over-the-counter derivatives pose to the financial system. Shortfalls in available data may undermine attempts to use so-called trade repositories as a tool to improve market oversight, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions said in a report published today. The lack of details on the value of trades “presents a potential gap in the data that authorities may require to fulfill” their mandates, the organizations said. More data on collateral would allow regulators to “better assess exposures, counterparty risk and ultimately systemic risk,” they said.
  • The slide in U.S. gasoline demand to a nine-year low is adding to evidence the faltering economy is keeping motorists off the road as the nation heads toward the Labor Day holiday. The amount of gasoline supplied to the U.S. market by refiners and blenders fell 2% to 9.01 million barrels a day last week, the lowest level for this time of year since 2002, an Energy Department report showed yesterday. American drivers last week bought 4.2% less fuel than a year earlier, MasterCard Inc. said Aug. 23.
Wall Street Journal:
  • Apple's(AAPL) Deep Bench. Mr. Jobs provided a charismatic persona and sharp instinct for knowing what consumers want. But his bench is considered a strong management team that has largely stayed out of the limelight until now.
  • German Unease May Add to Europe's Woes. With conditions becoming dimmer for Europe's biggest economy, consumers may hunker down more, an added burden for a euro bloc struggling to contain a debt crisis.
  • A Rush Out of 'Junk'. The market for "junk" bonds is enduring its worst rout since the depths of the financial crisis. Demand for high-yield bonds sold by the riskiest U.S. companies has nearly dried up, an ominous sign for low-rated companies hoping to tap the bond markets and private-equity firms trying to finance leveraged buyouts. New junk-bond offerings in August were at their lowest level since December 2008. Retail investors have been withdrawing record amounts from high-yield mutual funds, forcing those funds to dump bonds in order to raise cash, driving prices even lower. Returns on junk bonds—those rated below investment grade, which offer a high yield due to a high risk of default—dropped to negative 5.1% in August, the worst monthly performance since November 2008, according to the Barclays Capital U.S. High Yield Index.
  • Greek Banks Set to Lose €5 Billion in Bonds Swap. Greek banks are expected to face combined losses totalling about €5 billion under a proposed bond-swap program, a Greek government official said Wednesday, adding that the program is now slated to conclude in October. Speaking to Dow Jones Newswires, the official added that the banks are expected to reflect the impact of those losses when they announce their quarterly earnings next week. "The amount of the losses is yet to be determined, but estimates are for roughly €5 billion. They may be reflected in the banks' second-quarter results due by Aug. 31," the official said.
  • Europe Banks Lean More on Emergency Funding. New signs of stress are piling up in the ailing European banking system. Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday, while other banks continue to park unusually large amounts with the central bank, according to data released Wednesday. While the amount of borrowing is tiny relative to the multitrillion-euro European banking system, it, and the increase from €555 million a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources, such as the capital markets or other banks. The ECB charges a punitive 2.25% interest rate to borrow from its facility, well above what a healthy bank typically would pay to borrow via other channels and Tuesday's total is well above normal. Adding to the jitters, executives at Rabobank Groep NV said the Dutch lender is growing increasingly cautious about lending money to rival banks. Echoing past comments from other European bank executives, the Rabobank officials noted they have seen a pullback among the U.S. funds that traditionally have been important sources of liquidity for European lenders. All told, the evidence points to an environment when even strong European banks are finding it harder to obtain affordable long-term funding.
  • John Paulson's Advantage Plus Fund Down -38.7% This Year. John Paulson, the hedge-fund billionaire who runs $35 billion Paulson & Co., has suffered further losses in one of his core funds, as his losing streak continues. Paulson’s Advantage Plus fund has lost 38.7% so far this year, through the end of Friday’s trading, according to someone briefed on the figures. The fund has lost 21.7% for the month, through Friday, underscoring how rough this month has been for the well-known investor. Another fund, Paulson Partners, lost 14.4% in August, through Friday, according to an investor, and is down 11.8% for the year. This is a merger-arbitrage fund that in the past often has not had the same volatility as other funds. Though Paulson slashed holdings of Bank of America by more than half last quarter, his firm still holds shares of the beleaguered bank, as well as shares of other stocks that have fallen lately including Citigroup and Hewlett-Packard. Stocks have rallied this week, potentially helping Paulson’s holdings. But his vast gold investments likely tumbled in value amid the sell-off in gold this week.
  • Pensions Check Quality Rules After S&P Rating Cut. Some public and private pension funds are working to revise their investment guidelines after they were thrown into question when Standard & Poor's Ratings Services downgraded U.S. debt, financial consulting firms said. A principal area of concern for these funds is the overall minimum quality rating for a fixed-income portfolio—in the form of a letter grade—and what the guidelines call for when that rating is breached. The downgrading of a single security wouldn't significantly affect such a rating, but a blanket downgrade of U.S. government securities is a different matter. "The way many investment guidelines are written did not really assume that U.S.-backed debt would ever be downgraded," said Steve Center, vice president at consulting firm Callan Associates. He said he has been working for the past two weeks with several investors, including pension funds, to clarify their guidelines.
  • SEC Bears Down on Fracking. The Securities and Exchange Commission is asking oil and gas companies to provide it with detailed information—including chemicals used and efforts to minimize environmental impact—about their use of a controversial drilling process used to crack open natural gas trapped in rocks. The federal government's investor-and-markets watchdog is stepping into the heated environmental debate surrounding hydraulic fracturing, or "fracking," according to government and industry officials, even as state and federal environmental officials have begun to bring greater pressure on the industry.
  • SEC Officials Are Focus of Inquiry. The Securities and Exchange Commission's internal watchdog is investigating whether enforcement officials misled the government's archives agency last year by saying the SEC was "not aware" of the destruction of certain probe-related records, according to people familiar with the matter. The matter is part of a broader, continuing investigation by the SEC's Inspector General office into whether the Wall Street regulator improperly destroyed thousands of records connected to "matters under inquiry," or MUIs. MUIs are the enforcement division's preliminary looks into potential violations of securities law at hedge funds, Wall Street banks and other firms.
  • New Ways to Track Your Kids Online. Web programs and apps alert parents to sexting, bullying and other problems.
  • Euro-Zone Data Show Rough Path Lies Ahead. A slump in German business confidence and an unexpected fall in euro-zone factory orders marked the latest in a string of forward-looking data to suggest the bloc's economy is losing momentum.
  • Obama and the 'Competency Crisis' by Mortimer Zuckerman. Like many Americans who supported him, I long for a triple-A president to run a triple-A country. Mr. Obama seems unable to get a firm grip on the toughest issue facing his presidency and the country—the economy. He now asserts he is going to "pivot" to jobs. Now we pivot to jobs? When there are already 25 million Americans who are either unemployed or cannot find full-time work? Does this president not appreciate what is going on?
  • Hurricane Scenarios Run From Bad to Worse. Right now we have a rapidly strengthening, Category 3 hurricane heading for the eastern seaboard. We still don’t know exactly where or when it will strike land, but we do know that the potential impact could — emphasis on could — be catastrophic.
  • CME Raises Margin Requirements for Trading Gold Futures. The CME Group on Wednesday raised maintenance margins for trading COMEX 100-ounce gold futures by 27 percent, effective after the close of business on Aug 25.
  • Is High-Speed Computer Trading Killing Investing? High speed computer trading by funds with holding periods of sometimes just milliseconds are to blame for rising volatility, the disappearance of diversification and the death of individual stock picking, and the problem is going to get worse, say an number of traders and market strategists.
  • Applied Materials(AMAT) Beats Street; Outlook Dismal. Applied Materials posted quarterly results that beat market estimates, but the chip-gear maker forecast dismal fourth-quarter results on weak macro-economic conditions and a glut in the solar cell market.
Business Insider:
NY Times:
  • Behind the Glittery Web Start-Ups, Investors See Other Gold. While the spotlight of the latest technology boom has been trained on a cluster of popular consumer applications like Facebook, Groupon and Zynga, investors are increasingly taking a shine to the start-ups building the infrastructure for those Internet powerhouses.

  • Another Summer Chill for Youth Unemployment. The U.S. job market sure has been rough, but for young Americans this summer it was downright dismal. A Bureau of Labor Statistics report released Wednesday said 745,000 more job seekers between 16 and 24 years old were unemployed from April to July. That compares with an increase of 571,000 among the same age group last summer. In July, the share of young people who were employed was 48.8%, marking a record low for the second straight year. July is traditionally the peak month for summertime employment. "This has been another summer of lost opportunities for our nation's young people," said Michael Saltsman, research fellow at the Employment Policies Institute. While the job market for all Americans has been sluggish, the weak economy has hit young job seekers particularly hard. The youth unemployment rate in July was 18.1%, compared with 9.1% overall.
Institutional Investor:
  • How Badly Will The Gold Dive Hurt John Paulson? Is gold a bubble that is finally bursting? This is the big question on Wall Street after the metal dropped $104, or 5.6 percent, on Wednesday. It is down more than 7 percent after hitting an all-time high on Monday. If gold is truly a bubble that is now bursting — like energy prices did in mid-2008 after a stunning run-up in the first half of that year — a number of high-profile hedge funds stand to lose a lot. No one is poised to implode harder than John Paulson, who has staked virtually his entire fortune on gold and related investments. And he can ill afford another big loser in his portfolio: Through August 12 his Advantage Plus fund was already down 33.5 percent year-to-date. For one thing, most of Paulson’s personal money is in the gold share classes of his various hedge funds or his gold fund. In addition, his funds are heavily exposed to gold. For example, at the end of the second quarter, his firm, Paulson & Co, owned nearly $6 billion worth of the SPDR Gold Trust ETF. Paulson had an additional $1.76 billion in AngloGold Ashanti, a major global gold producer based in South Africa. These two positions made up 30 percent of Paulson & Co.’s equity assets alone. The hedge fund manager also had an additional $400 million invested in Gold Fields, another South African gold miner.
Rasmussen Reports:
  • US Green Groups Write Obama to Oppose Oil Pipeline. Ten U.S. environmental groups came out in support of hundreds of protesters arrested at the White House since Saturday for opposing a proposed $7 billion pipeline that would greatly expand imports of crude extracted from Canadian oil sands. The pipeline and processing of the oil, they claim, can potentially spill oil over a vast source of underground water, release large amounts of greenhouse gases, and damage Canadian forests. "We want to let you know that there is not an inch of daylight between our policy position on the Keystone Pipeline and those of the very civil protesters being arrested daily outside the White House," the head of the groups said in a letter sent to President Barack Obama. The groups include the Environmental Defense Fund, the Sierra Club, and the Natural Resources Defense Council. Backers of the project say it would create thousands of well-needed jobs and reduce U.S. dependence on oil from countries that are unfriendly to Washington. TransCanada believes the line will be approved and in service by 2013. The letter said Obama would "trigger a surge of enthusiasm from the green base that supported you so strongly in the last election," should he block the project. "Democrats have to be worried about the youth vote," said Kert Davies, a researcher at Greenpeace, one of the groups that signed the letter. Obama has done some things that environmentalists like, such as raising fuel efficiency standards for vehicles. But support from such voters could wane if Obama decides to approve the Keystone line. "Like it or not greens helped get Obama elected in 2008, but right now many are uninspired," said Davies.
Financial Times:
Die Welt:
  • The European Union has begun proceedings against Germany, accusing the government of violating the EU treaty regarding the free movement of people.
Tokyo Shimbun:
  • The crippled Fukushima Dai-Ichi nuclear plant emitted about 169 times the amount of radioactive cesium-137 released by the atomic bombing of Hiroshima, citing a Japanese government estimate submitted to a parliamentary committee. The Tokyo Electric Power Co. plant emitted 15,000 terabecquerels of cesium-137, the report said.
Asia Economy Daily:
  • General Motors Co.'s(GM) South Korean unit plans to raise output by 20% next year, citing industry officials.
China Securities Journal:
  • China should guard against large economic fluctuations, the China Securities Journal said in a front-page editorial today. Third-quarter economic growth should slow from the second quarter and export growth may have an obvious decline in the next several months. The inflation situation is also complicated because a "turning point" in August when consumer prices will probably grow at a slower pace than July's 6.5% gain won't mean inflation is entering a continuous downtrend. The frequency of monetary tightening may slow in the next several months although further tightening is possible.
China Business News:
  • China should consolidate management of local government debt so as to have "complete" control, Ba Shusong, a researcher with the Development Research Center of the State Council, wrote in a commentary. China's prohibition on local government's use of new debt to repay old debt will increase the liquidity risk for local governments and their financing vehicles, Ba writes.
China Daily:
  • Li Jianguo, vice chairman of the Standing Committee of China's National People's Congress, said the nation's "rapidly" aging population is a "serious" challenge to the introduction of an affordable and comprehensive pension system. Social security funds in some regions have had deficits because the population of retirees is larger than that of workers, citing Li.
National Business Daily:
  • China's inflation rate in August may be equal to or even higher than July levels as pork prices jumped. China's August pork prices may climb about 50% from a year earlier, lifting consumer prices. Pork prices are unlikely to decline "significantly" in the short term because tight supply of live hogs hasn't eased, citing Li Guoxiang, a researcher at the Chinese Academy of Social Sciences.
Evening Recommendations
  • Rated (VMI) Buy, target $110.
Night Trading
  • Asian equity indices are -.50% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 165.0 +4.25 basis points.
  • Asia Pacific Sovereign CDS Index 157.0 +6.0 basis points.
  • FTSE-100 futures +.49%.
  • S&P 500 futures -.23%.
  • NASDAQ 100 futures -.88%.
Morning Preview Links

Earnings of Note
  • (PDCO)/.44
  • (HRL)/.35
  • (BIG)/.45
  • (FRED)/.13
  • (MCRS)/.49
  • (SAFM)/-.91
  • (CPWM)/-.40
  • (KKD)/.06
  • (OVTI)/.71
Economic Releases
8:30 am EST
  • Initial Jobless Claims are estimated to fall to 405K versus 408K the prior week.
  • Continuing Claims are estimated to fall to 3700K versus 3702K prior.
Upcoming Splits
  • (CLW) 2-for-1
Other Potential Market Movers
  • The 7-Year Treasury Note Auction, weekly EIA natural gas inventory report, Fed's weekly Balance Sheet/M1, M2 reports and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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