Tuesday, August 09, 2011

Tuesday Watch

Evening Headlines


  • ECB Half-Hearted Bond-Buying Program May Backfire: Euro Credit. The European Central Bank will need to commit more to its Italian and Spanish bond purchases than it did trying to cap the yields of Greece, Ireland and Portugal. Last week's decision to end an 18-week fast and resume buying Irish and Portuguese debt wasn't unanimous, ECB President Jean-Claude Trichet said at a press conference that coincided with the resumption. Bundesbank President Jens Weidmann was among the dissenters, according to an official familiar with the discussions. The Aug. 7 statement heralding the extension of support to Italy and Spain was issued in Trichet's name. Italy's 10-year borrowing cost declined by 81 basis points to 5.3 percent yesterday, the biggest one-day drop in yields since the euro was introduced in 1999, after reaching a record 6.4 percent last week. Spain's 10-year yield has shed 110 basis points in the past week. The European Financial Stability Facility must be "effectively and rapidly" overhauled to provide additional firepower, European Union financial services commissioner Michel Barnier said yesterday. "Whether this will restore confidence is another big question," said Nick Firoozye, head of interest-rate strategy at Nomura International Plc. in London. "Oftentime, the ECB showed it's not that committed. Not all ECB members supported this intervention. The market will need long-term solutions to back this up and they are still missing. It's still unclear what will happen to the EFSF and there's still doubt if the new measures will solve the Greek solvency problem." "The buying of Italian and Spanish bonds is a risky strategy," said Charles Diebel, the head of market strategy at Lloyds Bank Corporate Markets in London. "For it to work, the ECB will have to be very committed. Given the amount of reticence -- the fact that the decision was not unanimous and the ECB's view this is not their job -- the market will soon test its resolve."
  • Bank of America(BAC) Leads Surge in Credit Swaps on Downgrade Concern. Credit-default swaps on Bank of America Corp., the nation’s biggest bank by assets, rose by the most on record and reached the highest since May 2009, while contracts tied to Morgan Stanley debt increased the most since September 2008. Swaps on insurers Hartford Financial Services Group Inc., MetLife Inc. and Prudential Financial Inc. rose, and a benchmark gauge of corporate credit risk climbed to the highest since July 2010. Contracts on Charlotte, North Carolina-based Bank of America, which rise as investor confidence deteriorates, soared 87.6 basis points to 295 basis points as of 4:30 p.m. in New York, according to data provider CMA. That’s the highest since May 2009. Swaps on New York-based Morgan Stanley jumped 80.2 to 280.1, the highest since June 2010, CMA prices show. The average credit swap price on the six biggest U.S. banks -- Bank of America, JPMorgan Chase & Co., Wells Fargo & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley -- jumped 51.5 basis points to 210.9 basis points. That’s the largest gain since September 2008 when Lehman Brothers filed for bankruptcy and caused credit markets to seize up. Swaps on Goldman Sachs jumped 44 to 210, CMA prices show. JPMorgan contracts climbed 25 to 135, while those on Wells Fargo rose 25 to 135, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Contracts on Citigroup added 47.8 to a 210, CMA prices show. Contracts on the Markit CDX North America Investment Grade Index, tied to the debt of 125 companies, jumped 12.5 basis points to 115.5 basis points as of 5:47 p.m. in New York, according to Markit Group Ltd. “We haven’t seen this kind of volatility since 2008,” said Rich Gordon, a fixed-income market strategist at Wells Fargo. Swaps on Hartford Financial, the insurer that repaid a $3.4 billion bailout last year, rose 34.3 to 249.2, CMA prices show. Contracts on MetLife, the largest U.S. life insurer, rose 44.3 to 229.3, while contracts on Prudential, the second-biggest life insurer, climbed 28.3 to 189.4. Swaps on GE Capital Corp., a finance unit of General Electric Co., rose 50.7 basis points to 230.5.
  • China's 6.5% Inflation May Limit Response to Global Crisis. China's inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing to support growth as plunging stock markets signal the global recovery is weakening. Consumer prices climbed 6.5 percent from a year earlier as food costs surged, reports from the Beijing-based National Bureau of Statistics showed today. That was more than the 6.4 percent median estimate in a Bloomberg News survey of 26 economists. In June, inflation was 6.4 percent. Shanghai stocks extended losses after tumbling into a bear market yesterday. Elevated inflation shows that China is still dealing with the after-effects of an unprecedented monetary expansion during the last global slump and may have limited room for more stimulus. "This is the kind of data that should trigger an interest rate hike, but the uncertainties in global financial markets may delay the action," said Yao Wei, a Hong Kong-based economist with Societe Generale SA. The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, fell 1.2 percent as of 10:56 a.m. local time, paring an earlier decline of as much as 3.5 percent. The gauge yesterday capped a 20 percent drop from a November high, signaling a bear market. Producer prices rose 7.5 percent in July from a year earlier, the biggest gain in almost three years, after jumping 7.1 percent the previous month, today's reports showed. Food costs climbed 14.8 percent and non-food inflation was 2.9 percent. Bank of America Merrill Lynch said that the ruling Communist Party is unlikely to ease monetary policy and may have a fiscal response, including more spending on social housing and water infrastructure. Banks already face risks from lending to local-government financing vehicles. "In case the global economy slows down sharply, it will hurt Chinese exports and consumption, and the room for China to stimulate itself out of the problem will be smaller than 2008/09," Vincent Chan and Peggy Chan, Hong Kong-based analysts at Credit Suisse Group AG, said in a report yesterday. "There is no escape."
  • Brazil may act more aggressively in the derivatives market to limit gains in the real, Finance Minister Guido Mantego told reporters in Brasilia, without giving more details.
  • Ackermann's Italian Hedging Shows It's Every EU Bank for Itself. When Josef Ackermann called on lenders to help bail out Greece last month, the Deutsche Bank AG (DBK) chief executive officer had already cut his potential losses from the crisis spreading to Italy and Spain. Five days after lenders agreed to back the Institute for International Finance’s plan to accept losses on their holdings of Greek debt, the Frankfurt-based bank said it reduced its risks linked to Portugal, Italy, Ireland, Greece and Spain by 70 percent in the first half. In Italy, the lender cut its exposure to 996 million euros ($1.4 billion) from 8.01 billion euros. The decision helped the bank to escape losses on Italian bonds, which have since slumped on speculation the country will struggle to finance its deficit. It prompted an investigation by Italy’s securities watchdog and has also opened the bank to criticism it helped undermine confidence in the country. That may damage the lender’s franchise in a country where households save more than other Europeans and pay higher bank fees. “The signal was that Deutsche Bank thought Italian bonds would fall,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt.
  • S&P Cuts AAA Muni Ratings Following U.S. Credit Downgrade. Standard & Poor's cut the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S. The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn't provide a dollar figure on the affected debt. S&P also cut ratings on securities backed by Fannie Mae and Freddie Mac, prerefunded issues and munis repaid by using federal assets, also known as defeased or escrow bonds. No state general-obligation ratings were affected and the company said some may remain unchanged.
  • Gold Extends Advance to Record as Equity, Oil Rout Spurs Demand for Haven. Gold extended its rally to a record for a second day as the global rout in equities and crude oil deepened on concern the economic slowdown will worsen after Standard & Poor’s cut the U.S. credit rating. Gold for December delivery in New York advanced 1.1 percent to $1,731.80 an ounce. Immediate-delivery gold rose as much as 0.6 percent to $1,729.20, also an all-time high. The precious metal has surged 22 percent this year, heading for an 11th year of gains, as the global sovereign-debt crisis and a faltering economy boost demand from investors to protect their wealth. Gold holdings climbed the most since May last year while U.S. stocks had the biggest slump since December 2008 yesterday as investors retreated from riskier assets. Gold was costlier than platinum for the first time since December 2008.
  • Crude Declines to 10-Month Low on U.S. Rating Downgrade, Rising Stockpiles. Oil dropped below $80 a barrel in New York, falling to the lowest in more than 10 months, as the U.S. credit rating cut and rising stockpiles stoked concern an economic slowdown will worsen, reducing fuel demand in the world’s biggest crude consumer. Futures slipped as much as 3.3 percent today, following a 6.4 percent plunge yesterday. Crude for September delivery fell as much as $2.69 to $78.62 a barrel in electronic trading on the New York Mercantile Exchange, the lowest intraday price since Sept. 30. It was at $78.71 at 10:41 a.m. Sydney time. The contract yesterday tumbled $5.57 to settle at $81.31. Prices are down 17 percent in August and 14 percent lower in 2011.
  • Boehner Says Both Parties 'Must Work Now to Cut Spending' After S&P Action. Excessive spending by both political parties over decades “has created an environment of economic uncertainty,” and now Republicans and Democrats must work to cut federal spending, House Speaker John Boehner said. In a statement issued after President Barack Obama commented on the economy from the White House today, Boehner said “it is welcome news that the president will contribute to this process by laying out specific reforms he supports.”
  • PNC(PNC) Subpoenaed by U.S. Attorneys Office in Probe of National City Lending. PNC Financial Services Group Inc. (PNC), the sixth-largest U.S. bank by deposits, said it was subpoenaed by federal prosecutors investigating lending practices at National City Corp., which PNC agreed to buy in 2008. The inquiry, which is in an early stage, concerns debts insured by the Federal Housing Administration, and certain non- FHA insured loan origination, sale and securitization practices, Pittsburgh-based PNC said today in a regulatory filing. The probe is being conducted by the U.S. Attorney’s Office for the Southern District of New York. “PNC is cooperating with the investigation,” according to the filing. “The outcome of the investigation is unknown, but it could result in penalties or other remedial actions.”
  • Sotheby's(BID) Shares Plunge 13% Amid Concern About Resilience of Art Market. Sotheby’s (BID) shares plunged as much as 20 percent today amid concern that the art market rally since the 2008 financial crisis will fizzle. Shares of the publicly traded auctioneer closed down $5.17, or 13 percent, to $33.44, and are off 39 percent since their April 5 high this year. In the past three sessions, they’re down 16 percent.
  • Freddie Mac Swings to Loss in Second Quarter, Seeks $1.5 Billion in Aid. Freddie Mac, one of two mortgage- finance companies under government conservatorship, reported a $2.1 billion loss for the second quarter and said it will seek $1.5 billion in U.S. Treasury aid.\
  • Bank Stocks Plunge Most Since 2009. Bank of America, the nation’s largest bank by assets, plunged 20 percent and Citigroup slid 16 percent, leading the KBW Bank Index (BKX) down 11 percent. It was the worst showing for the 24-company benchmark since April 20, 2009, when Bank of America told investors it was putting aside more money to cover a growing pool of uncollectible loans. Those costs have continued to erode investor confidence ever since for the lender and some of its biggest rivals. More pressure came last week after S&P downgraded the credit of the U.S. government, which guarantees some of their deposits and debt, to AA+. Bank of America’s shares sold for only a third of their book value today, and Citigroup’s price-to-book ratio fell to less than 50 percent. “Investors are dumping financials because there’s so much confusion about what could be on their books,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in an interview. “You’ve got a perfect storm against Bank of America.”
  • Cameron Returns to U.K. for Emergency Meeting on Rioting. U.K. Prime Minister David Cameron is returning to the U.K. from vacationing in Italy to chair an emergency meeting today to discuss rioting in London, which continued for a third night as petrol bombs were thrown, vehicles and businesses set ablaze and violence spread to three other cities.
  • Hong Kong Stocks Tumble Amid Chinese Inflation, Global Selloff. Hong Kong stocks tumbled, with the index sliding more than 20 percent from a November high, as a report showing Chinese inflation accelerated added to concern the global economic slowdown may worsen in the wake of the U.S. credit-rating downgrade. Li & Fung Ltd., a supplier of toys and clothes to retailers including Wal-Mart Stores Inc., tumbled 6.1 percent. HSBC Holdings Plc, the U.K.-based lender that made a fifth of its revenue in North America last year, sank 7.9 percent. The Hang Seng Index tumbled 6.2 percent to 19,212.40 as of 10:50 a.m. local time, falling 23 percent from its closing high on Nov. 8, a level that some investors define as a bear market. None of the stocks in the 46-member gauge rose. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong plunged 6.6 percent to 10,382.86 after Chinese inflation accelerated in July.
Wall Street Journal:
  • Republicans Push Back on Higher Taxes. House Republican leaders, facing a stock-market rout on the first trading day after the U.S. lost its triple-A credit rating, warned colleagues not to feel pressured into raising taxes when the next stage of deficit negotiations begin. "Over the next several months, there will be tremendous pressure on Congress to prove that S&P's analysis of the inability of the political parties to bridge our differences is wrong," House Majority Leader Eric Cantor (R., Va.) wrote in a memo to Republicans. "In short, there will be pressure to compromise on tax increases. We will be told that there is no other way forward. I respectfully disagree." House Speaker John Boehner (R., Ohio) echoed Mr. Cantor's position, emphasizing that the U.S. needed to create "an environment in which businesses can invest and jobs can flourish." He said that "raising taxes is simply the wrong approach." A key pressure point will come when a bipartisan super-committee, created last week to come up with $1.5 trillion in additional cuts over 10 years, is formed and starts meeting. The S&P downgrade puts more pressure on the panel to come up with an even bigger package.
  • Bank Lending Slows in Emerging Markets, Survey Finds. Banks in emerging markets are starting to tighten credit after years of rapid expansion, offering new evidence of a potential slowdown in global growth, a new industry survey found. The survey by the Institute of International Finance, a global banking trade group, found a cooling in financial conditions in recent months despite strong loan demand across emerging markets. The recent moves to tighten credit standards threaten to limit loan availability and restrain the global economic recovery.
  • Indian Firms Wary. India's technology sector is bracing for a potential slowdown in growth after the historic U.S. credit downgrade over the weekend, which heightened fears of a double-dip recession in the largest outsourcing market and sparked a sell-off in IT stocks Monday.
  • Hedge Funds Dumping Holdings. (video) Big hedge funds are dumping their favorite holdings en masse. Who's selling and what are they getting rid of? Find out from Anthony Scaramucci of Skybridge and Greg Zuckerman of the WSJ.
Business Insider:
Zero Hedge:
  • Is John Paulson Having to Liquidate His Positions? This is rumour, nothing more than mildly informed rumour. Which is, of course, the most interesting form of market information. But is John Paulson having to liquidate his hedge fund’s positions? That’s the interesting question posed over at Bronte Capital.
NY Times:
  • China Economists See Big Risks From US Downgrade. It is not just many Americans who are upset about the Standard & Poor’s downgrade of United States debt. A lot of people in China are angry, too. But they are aiming their venom at the Chinese government.

Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 22% 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 -18 (see trends ).
  • Senate Panel Reviewing S&P Downgrade. The Senate Banking committee has begun looking into last week's decision by Standard and Poor's to downgrade the U.S. credit rating, a committee aide told Reuters on Monday. The aide said the panel was gathering information about the S&P move but no decision had been made on whether it will hold hearings into the downgrade. While an official investigation has not been launched, the aide said that all options were being weighed.
China Business News:
  • Chinese regulators have placed a cross-default provision on local government financing vehicle debt such that all banks must recognize loans to that vehicles as defaulted if it defaults on any one bank's loan, citing a person familiar with the matter.
21st Century Business Herald:
  • U.S. and Mexico have jointly submitted a memorandum of understanding to the World Trade Organization accusing China of protectionism in its rare-earth policy, citing Gan Yong, vice president of Chinese Academy of Engineering.
Beijing News:
  • Beijing's average new home prices fell to 13,623 yuan per square meter in the first seven months of the year, from 113,948 yuan per square meter in the first six months, citing Beijing Real Estate Association. The average prices were for new homes of 140 square meters or smaller. Average existing home prices dropped 2.2% in July from the previous month to 18,142 yuan per square meter.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -5.0% to -1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 156.0 +20.0 basis points.
  • Asia Pacific Sovereign CDS Index 148.0 +17.5 basis points.
  • S&P 500 futures -1.60%.
  • NASDAQ 100 futures -1.42%.
Morning Preview Links

Earnings of Note
  • (DISH)/.78
  • (FOSL)/.76
  • (CVC)/.40
  • (AOL)/.17
  • (CREE)/.27
  • (DIS)/.73
  • (SPWRA)/-.19
  • (PEGA)/.13
  • (NUAN)/.34
Economic Releases
7:30 am EST
  • NFIB Small Business Optimism for July is estimated to fall to 89.9 versus a reading of 90.80 in June.
8:30 am EST
  • Preliminary 2Q Non-farm Productivity is estimated to fall -.9% versus a +1.8% gain in 1Q.
  • Preliminary 2Q Unit Labor Costs are estimated to rise +2.4% versus a +.7% gain in 1Q.
2:15 pm EST
  • The FOMC is expect to leave the benchmark fed funds rate at .25%.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The 3-Year Note Treasury Auction, weekly retail sales reports, Oppenheimer Tech/Communications Conference, Raymond James Bank Conference, Credit Suisse Industrial Conference and the Canaccord Growth Conference could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and technology shares in the region. I expect US stocks to open lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

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