Monday, August 29, 2011

Tuesday Watch


Evening Headlines

Bloomberg:

  • Companies Stop Selling Bonds as Costs Jump by 40%: Euro Credit. Company bond sales have ground to a halt in Europe, with August poised to end without a single offering as the sovereign debt crisis drives borrowing costs up by 40 percent. “When spreads are moving so quickly, it’s very difficult to see clearly how to price new issues,” said Olivier Casanova, the head of financing and treasury at PSA Peugeot Citroen in Paris, which last sold bonds in euros on June 15. “Conditions are very volatile.” The extra yield investors demand to own corporate bonds rather than government securities has surged to a two-year high of 186 basis points from 134 at the end of July, Bank of America Merrill Lynch indexes show. Yield premiums are climbing as speculation Greece may default forces the European Central Bank to buy Spanish and Italian bonds, and as second-quarter euro- area growth slowed to the worst since the region emerged from recession in 2009. Gauges of European company creditworthiness are headed for their worst month ever. The Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield credit ratings is up 274 basis points so far in August, climbing to 714 basis points. That compares with a jump of 207 in October 2008 after the collapse of Lehman Brothers Holdings Inc.
  • On Company Taxes, U.S. Should Follow World Down: Ramesh Ponnuru. Nations don’t compete with one another the way companies do. Pepsi’s gain is almost always Coca-Cola’s loss, but the same doesn’t always, or even often, hold true for national economies. Governments do compete in some respects: They want to attract capital investment to their countries, for example, to provide more jobs, higher wages and better products and services to their people. That competition offers a reason for optimism that the U.S. Congress will eventually reform our inefficient, investment-destroying corporate taxes.
  • Chinese stocks trading in Hong Kong may slump as much as 19% by year-end in a "worst-case" scenario as an order to widen the base of required reserves threatens non-bank lenders, BNP Paribas SA said. Tightening measures have driven the lending rate in the "shadow banking system" from the 13%-17% annual range between 2003 and 2010 to around 26% in the first half of this year, Dorris Chen and Kathryn Ding, analysts at BNP paribas, wrote in a report, citing the rate in the central bank monitored alternative lending market. "The People's Bank of China's new rules broadening the base of required reserve is an incremental threat to liquidity given that acceptance bills and letters of credit are important sources of funding for many alternative lenders and private small and medium enterprises," they wrote.
Wall Street Journal:
  • German Debate on Bailout Fund Is Test for Merkel. German Chancellor Angela Merkel faces growing resistance within her ruling coalition over expanding the powers of the euro zone's bailout fund, forcing a domestic political debate she will have to win to preserve confidence in her leadership. At issue is securing German parliamentary approval for a deal Ms. Merkel brokered with other European leaders in July to keep the debt crisis from spinning out of control. Part of the agreement involves vesting the bailout fund with powers that were previously the prerogative of national parliaments. Conservative opponents of the deal worry it will open the door to relinquishing more sovereignty to the European Union. Winning a majority of votes from within Ms. Merkel's center-right coalition was seen as relatively smooth sailing after reaching the hard-fought deal, which also included a second bailout for Greece. But in recent days, more dissenters have emerged from the coalition, now putting a sure victory in doubt. The shift reflects the pressure many rank-and-file conservative German politicians face as they try to justify the recent string of bailouts for Greece and other countries to an increasingly skeptical electorate.
  • Irene's Floods Prove Deadly as Water Continues to Rise. Hurricane Irene never packed the catastrophic winds of more famous tropical storms, but by the time its remnants finally blew into Canada Monday, it had proved to be a slow killer, leaving behind a vast swath of shattered communities and dozens of fatalities.
  • Tally of Damages Put at $12 Billion, but That Number Could Yet Rise. The economic damage wrought by Hurricane Irene—everything from washed-out roads to lost hotel bookings—could hit $12 billion or more.
  • NLRB Gets New Chairman, Mark Pearce. The National Labor Relations Board has a new chairman: Mark Pearce, a Democrat. But business groups and Republicans are expecting more of the same from the agency they say favors unions over employers.
  • Pimco's Gross Has 'Lost Sleep' Over Bad Bets. In recent weeks, Pacific Investment Management Co. founder Bill Gross says he has "lost sleep" over an ill-timed bet on Treasurys. During an Aug. 16 interview at Pimco's Newport Beach, Calif., headquarters, Mr. Gross, manager of Pimco's Total Return Fund, the world's biggest bond fund, acknowledged that his decision to sell all of the fund's Treasury holdings in February, and then use derivatives to place wagers against government-related bonds in March, was a "mistake."
  • Europeans Appear Set to Pause Rate Rises. European Central Bank President Jean-Claude Trichet signaled the ECB may reconsider its longstanding warnings about inflation, potentially setting the stage for a lengthy pause in its rate-increase cycle. In testimony to the European Parliament, Mr. Trichet also played down the risks of a renewed recession in the euro bloc, saying he expects growth in the common-currency area to continue at a "modest pace." While euro-zone inflation is likely to remain above the bank's 2% target in the months ahead, "risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released [in] early September," Mr. Trichet said. Mr. Trichet avoided code words the ECB often employs to signal that it is worried about inflation or that interest-rate rises are on the horizon.
  • Czech Premier Takes new Dig at Euro Zone. The Czech Republic's euro-skeptic leadership is taking some new swipes at the neighboring single-currency zone, which is struggling to quell internal dissension about how to deal with its weaker members' debt woes. On Monday, Czech Prime Minister Petr Necas told a group of Czech diplomats: "We agreed to join a [monetary] union, not a transfer union or debt union." He went on to say that an independent currency was critical to the country's economic health.
CNBC:
  • Hedge Funds Burned by August Market Heat. Many of the world’s largest hedge funds have been left nursing billions of dollars in losses following the industry’s most brutal month since the collapse of Lehman Brothers. Falling equity markets worldwide have caught hedge fund managers off-guard, leading to significant losses as portfolios declined in value and managers sold holdings, crystallizing losses. According to provisional estimates from consultancy Hedge Fund Research, the average hedge fund has lost 4.1 percent during August – making the month the industry’s fourth worst ever.
Business Insider:
  • The Rising Mismatch In Chinese Credit Markets. There is a mismatch in the credit market in China that is becoming increasingly pronounced. On the one hand, many privately owned Chinese companies; especially manufacturing and industrial companies are in dire need for capital to cover their short term financing needs and to ramp up further expansions. On the other hand, the domestic Chinese capital markets, dominated by large state owned banks, have been rather unresponsive to such demands.
  • Money Game Tip of the Day: Commodities Offer Very Poor Real Returns. (graph)
Zero Hedge:
IBD:
Courier-Journal.com:
PIMCO:
Rasmussen Reports:
Financial Times:
  • IASB Criticises Greek Debt Writedowns. Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules. In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt. “This is a matter of great concern to us,” Hans Hoogervorst, IASB chairman, said in the letter, which was seen by the Financial Times.
ZDF TV:
  • Euro-area governments will need to transfer additional sovereign functions to the European Union if they want to establish a European economic government, citing an interview with Luxembourg Prime Minister Jean-Claude Juncker. Regional leaders won't be able to sidestep the issue of joint euro-area bonds indefinitely, he said.
Financial Times Deutschland:
  • Andrea Enria, chairman of the European Banking Authority, demanded that the European Financial Stability Facility be allowed to give funds directly to banks to shield them from financial difficulties, citing a letter to be sent to the council of European finance and economy ministers. Currently, the 725 billion-euro fund may give money only to governments, which can then pass it on to lenders. The majority of the 27 EBA members approve of the plan, while Germany is opposed, citing a person close to the German government.
Xinhua:
  • The eastern Chinese province of Jiangxi plans to halt production in three major rare earth mines in Ganzhou city for 2011, citing the local government.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are +.50% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 153.0 -5.0 basis points.
  • Asia Pacific Sovereign CDS Index 150.50 -2.5 basis points.
  • FTSE-100 futures +2.90%.
  • S&P 500 futures +.04%.
  • NASDAQ 100 futures +.09%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (DG)/.48
  • (DSW)/.63
  • (BKS)/-.96
  • (PVH)/.95
Economic Releases
9:00 am EST
  • The S&P/CS 20 City MoM% SA for June is estimated unch. versus a -.05% decline in May.
10:00 am EST
  • Consumer Confidence for August is estimated to fall to 52.0 versus a reading of 59.5 in July.
2:00 pm EST
  • Minutes of FOMC Meeting.
Upcoming Splits
  • (HFC) 2-for-1
  • (VRUS) 2-for-1
  • (RGCO) 2-for-1
Other Potential Market Movers
  • The Fed's Kocherlakota speaking, Fed's Lockhart speaking, the weekly retail sales reports and the Morgan Stanley Aerospace/Defense Unplugged Conference could also impact trading today.
BOTTOM LINE: Asian indices are 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 75% net long heading into the day.

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