Wednesday, August 17, 2011

Wednesday Watch

Evening Headlines


  • Stalling EU Economy May Hold ECB Rates. Europe’s unexpectedly sharp economic slowdown has increased the risk of another recession and may prevent the European Central Bank from raising interest rates again this year. The 17-nation euro-area economy may struggle to gather momentum after growing just 0.2 percent in the second quarter, its worst performance since emerging from the last recession in 2009, said economists including Marco Valli at UniCredit Global Research and Stewart Robertson at Aviva Investors. France’s economy stagnated and in Germany, the region’s economic engine, expansion almost stalled. “I’m comfortable believing that this is a temporary slowdown, but the focus will remain on recession risks for the next few months,” said Valli, chief euro-region economist at UniCredit in Milan. “Rate hikes are off the table for now.” Europe’s weakness may persist for the remainder of the year as governments from Ireland to Italy cut spending to rein in ballooning budget deficits and the global economy cools. Europe’s debt crisis, having prompted bailouts of peripheral nations Greece, Ireland and Portugal, is now affecting confidence in the region’s core economies. German GDP rose 0.1 percent in the second quarter; the median forecast of economists was for 0.5 percent growth. “The weak GDP print piles pressure on euro-zone authorities to come up with a structural solution to the debt crisis,” said Martin van Vliet, senior euro-area economist at ING Bank in Amsterdam, who hasn’t discounted the possibility of a recession. “Much depends on whether further contagion from the financial-market turbulence to consumer and business confidence will be avoided.”
  • German Euro Bond Critics Roused by U.S. Downgrade: Euro Credit. Chancellor Angela Merkel’s resolve to defend Germany’s top credit rating in the wake of Standard & Poor’s U.S. downgrade is at odds with the likely expense of containing Europe’s debt crisis. Merkel faces a domestic audience both wedded to Germany’s AAA rating and divided over whether Europe’s largest economy should provide financial succor to its currency-union partners in the form of common bonds. Mohit Kumar of Deutsche Bank AG estimates an aggregate credit rating of AA+ for the euro region, a notch lower than Germany is used to, which would make it impossible to maintain a top grade while allowing Euro bonds. “A transfer union where Germany pays for the debt of other countries, but has no access to their tax revenues, would probably be the worst outcome for Germany’s rating,” said Kornelius Purps, a strategist at UniCredit SpA in Munich. The difference between the cost to insure German bunds and U.S. Treasuries rose to a record 34 basis points on Aug. 11, as traders increased bets that Germany will end up responsible for the debts of countries such as Italy and Spain, whose 10-year borrowing costs topped 6 percent this month. The German-American gap widened even after Standard & Poor’s cut the U.S. government’s credit rating one level to AA+ on Aug. 5. “The downgrade by S&P sends a significant sign to market participants” that there’s a “turnaround” in the perception of debt sustainability for major economies, said Peter Walschburger, a professor at Berlin’s Freie Universitaet who specializes in economic psychology.
  • Companies are paying the most to borrow relative to benchmark government debt since September 2009 as investors shun all but the safest securities on concern the biggest economies are faltering. The extra yield investors worldwide demand to own corporate rather than government debt is 214 basis points, up from this year's low of 145 on April 11, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index.
  • Some Rare Earth Prices Will "Collapse" on Oversupply, Miner Says. Prices for some rare-earth minerals, which have soared in the past year after China restricted exports, will plunge as additional output creates an oversupply, according to a company developing a rare-earth mine in Wyoming. "We're going to see a collapse of some of the prices," said Don Ranta, chief executive officer of Vancouver-based Rare Element Resources Ltd. So-called light rare earths, including lanthanum, which is used in oil refining, and cerium, used in glass polishing, will "come down substantially," he said today in an interview at Bloomberg headquarters in New York. "Those are going to be in oversupply."
  • Pakistan Seeks $300 Million to Fund Gas Pipeline. Pakistan plans to borrow $300 million from local banks to build a pipeline that will carry natural gas from Iran, easing its worst energy crisis. Local state-owned companies will provide about $210 million in equity for the $1.3 billion pipeline, said Mobin Saulat, acting managing director of Inter State Gas Systems Ltd., the agency responsible for the project. Pakistan may approach foreign companies including OAO Gazprom, International Petroleum Investment Co. and China National Petroleum Corp. for the rest of the financing, he said. Local funding is crucial for the project because of pressure on Western banks and international agencies to isolate Iran, which the U.S. and European Union say is seeking to build nuclear weapons.
  • Los Angeles Mayor Tests 'Third Rail' in Call for Proposition 13 Changes. Los Angeles Mayor Antonio Villaraigosa, the chief of California’s largest city, called for sweeping changes in Proposition 13, the nucleus of the nation’s anti-tax movement. The state’s perennial budget crises could be eased by as much as $8 billion a year by removing Proposition 13’s limits on tax assessments for commercial property, Villaraigosa said in a speech to the Sacramento Press Club today. He also urged new taxes on services such as legal representation that he said might yield as much as $28 billion a year. “We need to have the courage to test the voltage in some of these so-called ‘third rail’ issues, beginning with Proposition 13,” said Villaraigosa, referring to notions deemed so politically sensitive as to be untouchable.
  • VIX Swings Prompts Redemptions in Barclays ETN. Investors are using exchange-traded notes to speculate U.S. stock declines will slow, placing record bets that the benchmark gauge for volatility is poised to decrease after soaring the most in four years. Outstanding stock in Barclays Plc (BARC)’s iPath S&P 500 VIX Short-Term Futures ETN (VXX), which rallies when volatility increases, plunged 48 percent last week for the biggest drop in its 30- month history. Credit Suisse Group AG (CSGN)’s VelocityShares Daily Inverse VIX Short Term ETN (XIV), a bet the gauge will fall, rose to a record 49.9 million shares, becoming the second-largest ETN tied to equity swings.
  • Singapore July Exports Decline 2.8%. Singapore’s exports fell the most since 2009 in July as sales of electronics slumped, adding to concern the city state may experience a recession as global economic risks grow. Non-oil domestic exports declined 2.8 percent from a year earlier, after a revised 1 percent gain in June, the island’s trade promotion agency said in a statement today. The slide was the largest since the 6.2 percent drop in October 2009. The median of 12 estimates in a Bloomberg News survey was for an increase of 4.6 percent. The weakness in shipments abroad raises the odds of a “technical” recession in Singapore, CIMB Research Pte and Bank of America Merrill Lynch said today. “We could see a real risk of Singapore, being one of the most export-oriented economies on this planet next to Hong Kong, experiencing a technical economic contraction,” said Song Seng- Wun, an economist at CIMB Research in Singapore who has analyzed Asian economies for more than two decades. “It could be a sign of things to come for the other economies around the region.” Electronics shipments by companies such as contract manufacturer Venture Corp. dropped 16.9 percent in July from a year earlier, after declining 17.2 percent the previous month. Singapore’s central bank may maintain a stance of allowing modest appreciation in the local dollar in October because the threat from inflation remains, Song said. The island uses the exchange rate as its main tool to manage monetary policy.
  • Too Soon to Bet on India Easing Policy: Credit Suisse. Investors should hold off from bets that India’s central bank will cut interest rates as global inflation is unlikely to fall enough to bring down the country’s wholesale-price index, Credit Suisse Group AG said. “Against market consensus of inflation falling and thus potentially driving rate cuts, we believe it is too early for the ‘monetary easing’ trade,” Neelkanth Mishra and Karthik Visvanathan, analysts at Credit Suisse, wrote in today’s report. Prices are “unlikely to fall much” amid quantitative easing in developed markets unless the rupee rises against the dollar, they wrote. India’s wholesale-price index rose 9.22 percent in July from a year earlier, the commerce ministry said yesterday, after a 9.44 percent jump in June. Emerging-market stocks may not have reached their lows because inflation has yet to slow in the so- called BRIC nations of Brazil, Russia, India and China, Adrian Mowat, JPMorgan Chase & Co.’s emerging-market strategist, said yesterday. India’s inflation is the fastest among the four nations.
  • Fed's Bullard Says New 2013 Rate Pledge Not a Signal for More Bond Buying. St. Louis Federal Reserve Bank President James Bullard said the Fed’s pledge to keep rates at a record low through at least mid-2013 shouldn’t be seen as a signal for a new round of central bank bond purchases. “The most likely outcome for the U.S. economy is still that the economy continues to grow at a moderate pace through the second half of the year,” Bullard said today in a telephone interview. “If the economy is substantially weaker than expected, we could take more action, especially if it was coupled with a renewed deflation risk,” he said. Bullard, who doesn’t vote on monetary policy this year, said he would have dissented against the Aug. 9 Federal Open Market Committee statement that for the first time attaches a date to its pledge to keep borrowing costs in a range of zero to 0.25 percent. “I think it is a much tougher call to do more QE this time around than it was last year,” Bullard said. “The inflation picture is different this year than it was last year and the risk of deflation is much more remote than it was last year.” “Moving farther into unchartered territory could be helpful for the economy but might also generate substantial inflation,” he said. “So we have to weigh the risks of going further into unchartered territory.” Bullard said he opposed setting a date to the rate commitment because it limits the Fed’s flexibility to adjust to new economic data. It could also trigger a “political battle” and create an additional risk of deflation by encouraging public expectations that prices will head toward a “Japanese-style outcome,” he said. “Most importantly, I think it puts the committee in a box if the economy improves and an inflation problem begins to develop,” he said. If inflation rises and the Fed is forced to react before 2013, “that will cost us some in terms of credibility.” While seven members of the panel favored the action, Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against it. Bullard’s views have sometimes foreshadowed shifts in the FOMC.
  • China Rail Investment Drops 26% on Crash. China’s rail construction investment slumped 26 percent last month after a deadly high-speed train collision prompted officials to suspend approvals for new projects and impose more safety checks. Rail construction investment in July amounted to 41.2 billion yuan ($6.4 billion), compared with 55.8 billion yuan a year earlier, based on Ministry of Railways data released Aug. 15. The Chinese government ordered trains to lower speeds and reduced Beijing-Shanghai bullet-train services after the July 23 collision, which killed 40 people. It dismissed the railway ministry’s spokesman and ordered trainmaker China CNR Corp to recall 54 high-speed locomotives for safety checks. Total rail construction investment in the first seven months of the year dropped 2.5 percent from a year earlier to 283 billion yuan, according to the ministry data. In the first half, the figure was 242.2 billion.
Wall Street Journal:
  • President Weighs Asking Panel for Stimulus Measures. President Barack Obama is considering recommending that lawmakers on a deficit committee back new measures to stimulate the lagging economy, people familiar with White House discussions said Tuesday. The plan Mr. Obama is considering also would recommend the congressional committee come up with a package that reduces the federal budget deficit by much more that its mandate of $1.5 trillion over the next decade, a senior administration official said, through changes in the tax code and social safety-net programs. "There's no reason to stop at $1.5 trillion," the official said.
  • Syria Threatens Dissidents Around Globe, U.S. Says. Syria is taking its war against President Bashar al-Assad's political opponents global, using diplomats in Washington, London and elsewhere to track and intimidate expatriates who speak out against the Damascus regime, according to Syrian dissidents and U.S. officials. Syrian embassy staffers are tracking and photographing antiregime protesters and sending reports back home, Syrian activists and U.S. officials say. Syrian diplomats, including the ambassador to the U.S., have fanned out to Arab diaspora communities to brand dissidents "traitors" and warn them against conspiring with "Zionists."
  • Buyers Wary of Building Bubble. Some of the nation's largest pension funds are starting to back away from trophy properties in the most expensive real-estate markets over concerns a new bubble is inflating. After property prices crashed during the financial crisis, pension funds—among the biggest investors in commercial real estate—turned their investment strategies away from risky speculative projects and toward properties considered "core," well-leased buildings that are seen as low risk due to their stable income, in cities such as New York, Washington and San Francisco.
  • Verizon(VZ) Steps Up Labor Fight. In the latest escalation of an increasingly bitter labor battle, Verizon Communications Inc. has been telling union members it will suspend basic health-insurance and medical benefits on Aug. 31 for all workers still on strike at that time. Verizon issued the threat in letters sent to 45,000 workers, who walked off the job to protest proposed cuts to their benefits that the telecommunications company says are necessary to stem a sales decline in its traditional wireline business.
  • Maverick Capital Does An About-Face on Goldman Sachs(GS). Maverick Capital, the Dallas hedge fund run by Lee Ainslie, high-tailed it out of a relatively new position in Goldman Sachs Group during the second quarter. The fund sold its entire 817,742 shares of Goldman between April and June, according to a quarterly securities filing. Maverick had acquired the stake during the first three months of the year.
  • Warren Buffett's Tax Dodge. The billionaire volunteers the middle class for a tax increase. Since the media are treating Mr. Buffett as a tax oracle, let's take a closer look at some of the billionaire's intellectual tax dodges.
  • Nevergreen Solar. In 2008, Reuters published one of those stories predicting that green power would be cost-competitive with fossil fuels in five years. Headline: "As Energy Costs Soar, U.S. Looks to Solar." Among the prophets was Richard Feldt, then the CEO of Evergreen Solar, who said that "it's not far away" and called for more subsidies. On Monday, Evergreen filed for Chapter 11 bankruptcy.
  • Putin Sets Sights on Eurasian Economic Union. Twenty years after the Soviet Union collapsed, Vladimir Putin, the Russian prime minister, may not, as is sometimes alleged, be trying to recreate it. But he is pursuing a different project – to build a “quasi-European Union” out of former Soviet states.
Business Insider:
Zero Hedge:
  • Statoil Reveals Elephant-Sized Oil Discovery. Statoil has suggested the Aldous and Avaldsnes oil discoveries in the North Sea may collectively contain 500 million and 1.2 billion barrels of recoverable oil. The discovery may represent one of the ten largest oil finds ever on the Norwegian Continental Shelf (NCS). Statoil has a 40% stake both in license PL 265, where Aldous was discovered, and in PL 501, where the Avaldsnes discovery was made. The discovery is located about 140 km west of Stavanger, Norway, in a water depth of 112 meters. “Aldous/Avaldsnes is a giant oil discovery, and according to our estimates the combined discovery may make the top 10 list of NCS oil discoveries. Norway has not seen a similar oil discovery since the mid-eighties,” said Tim Dodson, Statoil’s executive vice president for Exploration. This is the third “high-impact discovery” – defined as a total of more than 250 million barrels of oil equivalent, or 100 million net barrels of oil equivalent - for Statoil as an operator in 2011. In April, the 250 million barrel Skrugard oil discovery was made in the Barents Sea, and the 150-300 million barrel Peregrino South oil field was discovered offshore Brazil.
  • China's Not-So-Veiled Threats to Exploit U.S. Debt. The troubling part of Gang’s proposal was not so much the desire to prevent U.S. arms sales to Taiwan, which is hardly surprising, but rather how he suggested China extort the U.S. government. Here is a long excerpt from Gang’s editorial:
The Detroit News:
  • Treasury Hikes Estimate of Auto Bailout Losses to $14.3 Billion. The Treasury Department has raised the government's estimate of taxpayer losses due to the auto bailout by more than $400 million to $14.33 billion. Earlier this summer, the Treasury had pared its loss estimate to $13.91 billion on its $85 billion bailout of General Motors Co., Chrysler Group LLC and auto finance companies. Overall, the Treasury Department hiked its estimates that it will lose $36.7 billion on its $700 billion Troubled Asset Relief Program, including the value of some AIG shares. That's up from an earlier estimate of $29.6 billion.
  • April 5th, 2009 - Warren Buffett, Champion of Bailout, Is Also Leading Beneficiary. Billionaire investor Warren Buffett has been lauded for his plainspoken denunciation of the greed and foolishness behind the economic crisis. He's pushed the massive federal bailout of imploding banks as the essential response to an "economic Pearl Harbor." When Buffett speaks, people in high places listen. He's so highly regarded that in a fall debate, both presidential candidates said they'd consider him for Treasury secretary. A Sacramento Bee examination of regulatory records has found that his extensive holdings in financial firms have made Buffett, the world's second-wealthiest person behind Microsoft Chairman Bill Gates, one of the top beneficiaries of the banking bailout. Just 28 companies received more than 90 percent of the funds so far disbursed to financial firms by the $700 billion Troubled Asset Relief Program. Buffett's company, Berkshire Hathaway, hasn't received any of that federal aid, but Berkshire, based in Omaha, Neb., owns stock valued at more than $13 billion in the top recipients of TARP funds, including Goldman Sachs Group, US Bancorp, American Express and Bank of America, which analysts all thought were in deep trouble before TARP was approved in October. That total, The Bee found, ranks Berkshire fifth among all investors in TARP-assisted companies. Berkshire's TARP holdings constitute 30 percent of its publicly disclosed stock portfolio, and that proportion reflects at least twice as much dependence on bailed-out banks as any other large investor.
The Blaze:
  • Ohio Business Owner Terrorized & Shot For Being Non-Union. We’ve all heard the stories of shakedowns and bullying that occurs to many non-unionized workers and private business owners. However, the thuggery might have gone beyond the pale recently when one Ohio business owner was repeatedly harassed, then shot and almost killed, for allegedly being non-union.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 19% 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 -23 (see trends).
Real Clear Politics:
  • Angela Merkel and Nicolas Sarkozy Fail to Calm Markets Despite Eurozone Concord. Traders reacted with exasperation as Angela Merkel and Nicolas Sarkozy repeated their "absolute will to defend the euro" and "shore up investor confidence" yet refused to back the shattered currency with eurobonds or a bigger bail-out fund. The failure to address the two measures left many traders ruing what they see as a lack of political leadership. Edward Meir from MF Global in New York said: "It doesn't look like the two biggest items were seriously discussed -- the potential for a eurobond and the size of the stabilization/bailout fund.
Dau Tu:
  • Vietnam's year-on-year inflation may be 20-21% at the end of 2011, citing Le Xuan Nghia, vice-chairman of the National Financial Supervisory Commission.
21st Century Business Herald:
  • China will slow the pace of expansion of central government state-owned enterprises over the five years to 2015, compared with the previous five year period, citing Shao Ning, deputy director at the State-owned Assets Supervision and Administration Commission.
Shanghai Securities News:
  • China's housing ministry is studying measures to "eliminate" speculation in the nation's property market so it can return to a "normal and rational" order, citing an unidentified person. Home purchase restrictions are currently one of the most effective ways to curb the property market. The central government may ask the local governments to limit home purchases in their jurisdictions if they are reluctant to do so while home prices keep rising, Wang Juelin, a researcher at the Ministry of Housing and Urban-Rural Development, was quoted as saying.
China Daily:
  • The U.S. shouldn't launch a third round of quantitative easing as it might cause asset bubbles and stock inflation expectations, Bank of China Ltd. Chairman Xiao Gang wrote today in a commentary in the China Daily. The U.S. should tighten monetary policy to raise confidence in the value of the dollar, Xiao wrote.
  • Risks from lending to China's local government financing vehicles are "controllable" if local authorities and banks take effective measures, citing Liu Mingkang, chairman of the China Banking Regulatory Commission, as saying. The nation's financial institutions must strictly control local debt risk and stop loans to vehicles or projects that don't meet requirements, citing Liu in an interview. China's property loan risks are also "controllable," he said. Banks have been told not to roll over loans to developers, citing Liu.
  • The U.S. Vice President Joe Biden said he aimed to deepen his relationship with China's top leaders, including Vice President Xi Jinping, during his trip to China, citing an interview with the U.S. elected official.
National Business Daily:
  • At least 30 more Chinese cities may be required to restrict local home purchases based on five criteria prepared by the housing ministry, citing Zhang Dawei, a researcher at Centaline Property Agency Ltd.
Evening Recommendations
Morgan Stanely:
  • Reiterated Underweight on (JCP), lowered target to $25.
Night Trading
  • Asian equity indices are -.50% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 145.50 +5.5 basis points.
  • Asia Pacific Sovereign CDS Index 140.75 +1.75 basis points.
  • FTSE-100 futures -.34%.
  • S&P 500 futures +.07%.
  • NASDAQ 100 futures -.16%.
Morning Preview Links

Earnings of Note
  • (CHS)/.24
  • (TGT)/.97
  • (BJ)/.77
  • (ANF)/.29
  • (EV)/.50
  • (LTD)/.46
  • (JDSU)/.22
  • (IRF)/.51
  • (CACI)/1.17
  • (SNPS)/.43
  • (PETM)/.51
  • (NTAP)/.55
  • (FLO)/.26
  • (SPLS)/.19
  • (DE)/1.67
Economic Releases
8:30 am EST
  • The Producer Price Index for July is estimated to rise +.1% versus a -.4% decline in June.
  • The PPI Ex Food & Energy for July is estimated to rise +.2% versus a +.3% gain in June.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -500,000 barrels versus a -5,225,000 barrel decline the prior week. Distillate supplies are estimated to rise by +550,000 barrels versus a -737,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,175,000 barrels versus a -1,588,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.3% versus a +.7% gain the prior week.
Upcoming Splits
  • (EDU) 4-for-1
Other Potential Market Movers
  • The Fed's Fisher speaking and the weekly MBA mortgage applications report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

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