Wednesday, August 24, 2011

Wednesday Watch

Posted by Gary .....at 1:01 AM

Evening Headlines

Bloomberg:
  • Japan Debt Rating Cut to Aa3 by Moody's. Japan’s debt rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden. Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said. The first Japan downgrade by Moody’s since 2002 reflects deteriorating credit quality across developed nations from Italy to the U.S., which lost its AAA status at Standard & Poor’s this month. “I hope this serves as a warning to the soon-to-be new administration,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “It’s imperative to begin to raise the sales tax.” Moody’s is in final discussions on whether to downgrade Japan’s biggest lenders, a person with direct knowledge of the matter said. Banking units of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. (8411) are among those being examined, said the person, who asked not to be identified before a decision. Moody’s put Japan on review in May, calling on the government to step up efforts to narrow the budget gap. S&P lowered the nation’s grade to AA-, equivalent to the current Moody’s grade, in January, and has the nation under review for a further cut. Fitch Ratings has Japan at AA- with a negative outlook. Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.” Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development. The government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. “Insufficient fiscal adjustment could lead to a spike in JGB yields which, even if the effects were contained, could trigger financial volatility and prove highly disruptive,” according to the IMF, referring to Japanese government bonds. The IMF also said that outstanding government bonds could exceed total financial assets owned by households in five to 10 years barring policy changes, suggesting the government may need to rely more on foreign investors to fund its deficits.
  • Merkel Rejects Seeking Collateral in European Bailouts as Splits Emerge. German Chancellor Angela Merkel rejected demands that Greece provide collateral for emergency loans as splits emerged in her Cabinet, reflecting euro-area divisions on the issue. Merkel told lawmakers from her Christian Democratic bloc that a call by Labor Minister Ursula von der Leyen for countries to put up gold as security for bailouts is “not the right way,” Ulrich Scharlack, a spokesman for the parliamentary group, said yesterday in Berlin after they were briefed by Merkel on the region’s debt crisis. The disagreement at the top of Europe’s biggest economy underscores risks over a second Greek aid package after the Finnish government said Aug. 16 that it secured a collateral arrangement to ensure its contribution would be repaid. Austria and the Netherlands, which both share Finland’s AAA rating, called for similar deals, as did Slovakia and Slovenia. “We expect other euro-area members to ultimately reject the Finland-Greece deal,” Moody’s Investors Service said. “But the message sent by the calls for such agreements confirms that Europe is conflicted over the very decision to provide financial support to its members, not just the amount of support.”
  • European Bank Job 'Bloodbath' Surpasses 40,000. UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue. UBS, Switzerland’s biggest bank, said yesterday it will eliminate 3,500 jobs, mainly from its investment bank. It follows HSBC Holdings Plc (HSBA), which announced 30,000 cuts on Aug. 1, Barclays Plc (BARC), which is cutting headcount by 3,000, and Royal Bank of Scotland Group Plc (RBS), which is eliminating 2,000 posts. Credit Suisse Group AG (CSGN) announced 2,000 reductions on July 28. European banks are slashing jobs this year six times faster than their U.S. peers, according to data compiled by Bloomberg, as concerns about the creditworthiness of Italy, Spain and France roil financial markets and reduce income from fixed- income trading, stock and bond underwriting as well as mergers and acquisitions. Financial firms are also cutting costs as regulators force banks to hold more and better quality capital to withstand future shocks. “It’s a bloodbath, and I expect things to get worse before they get better,” said Jonathan Evans, chairman of executive- search firm Sammons Associates in London. “I cannot see a lot of those who have lost their jobs getting re-employed. Regardless of how good someone is, no one wants to talk about hiring. Life will be very difficult for two or three years.”
  • Homeowners on East Coast May Find Insurance Won't Cover Earthquake Damage. Homeowners won’t be covered by standard property insurance policies if there’s any damage following today’s 5.8 magnitude earthquake centered near Richmond, Virginia. Earthquake protection is generally excluded from standard homeowners’ insurance policies, and consumers have to purchase coverage either as a separate policy or an endorsement to an existing policy, said Michael Barry, a spokesman at the Insurance Information Institute in New York.
  • Ford(F) Said to Face Hearing on Union's Equal-Sacrifice Complaint. Ford Motor Co. (F) is facing a Sept. 15 hearing on a complaint by the United Auto Workers union that salaried employees didn’t sacrifice as much as hourly workers, said two people familiar with the matter. The hearing before an independent arbitrator is scheduled for the day after Ford’s contract expires with its 41,000 U.S. hourly workers, said the people, who asked not to be identified revealing details of the grievance process. More than 35,000 Ford workers, who gave up pay increases and bonuses, signed the grievance last year after the company reinstated raises, tuition assistance and 401(k) matches to white-collar employees. The union’s “equality of sacrifice” grievance has become a topic at the bargaining table with Ford, said one of the people. Ford is seeking to reduce labor costs while the UAW tries to recover what workers gave up to help U.S. automakers survive. UAW President Bob King has said members must be rewarded for concessions of $7,000 to $30,000 each since 2005. “It’s going to be difficult to get anything else done with this hanging over the Ford talks,” said Kristin Dziczek, labor analyst at the Center for Automotive Research in Ann Arbor, Michigan. “It will be tough to get a contract ratified if this is not resolved first.”
  • Fed Made State Street(STT) Profitable as Middleman. State Street Corp. (STT) and JPMorgan Chase & Co. (JPM) profited during the financial crisis by borrowing $200 billion almost risk-free from the Federal Reserve under a program intended to rescue money-market mutual funds. The Fed lent State Street a total of $89 billion to buy securities from the funds in 2008 and 2009 after the credit crisis triggered by the collapse of Lehman Brothers Holdings Inc., according to Fed data compiled by Bloomberg News from information released in response to Freedom of Information Act requests, related court orders and an act of Congress. The central bank also guaranteed against losses on the short-term notes as long as they met eligibility guidelines. State Street, based in Boston, held the securities to maturity and collected a return of $75.6 million, according to regulatory filings. JPMorgan borrowed and bought $111 billion in securities under the same program, records show. While New York- based JPMorgan hasn’t disclosed its profit from the transactions, it would have been about $93 million at the same rate of return State Street reported. “The program was enacted without any bidding process and awarded on the basis of whoever was there at the moment,” said Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge. While the banks’ return may have been appropriate, the lack of competitive bids is troubling, Mason said. He noted that for State Street, JPMorgan and other participants, “there was virtually no risk.”
  • Japan's Government Unveils $100 Billion Effort to Cope With Yen's Strength. Japan’s government unveiled a $100 billion effort designed to cope with persistent strength in the yen that threatens to thwart the nation’s recovery from three straight quarters of economic contraction. Officials will release $100 billion to fund loans by Japan Bank for International Cooperation, Finance Minister Yoshihiko Noda told reporters today in Tokyo. JBIC, as the lender is known, is a state-run export credit agency.
  • Banks Pay Record Rate for Government Cash on Tightening Risk: China Credit. Chinese lenders are paying record interest rates for government funds as rising yields on central bank bills fan speculation policy makers will further tighten supplies of cash. The Finance Ministry received a rate of 6.5 percent for 30 billion yuan ($4.7 billion) of six-month money offered at an auction yesterday, the highest level in central bank data going back to December 2006. The People’s Bank of China raised rates on one-year bills last week for the first time since June, boosting the yield by eight basis points to 3.58 percent, compared with the 0.10 percent yield on 12-month U.S. Treasuries. China has limited scope to stimulate the world’s second- biggest economy even as a faltering recovery in the U.S. and Europe’s sovereign debt crisis dim the outlook for global expansion. Inflation has exceeded Premier Wen Jiabao’s target every month this year and economic growth that’s double the pace of Brazil and Russia may give the government confidence to continue raising benchmark rates that have already been boosted by a total 75 basis points in 2011. “Increases in the one-year bill yield have proved a good leading indicator of interest-rate hikes in China,” said Kevin Lai, a Hong Kong-based economist with Daiwa Capital Markets Ltd. “The turbulence in global markets has settled down and with inflation pressure still strong the central bank needs another rate increase to fully contain inflation expectations.”
Wall Street Journal:
  • Gadhafi's Compound Falls. Triumphant rebel fighters and thousands of ordinary Libyans stormed Col. Moammar Gadhafi's fortress compound here Tuesday after a daylong battle, but the elusive strongman was nowhere to be found.
  • Live Blog: The Battle for Tipoli.
  • Oil Exports to Start Faster Than Thought, Some Say. With Libyan opposition forces now in control of much of the country's oil fields, refineries and export terminals, Libyan crude could start returning to world markets far quicker than previously forecast, analysts say. That has big implications for the price of oil. The prospect that Libyan barrels could soon be flowing again, amid weakening demand in the U.S. and Europe, has led some banks this week to make downward revisions to their crude price forecasts for 2012. Ross Cassidy, an analyst at oil and gas consultancy Wood Mackenzie, said he expected Libya to get back up to 600,000 barrels a day of production within three months, "assuming a swift end to hostilities," and a focus by the new government on repairing infrastructure and stabilizing the sector. The consultancy had previously only said that it would take around three years for Libya's oil production to rebound to preconflict levels.
  • Goldman Sachs(GS), Citigroup(C) Hire Moody's To Rate Pulled $1.5 Billion CMBS - Sources. Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) have hired Moody's Investors Service to provide a rating on their $1.5 billion commercial mortgage-backed security in an effort to salvage the issue that was abruptly shelved last month.
  • Hilton Is Unlikely to Stay in Vegas. Hilton Worldwide Inc.'s namesake brand, a fixture in Las Vegas since 1970, is set to vanish from the city's gambling scene unless Hilton finds another property to fly its flag there before year end.
  • Investors Pay Price for Fund's Success. Billionaire investor Paul Tudor Jones II has decided to lower some fees charged by his largest hedge fund after years of grumbling by some clients, according to people close to the matter. But Mr. Jones, who runs hedge-fund firm Tudor Investment Corp., is raising other key fees charged by the fund. And he will maintain overall charges that top most hedge funds and other investment vehicles, a sign of the interest that continues for brand-named funds.
  • Euro Zone Weighs New Plan on Greek Bailout Collateral. Euro-zone governments are discussing a plan to have noncash Greek government assets, including real estate, offered as collateral for a new round of rescue lending to Greece, backing away from a bilateral agreement reached last week between Greece and Finland, officials said Tuesday. The discussions come as opposition is mounting among the governments to the Finnish-Greek deal—which would see Greece pay Finland hundreds of millions of euros in cash as collateral against the loans. Crucially, German Chancellor Angela Merkel has rejected the deal, said a German lawmaker.
  • Slower Business Spending Spells Trouble. Business spending has been the recovery's bright spot. Now, it too may be fading. It is difficult to exaggerate the importance of such business capital expenditures, or capex, to recent economic growth. In the eight quarters since the recession's official end in June 2009, business spending on equipment and software has accounted for about a third, or 0.8 percentage-point, of average gross domestic product growth.
  • Toronto Wary of Condo Correction. A condominium-building boom is lifting Canada's largest city into the same stratosphere as London, Sydney, Vancouver and Miami, but deepening the worries about a potential tumble. Buyers snapped up 1,986 condominiums in Toronto in July, up 28% from a year earlier, according to the Canadian Real Estate Association. Average prices have surged 8% to 9% a year for the past five years, climbing to 304,000 Canadian dollars (US$306,900). Rows of sparkling condo towers line the shores of Lake Ontario, while cranes dot the inland skyline near the tony neighborhood of Yorkville, a magnet for visiting pop-music and Hollywood celebrities.
  • A Value-Added Tax Fuels Big Government. In Europe the VAT hasn't substituted for income taxation. It's merely added to the tax burden.
Business Insider:
Zero Hedge:
IBD:
NY Times:
  • New S&P Chief Knows Crisis and Change. The new president of Standard & Poor’s is used to dealing with crises, including mollifying angry government officials and navigating complex new regulations. That experience should serve the executive, Douglas Peterson, the chief operating officer of Citibank, well at his new job at a ratings agency under fire on multiple fronts. Yet his appointment is not likely to ease the pressure from investors on its parent company, McGraw-Hill, to break itself up even as the company presses ahead with a likely spinoff of its education business.
  • Romney Condemns Biden's Comments on China's One-Child Policy. On Tuesday he condemned Vice President Joseph R. Biden Jr. for comments that seemed to condone China’s controversial one-child policy. Calling China’s policy “gruesome and barbaric,” Mr. Romney said in a statement Tuesday morning, “Vice President Biden’s acquiescence to such a policy should shock the conscience of every American.” Mr. Romney was responding to comments Mr. Biden made during a question-and-answer session focused on United States debt and entitlement reform at Sichuan University in China, in which he seemed to condone China’s policy of allowing families to have just one child in order to limit the country’s population. The policy has been linked to coerced abortions and forced sterilization, and has been challenged as a human rights violation. “Your policy has been one which I fully understand — I’m not second-guessing — of one child per family,” Mr. Biden said. Mr. Romney’s campaign was quick to attack Mr. Biden for his remarks. “Instead of condoning the policy, Vice President Biden should have condemned it in the strongest possible terms,” Mr. Romney’s statement read. “There can be no defense of a government that engages in compulsory sterilization and forced abortions in the name of population control.”
  • Oil Reserves Sidestep U.S. Vessels. In its hurry to transport millions of barrels of oil from federal stockpiles to stabilize world oil prices earlier this summer, the Obama administration has repeatedly bypassed federal law by allowing nearly all the oil to move on foreign-owned vessels, drawing protests from domestic maritime operators.
Boston Globe:
  • Lawmakers Propose Three Casinos, One Slot Parlor as Gambling Plan Emerges. House and Senate leaders today proposed building three sprawling casinos in three regions of the state as well as a fourth gambling hall with up to 1,250 slot machines, according to a copy of the proposal obtained by the Globe. The 133-page bill would require developers to invest a minimum of $500 million per casino and specifies that each casino must also include a hotel. Licenses for the casinos would be auctioned off at a starting price of $85 million.
AppleInsider:
DesMoinesRegister:
  • Steffen Schmidt: Some Dems Think The Unthinkable: Not Obama. I literally choked on my next sip of a nice New England summer ale when one of them said, “New Hampshire was right. Hillary Clinton would have made a better president.” Whoa! Then the other shoe dropped. “I think we need a write-in candidate for the 2012 Iowa Democratic caucuses and Hillary would be my choice.”
The Blaze:
  • NJ School Reading List Featured Books On Lesbian Sex, Gay Orgy. Most of us can remember many of the books on the assigned reading list in middle and high school — from Charles Dickens’ “Great Expectations” to Fyodor Dostoyevsky’s “Crime and Punishment.” Today, however, required reading for students apparently includes “Tweak: Growing up on Methamphetamines,” a book that features a scene depicting a homosexual orgy and “Norwegian Wood,” a book that features a sex scene between a 31-year-old woman and a 13-year old girl. That’s right. Books on gay orgies and lesbian sex as required reading for students. Fox Nation reports that a New Jersey school district has apologized to parents after requiring high school students to read the graphic books. “Some of the language is inappropriate,” said Chuck Earling, superintendent of Monroe Township Schools in Williamstown, NJ. “We were not trying to create controversy. We were just trying to get students to read.” Even more disturbing, is that the books reportedly on the required reading list were not just for high school students, but for middle school students as well.
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-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -26 (see trends).
Reuters:
Telegraph:
  • Finland Threatens to Withdraw Greek Bailout Support. Jyrki Katainen, the Finnish prime minister, has threatened to withdraw support for the Greek bailout in a move that could crush the fragile signs of recovery on global markets. Mr Katainen said that if Finland's bilateral agreement with Greece over collateral payments was overruled, the Nordic country could back out of the rescue programme. He told reporters that the private collateral agreement, in which Greece agreed to give Finland €1bn (£875m) in cash in return for its suppport, was "our parliament's decision that we demand it as a condition for us joining in".
Guardian:
  • Bank of America's(BAC) Share Nosedive Fuels Fears of a Second Credit Crunch. Bank of America continued its tailspin on Tuesday as shares in the largest US bank tumbled by another 6.4% to their lowest level since March 2009, fueling fears of a second banking crisis. As concerns mounted that BoA will need to take huge additional write-offs on bad mortgages, the cost of insuring the group's debt jumped to record levels and investors became increasingly concerned that the financial system could be facing a fresh credit crunch. Graham Turner, of GFC Economics, said it was "small wonder that stocks such as BoA's are under such pressure," adding that banks are holding on to many of the properties they have repossessed for fear of precipitating further price declines. "The recent uptick in the unemployment rate increases the risks that early arrears will climb further in Q3. The Lehman Brothers crisis succeeded in pushing 30-day arrears up by 39 basis points over two quarters. A similar increase over the coming six months would push early arrears up to new highs," Turner said.
  • Goldman Sachs(GS) Braced for Legal Battles Over Financial Crisis. US lawyer, Jake Zamanksy – who led pursuit of investment banks after the dotcom crash – predicts wave of legal actions. Goldman Sachs the embattled investment bank, will face an array of legal claims focusing on its conduct during the financial crisis, one of Wall Street's most feared lawyers warned last night. The prediction of an escalation in cases is being made by Jake Zamansky, the US attorney nicknamed "Jaws" who spearheaded the successful pursuit of the investment banks after the dotcom crash.
Welt:
  • Carsten Schneider, budget spokesman for Germany's main opposition Social Democratic Party, criticized the labor minister for demanding collateral from euro-area members needing financial aid. Comments from German Labor Minister Ursula von der Leyen that nations in need of a bailout need to put up collateral is a sign of "the chaos in the federal government" and shows that it has "no negotiation strategy," citing Schneider.
Xinhua:
  • Chinese President Hu Jintao said the nation should implement a land-saving strategy and reduce its reliance on land resources for economic growth. Hu called for more frugal use of land for new construction projects and said developers should stop using arable land for building new projects.
  • China's Power Giant, GE(GE) Build Joint Venture. Distributed energy systems, also known as distributed energy resources (DER), refer to the generation of energy from small energy sources. The $100-million joint venture will be called Huadian GE Aero Gas Turbine Equipment Co., Ltd., with Huadian owning a majority share of 51 percent. Located in Shanghai, it will be completed for production in 2013. "It is the first step for us to introduce key DER technical equipment from the US In the next stage we will gradually localize the technology," Huadian vice-manager Deng Jianling said.
Shanghai Securities News:
  • China Banking Regulatory Commission Chairman Liu Mingkang told the nation's banks to strictly control asset bubbles and to properly implement differentiated property lending policies. The regulator will also bank bank loans from entering the stock market and bar lenders from providing guarantees for corporate bonds, citing Liu. The regulator also asked banks to set up a country-risk management system.
  • China should use interest rate as a priority among tools to curb inflation, while "appropriately" reducing reliance on the reserve requirement ratio to adjust liquidity, citing a Chinese state researcher. Curbing inflation should remain the top priority for the country, Ba Shusong, a researcher with the Development Research Center of the State Council, was cited as saying. The global economy may be entering a "moderate double-dip" recession, which may last longer than the subprime crisis in 2008, Ba said.
21st Century Business Herald:
  • China's Ministry of Railways will lose about 2.6 billion yuan annually because of the cut in high-speed train ticket prices of about 5%, citing people close to the ministry.
Metro Express:
  • Shanghai told banks to ban individuals from using consumer loans to buy commercial properties as part of efforts to curb speculation, citing the China Banking Regulatory Commission's branch in the city. Local banks were also told to extend property loans to buyers of commercial real estate only after the properties have been completed. Banks were previously allowed to extend loans once a property's roof was in place. Unlike residential properties, commercial real estate doesn't have limits on bank borrowings or purchases.
People Daily:
  • China's consumer price situation in the second half is "not optimistic" and it is "very difficult" to achieve the government's inflation target for this year, the People's Daily said in a front-page commentary today. Worsening sovereign debt turmoil in the world and difficulties for the operations of domestic companies add to instability of the economy. The country's policies should slow price gains and prevent "big fluctuations" in the economy, according to the commentary.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 160.75 +1.75 basis points.
  • Asia Pacific Sovereign CDS Index 151.0 +4.5 basis points.
  • FTSE-100 futures +.94%.
  • S&P 500 futures -.52%.
  • NASDAQ 100 futures -.53%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (TOL)/.03
  • (AEO)/.11
  • (PSS)/.10
  • (SMTC)/.48
  • (AMAT)/.33
  • (SLH)/.59
  • (GES)/.80
Economic Releases
8:30 am EST
  • Durable Goods Orders for July are estimated to rise +2.0% versus a -2.1% decline in June.
  • Durables Ex Transports for July are estimated to fall -.5% versus a +.1% gain in June.
  • Cap Goods Orders Non-defense Ex Air for July are estimated to fall -1.6% versus a -.4% decline in June.
10:00 am EST
  • The House Price Index for June is estimated to rise +.2% versus a +.4% gain in May.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,750,000 barrels versus a +4,233,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,000,000 barrels versus a +2,449,000 barrel gain the prior week. Gasoline inventories are expected to fall by -1,000,000 barrels versus a -3,510,000 barrel decline the prior week. Finally, Refinery Utilization is expected unch. versus a -.9% decline the prior week.
Upcoming Splits
  • (RYN) 3-for-2
Other Potential Market Movers
  • The 5-Year Treasury Auction, weekly MBA Mortgage Applications Report and the (MU) Analyst Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology 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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