Evening Headlines
Bloomberg:
- Euro Declines Versus Yen on Slowing Recovery. The euro fell for a second day against the yen as economists forecast unemployment in the region remained last month at its highest level since February, adding to signs that Europe’s economic recovery is faltering. The 17-nation currency maintained losses versus the dollar on speculation the European Central Bank will cut borrowing costs to support growth. The yen extended this month’s advances against 15 of its 16 major peers before a report projected to show U.S. employers added fewer jobs in August, boosting demand for safer assets. “There are expectations in the market for European rate cuts to bolster the economy instead of a rate increase that hurts the economy,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign- exchange margin-trading services. “A rate cut is a negative for the euro.” The euro traded at $1.4421 at 10:30 a.m. in Tokyo from $1.4441 yesterday in New York. It was at 110.49 yen from 110.82.
- Subprime Mortgage Bonds Get AAA Rating From S&P Denied to U.S. Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government. S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties. New York-based S&P stripped the U.S. of its top rank on Aug. 5, saying Washington politics were making the country less creditworthy. Treasuries gained about 1.95 percent and U.S. borrowing costs have fallen to record lows as investors repudiated the downgrade, according to Bank of America Merrill Lynch indexes. S&P has awarded AAAs to more than $36 billion of securities in the U.S. this year that were created by bankers who continue to gather thousands of loans, bundle them into bonds of varying risk and pay ratings firms a fee to assign credit rankings.
- Capital Rules May Cut Bank Profitability to 11%, McKinsey Says. Lenders may struggle to earn more than an 11 percent return on their equity as they implement rules and capital requirements costing $610 billion over the next seven years, according to a report from McKinsey & Co. Global regulations, including the mandatory clearing of over-the-counter derivatives and higher capital requirements, may force banks to pass on a “portion of the higher regulatory costs” to customers, the study said. Banks should “conserve capital and boost efficiency” to stay profitable, London-based McKinsey said. “After mitigation, average returns-on-equity across businesses will likely be 11 to 12 percent but with considerable variation,” according to the report, written by a McKinsey team led by Philipp Haerle and Thomas Poppensieker in Munich. “Some of the worst-hit businesses with ROEs below the cost of capital may have to be disposed of, especially at banks with weak franchises.” European lenders will need to raise an extra 423 billion euros ($610 billion) by 2019 to comply with global capital rules approved by the Basel Committee on Banking Supervision, according to a European Union study. The Basel committee also said last month that 28 banks would be subject to additional capital requirements to rein in too-big-to-fail banks.
- Containers Slump to 50-Year Low as Sales Slow: Freight Markets. The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009. Commerce on the world's second-busiest container route rose 4.2% in the second quarter, the weakest since the end of 2009, Woking, England-based Container Trade Statistics Ltd. estimates. Rates excluding fuel surcharges were "practically" zero in July and little changed this month, the worst run ever, said Menno Sanderse, an analyst at Morgan Stanley in London.
- Oil Heads for Biggest Monthly Drop Since May on Signal Stockpiles to Climb. Oil declined, heading for the biggest monthly drop since May, as investors bet that increasing crude stockpiles in the U.S. indicate fuel demand may falter in the world’s biggest consumer of the commodity. Futures slipped as much as 0.4 percent, snapping four days of gains, after the industry-funded American Petroleum Institute said supplies rose 5.13 million barrels last week, the biggest gain since March. An Energy Department report today may say inventories fell 500,000 barrels, according to the median estimate in a Bloomberg News survey. Seven respondents forecast a drop and six expected an increase. Crude for October delivery slid as much as 39 cents to $88.51 a barrel in electronic trading on the New York Mercantile Exchange and was at $88.53 at 8:41 a.m. Sydney time. The contract yesterday advanced $1.63 to $88.90. Prices are down 7.5 percent this month and 23 percent higher the past year.
- Rebels Scrounge for Munitions Ahead of Final Assault on Qaddafi Birthplace. Libyan rebels from three parts of the country converged on the capital in search of weapons as time runs out for those still supporting Muammar Qaddafi to surrender or face attack. The coastal city of Sirte, Qaddafi’s hometown, and the southern town of Sabha are the key remaining bastions of Qaddafi loyalists, rebel leader Mustafa Abdel Jalil said yesterday in Benghazi. He advised people in those areas to surrender by Sept. 3 to avoid further bloodshed.
- China Stocks to ''Head Downward' on Inflation, HSBC Jintrust Says. China's stocks may extend this year's slump as the government maintains policy measures to tame inflation and corporate profit growth slows, according to HSBC Holdings Plc's fund management venture in China. Investors should avoid industries with overcapacity and excess inventories, including metals, automobiles and auto parts, said Yan Ji, investment director at HSBC Jintrust Fund Management Co., which manages $1.6 billion. The Shanghai Composite Index has fallen 8.6% in 2011, adding to last year's 14% drop. The government's Aug. 26 order to lenders to set aside more reserves on margin deposits shows that the central bank still regards controlling inflation as its biggest task, Yan said.
- Rescue Fund Hits Snags in Germany and Finland. German Chancellor Angela Merkel is weighing whether to yield to a demand by some lawmakers for a bigger voice in future debt bailouts as a condition to win her party's approval for a stronger euro-zone rescue fund, as a parliamentary vote on the issue was delayed a week. Granting the German parliament the right to approve or reject future bailouts could trigger similar demands from parliaments across the euro zone, whose lawmakers are closely observing Berlin's actions. That could lead to further delays in the EU's approval for the Greek rescue.
- Economy Deeply Divides Fed. Federal Reserve officials are as deeply divided as they've been in decades about how to spur the flagging economy, records released Tuesday show, as they stake out positions on what, if any, action to take at their September meeting.
- Exxon(XOM) Wins Arctic Deal, Gives Russia U.S. Access. Exxon Mobil Corp. snatched away a major Arctic exploration deal with Russia's OAO Rosneft from competitors including BP PLC in a sweeping agreement that for the first time gives a Russian state-controlled company access to energy projects in the U.S. Exxon, entering a country where energy investments are fraught with political risk, agreed to invest $2.2 billion to explore potentially giant oil fields with state-run Rosneft in the ice-choked Kara Sea. It also finalized a deal to spend $1 billion looking for oil in the Black Sea.
- Debate Heats Up Over Commodities Holdings. A battle is heating up over whether investors in oil and other commodities markets should be required to lift the veil of secrecy that shrouds their trading bets. The debate has simmered in the three years since oil prices spiked to record highs in 2008, sparking concerns that speculators were driving the move. But it intensified in recent weeks after The Wall Street Journal published confidential regulatory data that identified some of the biggest players in commodities markets, and big chunks of their positions, during that historic rally.
- Bank of America Burns 'Big Short' Star Lippmann. Warning: Irony ahead. LibreMax Capital is among the two dozen investment firms that have objected to Bank of America’s proposed $8.5 billion settlement with mortgage-security investors. For those of you without a hedge fund scorecard, LibreMax is the new firm started by Greg Lippmann, the former Deutsche Bank CDO trader who helped the bank earn billions of dollars betting against shoddy mortgages. Lippmann was among the big shorting stars of Michael Lewis’s book “The Big Short.” So the guy who hated subprime mortgages now has turned long on mortgage bonds, a batch of which has burned him. Hurts, don’t it?
- Bank of America(BAC) to Exit Another Line. Bank of America Corp. intends to sell its correspondent mortgage business, as the troubled lender looks to narrow its focus and bolster its financial strength, said people familiar with the situation.
- Japan's July Industrial Production Disappoints. Japan's industrial production rose a seasonally adjusted 0.6% in July, the Ministry of Economy, Trade and Industry said Wednesday. The result was well below an average forecast for a 1.5% rise from a Nikkei and Dow Jones Newswires survey. The ministry's regular survey of manufacturing also showed firms expect industrial output to rise 2.8% in August, up from a previous forecast of 2.0% last month, but to fall 2.4% in September.
- Pockets of Debt Illiquidity Show Rising Bank Fears. Pockets of the fixed income and money markets are starting to reflect concern that recent volatility will extend past August, and that growing risk aversion may again roil banks and funding markets. One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion in triparty loans. For example, banks have reduced activity in the intra-dealer Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital. To some, this spreading risk aversion suggests that an autumn of troubling headlines could again spark a freeze like the 2008 crisis. There is no shortage of potential flash points, from Europe's debt crisis to a weak U.S. economy. "I think the markets are going to get very stressed," said Abdullah Karatash, head of U.S. fixed income credit trading at Natixis in New York. Three-month interbank dollar lending rates also rose again on Tuesday to their highest in over a year. With rising interbank borrowing costs, futures contracts have also been implying three-month loan rates could rise as high as 60 basis points in December. This suggests nerves that funding pressures could increase over the new year period, when many banks reduce lending to tidy balance sheets for year-end. Commercial paper loans to banks have dropped by 15 percent, or $90 billion, since the beginning of June and lending to European banks has dropped 20 percent, according to Barclays. This has left European banks struggling to obtain the dollar funding they need to finance U.S. exposures, and sent the cost of swapping euros to dollars to post-crisis highs. "This could be Europe's 2008. That's probably the major concern for the market, what does that mean for the ripple effect on our capital markets and globally," said Mikelic. A CDS index based on of 25 European financials is also reflecting elevated concerns over their credit quality. The index traded on Tuesday at 242 basis points, just under last week's record 260 basis points and much higher than the 210 basis point peak reached at the height of the financial crisis, according to data by Markit.
- China Intensifies Purchases of Copper. Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks. “China is significantly less pessimistic relative to people in the western world,” said Raymond Key, head of metals trading at Deutsche Bank. “On dips they are restocking, especially in copper.” An executive at an important Chinese trading house added: “There is no doubt some traders have been buying [copper] recently.”
- Bank of America's(BAC) Lawyers Knew AIG(AIG) Was Ready to Sue for $10 Billion 6 Months Ago.
- A Close Look At One of Those Crashing Solar Equipment Companies. Both China Inc. and Euro Inc. solar panel manufactures are willing to provide 100% of the financing (including “soft” costs) for a viable project. What better evidence could you find that there is a very big imbalance of supply and demand?
The fundamental issue is that solar panels are a low tech. commodity product. It’s very difficult to make a buck when that is the case. These points all lead me to wonder about a big company in this space, Solyndra. This is a private company. I don’t have any financials to look at as a result. Neither do you. But you should, this company is heavily indebted to Uncle Sam.
NY Times:
- Bank of America(BAC) Settlement Faces Growing Challenges. The legal onslaught continues for Bank of America. On Tuesday, several homeowners filed suit in Federal District Court in Manhattan, seeking to block a proposed $8.5 billion settlement between Bank of America and major mortgage investors, including BlackRock, Pimco and the Federal Reserve Bank of New York. The suit says the deal fails to address widespread servicing problems and would actually speed up foreclosures. In a separate new case, U.S. Bancorp, the trustee of a $1.75 billion mortgage pool originated by Countrywide Financial in 2005, sued to force Bank of America to buy back the underlying mortgages, arguing that the loans were made without proper documents and did not conform to underwriting standards.
- At N.L.R.B., Flurry of Acts for Unions as Chief Exits. The on Tuesday released a decision that would make it easier to unionize nursing home workers. It is the latest in a flurry of moves favorable to unions that the board completed before the term of its chairwoman, Wilma B. Liebman, expired on Sunday. The board released two other pro-union decisions on Tuesday, both reversing decisions issued under President George W. Bush.
The Daily Beast:
- America's Secret Libya War. The U.S. military has spent about $1 billion on Libya’s revolution, and secretly helped NATO with everything from munitions to surveillance aircraft. John Barry provides an exclusive look at Obama’s emerging 'covert intervention' strategy.
Rasmussen Reports:
- Rasmussen Employment Index Falls to 2011 Low. At 69.3, the Employment Index is down eight points from the beginning of the year and down 14 points since last November when hiring expectations peaked. Generally speaking, a decline in the Rasmussen Employment Index suggests the upcoming government reports on job creation will be worse than prior months.
- Fed's Bullard: QE3 Possible Depending on Data - Asahi. The U.S. Federal Reserve could embark on a third round of quantitative easing depending on upcoming economic data but should first confirm that inflation has eased, a senior Fed official said in the Asahi newspaper on Wednesday. The Fed will need to confirm whether its economic outlook is still on track at a policy meeting next month and weigh the best options if additional easing is needed, St. Louis Fed President James Bullard said in an interview with the Japanese daily. Expectations are growing that the central bank could ease policy at its two-day meeting starting Sept. 20 after minutes from last month's gathering showed some policymakers pressed for bold and unconventional steps to shore up a flagging economy. "Depending on future economic data QE3 is one choice, but we need to gather information about how the economy will perform in the second half of the year," Bullard said in the Asahi, referring to the Fed's quantitative easing programme where it buys government debt. "Before any moves, I would like to confirm that inflation is easing." The head of the St. Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year.
- Steel, Other Sectors Point to Slowdown in Brazil.
- Chinese Speculators 'Major Force' in Gold Market. "Buying commodities with US dollars has proved to be an attractive investment for many mainlanders in the last few years," he said. According to a report in Yangcheng Evening News last Wednesday, just one city in Guangdong province - Guangzhou - has 2,000 underground investment companies dealing in gold and foreign currencies. Investors can leverage up to 100 times their principal with such black- market brokers, the daily said. The black market for gold in China sees up to 100 billion yuan (HK$122 billion) worth of trade every year, the report said.
- China CITIC Bank Corp.'s reserves placed at the central bank will increase by about 40 billion yuan after the People's Bank of China asked the nation's lenders to include customers' margin deposits when calculating required reserves, citing Vice President Cao Guoqiang.
- China's full-year consumer price index gains are unlikely to be less than 5%, citing Wang Jian, secretary-general of the China Society of Macroeconomics. Inflation may exceed 7% in November, when sales begin of the autumn grain harvest, the report cited Wang as saying. The China Society of Macroeconomics is affiliated with the National Development and Reform Commission.
- Up to 70% of small and medium-sized enterprises in China currently face "severe" survival difficulties, citing Gu Shengzu, a vice chairman at the national People Congress's internal and judicial affairs committee. Gu also said that only about 10% of the small and medium-sized companies are able to get loans from the standard banking system.
Citigroup:
- Reiterated Buy on (PVH), target $82.
- Rated (LYB) Overweight, target $43.
- Rated (APD) Overweight, target $97.
- Rated (CE) Overweight, target $49.
- Asian equity indices are -.25% to +.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 154.0 +1.0 basis point.
- Asia Pacific Sovereign CDS Index 147.0 -3.5 basis points.
- FTSE-100 futures -.08%.
- S&P 500 futures +.01%.
- NASDAQ 100 futures -.08%.
Earnings of Note
Company/Estimate
- (ZLC)/-1.15
- (JOYG)/1.50
- (BF/B)/.83
- (COO)/1.08
- (ZUMZ)/.05
- (GCO)/.10
- (SHFL)/.15
8:15 am EST
- The ADP Employment Change for August is estimated at 100K versus 114K in July.
- The Chicago Purchasing Manager report for August is estimated to fall to 53.3 versus 58.8 in July.
- Factory Orders for July are estimated to rise +2.0% versus a -.8% decline in June.
- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -500,000 barrels versus a -2,213,000 barrel decline the prior week. Distillate supplies are estimated to rise by +500,000 barrels versus a +1,731,000 barrel gain the prior week. Gasoline inventories are expected to fall by -950,000 barrels versus a +1,355,000 barrel increase the prior week. Finally, Refinery Utilization is expected to fall by -.5% versus a +1.2% gain the prior week.
- (HFC) 2-for-1
- (VRUS) 2-for-1
- (RGCO) 2-for-1
- The Challenger Job Cuts report for August, NAPM - Milwaukee for August, weekly MBA mortgage applications report, China PMI, (NVLS) Mid-Quarter Update, Piper Jaffray Semi Summit and the BofA Merrill Euro Tech Conference could also impact trading today.
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