Evening Headlines
Bloomberg:
- Trichet Urges Euro Officials to Get 'Ahead of Curve' in Crisis. European Central Bank President Jean-Claude Trichet pressed euro-area governments to take decisive action to halt the debt crisis, after the ECB bought them more time by extending an emergency lifeline to lenders. Trichet said finance ministers meeting in Wroclaw, Poland today need to show the same “unity of purpose” as central banks did yesterday in providing extra dollars to European banks bruised by the crisis that has seeped from Europe’s edges to its core. “We are not back to ‘business as usual’ as some thought some months ago,” Trichet said late yesterday in Wroclaw. “We call all authorities to implement swiftly all decisions and to be constantly ahead of the curve.” Eighteen months of crisis-fighting and 256 billion euros ($355 billion) in aid for Greece, Ireland and Portugal have failed to stabilize markets. The turmoil has spread to Italy and Spain, sending tremors through Europe’s banking system and leading to speculation that a currency meant to be permanent might break up.
- Germany Overtakes Spain in Debt Wagers Amid Crisis: Euro Credit. Bets on German credit quality overtook those on Spain for the first time in a year as the mounting cost of bailing out the region's most indebted nations infects Europe's largest economy. The net amount of German debt covered by credit default swaps surged 20% this year to $18.2 billion, making it the third most-referenced European sovereign after France and Italy, according to the Depository Trust & Clearing Corp. Germany has provided the biggest share of the rescue packages for Greece, Ireland and Portugal, and Chancellor Angela Merkel is struggling to maintain taxpayer support after a string of election defeats. Attempts to end the two-year-old crisis failed to stop the rot spreading to Italy and Spain, which now risk missing deficit-reduction targets.
- German Taxpayers Want Equity in Bank Bailouts: Karl Heinz Daeke. When will politicians finally accept that their ideology of cheap money has failed? A low-interest-rate policy after the dot-com frenzy encouraged the housing bubble. The government-sponsored housing boom led to a banking meltdown. And the fight against the banking crisis resulted in the sovereign-debt mess. Now, because it is forced to invest in toxic debt, the European Central Bank is set to lose its independence.
- Correlation Bets Climbing to Record as Europe Overwhelms Earnings: Options. U.S. options traders see almost no chance that earnings, dividends or buybacks will influence stock prices through the end of 2011, instead placing record bets that equities move in lockstep in reaction to Europe’s debt crisis. The Chicago Board Options Exchange S&P 500 Implied Correlation Index jumped 34 percent since the end of July to 79.31 yesterday, and reached 81.52 on Sept. 14, the highest level ever. The gauge uses options to measure expectations for how much Standard & Poor’s 500 Index shares will move together. Traders are speculating correlation among equities, already the highest since the crash of 1987, will increase as the threat of a banking crisis in Europe drowns out news about individual companies.
- China Resource Grab Costs to Rise as Yields Hit '08 High. The highest funding costs since 2008 may make it more expensive for China’s state banks to lend to commodity producing nations, as the world’s fastest-growing major economy tries to secure natural resources to fuel growth. Five-year borrowing costs for the so-called policy banks surged 70 basis points to 4.6 percent this year and touched a three-year high of 4.68 percent on Aug. 4, Chinabond prices show. Top-rated Indian lenders pay 9.45 percent on their five- year debt, compared with 8.94 percent at the end of 2010, data compiled by Bloomberg show. The government relies on China Development Bank Corp. and Export-Import Bank of China to lend to resource-rich nations such as Brazil, Kazakhstan and Venezuela in exchange for commodity and energy supplies. Borrowing costs surged after the central bank raised interest rates to control inflation and lenders increased provisions against loans for local governments. The value of banks’ dollar loans are falling as the yuan strengthened 3.3 percent against the currency in 2011. “Foreign exchange and rising funding costs are working against them and yields are probably decreasing on loans, especially if they are U.S. dollar,” said Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong. While the profits of policy banks will “be hurt in the current environment,” their lending supports government policies and is “still beneficial to the overall economy,” he said.
- Commodities May Dip to Lowest Since November: Technical Analysis. Commodities may drop to the lowest level since November after failing to breach key resistance levels, according to technical analysis by Commerzbank AG. The S&P GSCI Total Return Index of 24 commodities has failed at the downtrend and 200-day moving average resistance at 5,090 and 5,150, London-based Karen Jones, head of fixed-income, commodity and currency technical analysis, wrote in a Sept. 14 report. A resistance level indicates a price at which sell orders may accumulate when a security is rising. “We favor failure here and will maintain a negative bias,” Jones wrote. “Failure here should initiate a slide back to the August 19th low of 4,723 and then the August low at 4,530.” Further losses could then take the index back to the 50 percent retracement of the 2010 and 2011 advance at 4,446, the report said. A fall below that level may spur a decline to the 4,268 November low and the 2009 and 2011 support line at 4,293, it said.
- Euro Needs Restructuring, Coordinated Polices, FX's Taylor Says. John Taylor, founder and chief executive officer of FX Concepts LLC, said the euro has to be reorganized amid a failure to continuously coordinate policy. The European Central Bank said it worked with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to extend three-month loans to euro-area banks in an effort to ensure they have enough cash for the rest of the year, as policy makers seek to contain the European sovereign- debt crisis. “It certainly doesn’t get at really any of the major problems at all,” Taylor said today in a panel discussion at the Bloomberg Markets 50 Summit in New York, tied to the magazine’s ranking of the 50 most influential leaders in global markets, finance, business and government. “Continuous coordinated action” is needed, he said.
- UBS Placed on Review for Downgrade by Moody's Over Risk Control. UBS AG, which said it sustained a $2 billion loss from unauthorized trading at its investment bank, had its credit ratings put under review for possible downgrade by Moody’s Investors Service. The examination “will center on ongoing weaknesses in the group’s risk management and controls that have become evident again” with the disclosure, Moody’s analysts led by Robert Thomas said yesterday in a statement. The loss “would be manageable for the group given its sound liquidity and capital position.”
- Borrowing by the financing vehicles of local Chinese governments is the nation's version of the subprime crisis that hit the U.S., Cheng Siwei, a former vice chairman of the National People's Congress, said at the World Economic Forum in Dalian today. "Our version of the U.S. subprime crisis is the lending to local governments, which is causing defaults," Cheng said.
- BofA(BAC) Said to Keep Bankruptcy as Option for Countrywide Unit. Bank of America Corp., the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm's strategy.
- Muddy Waters' Block Says Chinese Consumer Theme Is 'Overblown'. Carson Block, the short seller who runs research firm Muddy Waters LLC, said U.S. investors are too eager to put their money into China where consumer demand is overstated. “The idea of the Chinese consumer has always been somewhat overblown,” Block said yesterday on a panel at a Bloomberg Link Conference in New York. “Part of the reason for that is that you have luxury-goods manufacturers such as Louis Vuitton that report outstanding sales in China.” Analysts at Capital Economics, a London-based research group, estimate that private consumption in China may have fallen to 34 percent of gross domestic product last year, the lowest level since the country began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates. “We see the tall, shiny buildings in Shanghai or Beijing and we meet with the Chinese who have graduated from Harvard, who have somewhat been inculcated with western values, and we mistakenly extrapolate this to the large portion of the economy,” Block said.
- Europe Can't Swap Its Banking Problem. It's the pattern investors have grown used to since the rolling financial crisis began in 2008. The market zeroes in on a point of weakness, policy makers finally apply a band aid, financial apocalypse is averted and the bears retreat before moving on to the next target. This time the trouble was European banks' access to dollar funding. Most importantly, the duration of available market funding was getting shorter. So the world's leading central banks agreed to extend existing swap lines with the Federal Reserve to allow the banks to access three-month dollar funding, rather than just the seven-day funding available before. The positive spin: It neutralizes a key investor concern over liquidity. And the move includes a feel-good factor, because central banks are finally seen to be acting in concert after a series of recent unilateral moves by, say, the Swiss to curb their rising currency or the European Central Bank to stem the rise in Italian bond yields. If this really is the start of greater international cooperation, as some seemed to hope, it is an important development. But investors risk reading too much into it. After all, the overall structure of the deal is not new. And it is fairly painless for the Fed. A central bank that does a swap for dollars with the Fed takes the currency risk as well of the credit risk of lending to its own banks. Thursday's move buys time and soothes funding markets. But European bank credit-default swaps remain way above their 2009 highs. That's a reminder that the real challenge facing the financial system—a solution to the sovereign-debt crisis—remains as elusive as ever.
- Google(GOOG) Says Display Ad Spending Rises Sharply. Google Inc. (GOOG) said Thursday that spending by the biggest advertisers on its display network more than doubled in the past year, a development that comes as the search giant's rivals seek to counter its expansion in the display ad market.
- Goldman Sachs(GS) Shutting Global Alpha Hedge Fund. Global macro has been an awful strategy for hedge funds for much of this year — even for the Vampire Squid. Goldman Sachs is shutting down its Global Alpha fund by the end of October, due to redemptions and general misery, the Wall Street Journal is reporting. It had about $1 billion left under management, down from $12 billion at its peak.
- Global Standards Sought on Derivatives Rules. Treasury Secretary Timothy Geithner in a letter Wednesday assured Congress that the Obama administration and federal regulators are working with their international counterparts to see they adopt similar rules requiring market participants to back their over-the-counter derivatives trades with cash. "Just as we have global minimum standards for bank capital—expressed through international agreement—we need global minimum standards for margin on uncleared over-the-counter derivatives," Mr. Geithner said.
- Foreign Buyers Go Direct. There are increasing signs that foreign buyers are going directly to the Treasury to do their bidding instead of relying on middle-men dealers, a change that is clouding the market's ability to gauge foreign participation in the U.S. debt-auction process. The portion of Treasury auctions awarded to so-called indirect bidders—those who have dealers submit bids on their behalf—is usually considered a reflection of foreign interest. Foreign central banks and monetary authorities traditionally go this route.
- Countrywide Whistle-Blower Had Alleged Subprime Fraud. A whistle-blower at Countrywide Financial, who the Department of Labor says was improperly terminated by Bank of America Corp.(BAC), had investigated widespread fraud in the home lender's subprime operations, including a probe that led to the closing of the majority of Countrywide branches in Boston.
- Road Gets Bumpy for GM(GM) in China. As the world's biggest car maker powers ahead in the world's biggest car market, it's hitting bumps in the road.
- Bank Probe in Stanford Case. Prosecutors Are Investigating Whether Societe Generale Ignored Suspicious Transactions.
- Why the Jobs Plan Falls Short. Instead of temporary tax breaks and more spending, we need permanent tax incentives, development of our energy resources, and entitlement reform.
- James Carville: Obama Needs to Panic, Fire Economic Team, And Indict Bank Execs. Former Clinton advisor James Carville has some blunt advice for President Barack Obama if he wants to maintain a chance at reelection — PANIC!
- New York Times: iPhone 5 Announcement is "Weeks Away".
- Google(GOOG) Is Secretly Spending Hundreds of Millions of Dollars Turning YouTube Into a Cable Alternative.
- Goldman Sachs(GS) Emerges In The Solyndra Scandal.
- Treasury Inspector General Opens Probe Into Obama's Solargate.
NY Times:
- China Consolidates Grip on Rare Earths. In the name of fighting pollution, has sent the price of soaring in the United States. By closing or nationalizing dozens of the producers of metals — which are used in energy-efficient bulbs and many other green-energy products — China is temporarily shutting down most of the industry and crimping the global supply of the vital resources.
- Mortgage Rates Hit Record Low: 30-Year Fixed Nears 4%. The average rate for a 30-year, fixed-rate loan fell to 4.09% this week, its lowest level in 60 years, according to mortgage giant Freddie Mac. Last week, the 30-year fixed averaged 4.12%. The average rate for a 15-year fixed mortgage -- a popular option among those who wish to refinance -- sunk to 3.30%, down from 3.33% last week, Freddie reported.
- Slow Employment Growth? Look to Obamacare. No one seems to be talking about the $2,000 per worker tax on employers, to begin in 2014. Enacted as part of the 2010 Patient Protection and Affordable Care Act, it will be levied on firms with 50 or more employees who do not offer the right kind of health insurance to their workers. Millions of Americans are looking for work, and the number in poverty, 46.2 million, is the highest since the Census Bureau began compiling poverty data 52 years ago. This tax might be one reason for the slow employment growth we observe two years after the end of the recession, in June 2009. Although the tax will not take effect until 2014, businesses are adjusting now. They are not stupid, they plan ahead.
Reuters:
- Rapid Rise in Asians' Costs of Funds Could Slow Loan Market Activity. It has been more than a year that the loan market has been plagued by higher costs of funds, mostly experienced by Asian and European banks. Today, these two groups of banks are still troubled by the issue and the problem has worsened. Basis Point surveyed over 20 Asian banks in Asia and the US, and more than half of the respondents saw costs jump by about 100bp since three months ago. An Asia-based Taiwanese bank said its costs are at over 150bp now, compared to less than 100bp just two months ago. "This situation was not seen in May," said a Taiwanese banker based in the US "But the costs gradually moved in late June and July, then soared in August and are still climbing this month." Many bankers agreed that the issue worsened when Europe announced further debt concerns in July. And some blamed the drastic hike on tightened credit back home. "Our costs are through the roof now as the central government is limiting lending capacity," said a US-based Chinese banker. "We have since stopped accepting new businesses."
- RIM(RIMM) Results, Outlook Stun Investors Even After Warning. Research In Motion reported a steep drop in quarterly profit on limp sales of its smartphones and tablets, and offered investors little hope of a turnaround anytime soon, sending its shares tumbling. RIM shipped just 10.6 million smartphones in the second quarter, as carriers struggled to sell year-old devices with limited processing power compared to newer rival products. "I was stunned that the device number was below their guidance," said Peter Misek from Jefferies & Co. Perhaps more ominously, RIM shipped only 200,000 PlayBook tablet computers, which went on sale globally in June after weathering some scathing reviews at a North American launch in April. Analysts had expected RIM to ship almost 12 million phones and 600,000 tablets. RIM's own outlook was for BlackBerry shipments of between 11 million and 12.5 million. Highlighting a widening gap, Apple sold more 20 million iPhones and more than 9 million iPads last quarter after virtually creating the tablet market last year. RIM's Nasdaq-listed shares fell as much as 18 percent to $24.20 in after-hours trade following the results.
- US Equity Funds Take in Cash, Whipsawed by ETF - Lipper.
- Cooper Industries(CBE) Cuts Q3 Profit Outlook, Shares Fall. Electrical products maker Cooper Industries cut its third-quarter earnings outlook, as it faces weakness in its residential and commercial markets, along with softness in its electronics business. The company sees third-quarter earnings of 94-98 cents a share, down from its prior estimates of 98 cents to $1.03 a share. Analysts, on average, were expecting earnings of $1.02 a share, according to Thomson reuters I/B/E/S. Cooper said material inflation and production shortfalls from restructuring activities would also hurt its third quarter. Shares of the Dublin-based company were down 6.5 percent in trading after the bell.
- China won't change the direction of its monetary policy as curbing inflation gains remain the nation's top priority, citing China Construction Bank Corp. Chairman Guo Shuqing. Risks have increased for banks as underground lending and illegal loans pick up after monetary policy tightened liquidity, Guo said. Overseas demand is also weakening, he said.
Barclays Capital:
- Rated (LNKD) Overweight, target $93.
- Rated (IACI) Overweight, target $55.
- Rated (WBMD) Underweight, target $36.
- Rated (SFLY) Overweight, target $73.
- Rated (OPEN) Underweight, target $60.
- Rated (RLOC) Underweight, target $16.
- Rated (DMD) Overweight, target $11.
- Asian equity indices are +.50% to +2.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 164.0 -11.0 basis points.
- Asia Pacific Sovereign CDS Index 151.25 -7.0 basis points.
- FTSE-100 futures +1.17%.
- S&P 500 futures +.09%.
- NASDAQ 100 futures +.07%.
Earnings of Note
Company/Estimate
- (MLHR)/.32
9:00 am EST
- Net Long-term TIC Flows for July are estimated at $30.0B versus $3.7B in June.
- Preliminary Univ. of Mich. Consumer Confidence for September is estimated to rise to 57.0 versus 55.7 in August.
- None of note
- The (AGP) investor day could also impact trading today.
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