Evening Headlines
Bloomberg:
- Money Funds' Cuts to French Banks Could Force Sales. U.S. money-market fund managers have cut their lending to French banks at a pace that may force the banks to raise capital by selling assets, according to William Prophet, a desk analyst at Deutsche Bank Securities Inc. Prime money funds in the U.S. reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through Aug. 11, Prophet wrote in a Sept. 9 report, based on a review of seven of the 10 largest funds eligible to purchase corporate debt. The proportion of the remaining holdings maturing in less than a month increased to 56 percent on Aug. 11 from 17 percent on June 11. “What’s happened very recently is simply unsustainable,” Prophet wrote. “While a decent amount of funding is evidently still available to the French banking system, it is all migrating towards the very front end of the money-market curve, and regulators no longer look the other way when this happens.” U.S. funds are cutting their holdings in European banks on concern the financial institutions may face funding problems as the sovereign-debt crisis escalates.
- European Bank Blowups Hidden With Shell Games: Jonathan Weil. The last time the world had a major banking crisis, fair-value accounting rules were near the top of the list of scapegoats most likely to be denounced by government and industry leaders. Not so this go-around. Today many of Europe’s largest financial institutions are seemingly on the brink again, driven by fears of pent-up losses stemming from the sovereign-debt debacle. Only you don’t hear much criticism of fair-value reporting anymore. That’s probably because the accounting mandarins gutted many of their fair-value rules in response to the financial system’s near-meltdown three years ago. This hasn’t made banks safer. It has given politicians and bankers one less culprit to blame, though.
- Currency 'Ugly Contest' Signals Euro to Weaken: Chart of the Day. The euro may win the “ugly contest” and drop against the dollar, as Europe’s debt crisis makes the region more likely to fall into an economic recession than the U.S., according to Westpac Banking Corp.
- A potential double-dip recession among developed economies could have "tough knock-on effects" for Asia-Pacific nations, S&P said today. "While not our base-case scenario, the region could be in for a hard landing if the U.S. and eurozone enter another recession," says Michael Petit, S&P's head of corporate and government ratings for Asia-Pacific.
- SocGen Says It's Underweight in Commodities Which Are Now in 'Danger Zone'. Societe Generale SA’s global asset allocation team went “underweight” on commodities, saying the asset class is in the “danger zone.” The team recommends that investors position for higher gold prices and lower oil prices, one of seven key calls made in the report distributed today by the Paris-based bank. The precious metal should benefit from risk aversion, central-bank purchases and negative real interest rates, the team wrote. Crude and copper may decline as economic growth slows and the dollar gains against the euro. “Prices of cyclically sensitive commodity prices, such as crude oil and copper, have held up well over recent weeks despite the recent deceleration in economic activity,” Societe General strategists Alain Bokobza, Roland Kaloyan, Arthur Van Slooten and Philippe Ferreira wrote in the report. “This should contribute to a meaningful drop in the prices of these commodities.” The Standard & Poor’s GSCI gauge of 24 commodities is down 14 percent since reaching a two-year high on April 11 amid mounting concern that demand for fuel, metals and food will slow as the European debt crisis deepens, U.S. employment stagnates and Chinese demand slows. This week, the dollar climbed to the highest since February against a basket of six major currencies, including the euro. Investor skittishness over the spread of Europe’s debt crisis has raised banks’ funding costs and roiled markets worldwide. European governments are aiming to ratify a July 21 agreement to bolster the euro bailout fund and extend a second rescue to Greece. Moody’s Investors Service cut long-term credit ratings today for SocGen and Credit Agricole SA by one level, citing risks posed by the banks’ investments in Greece. Speculators are holding their biggest wager on higher commodity prices in almost three months, U.S. Commodity Futures Trading Commission data show, anticipating shortages of everything from corn to copper.
- Fighters Tied to Pakistan Hit Kabul Embassy: U.S. A guerrilla faction with ties to Pakistan’s military intelligence agency hit the U.S. Embassy in Kabul with a half-dozen rocket-propelled grenades, American Ambassador Ryan Crocker said. The attackers who seized a high-rise building under construction belonged to the Jalaluddin Haqqani group, which operates largely from a sanctuary in Pakistan’s borderland with Afghanistan, Crocker said after Afghan forces ended the 20-hour siege yesterday. “The information available to us is that these attackers” are “part of the Haqqani network, they enjoy safe haven in northern Waziristan,” Crocker said in Kabul.
- Europe Lending Woes Deepen. Two Banks Tap ECB for Dollars; Companies Look Beyond Euro Zone for Loans. Europe's financial crisis intensified Wednesday as banks moved to obtain more dollars for loans to their U.S. customers, and some nervous corporate clients began looking to banks outside the euro zone for loans. Tensions in the 17-nation euro zone are increasing despite attempts by central banks to pump badly needed dollars into the region, as U.S. sources have shrunk. On Wednesday, the European Central Bank said two banks had tapped it for $575 million, only the second time in six months the ECB has doled out dollar funding. The names of banks that tap the ECB are kept confidential.
- SEC Widens CDO Probe. Agency in Talks With Citigroup(C) on Settlement, Examines Mizuho Financial Deals. Securities regulators are stepping up their probe into mortgage-bond deals at the heart of the financial crisis, including by pushing for a settlement of more than $200 million with Citigroup Inc., according to people familiar with the matter. Securities and Exchange Commission officials are in advanced talks with Citigroup to settle civil charges related to a $1 billion mortgage-bond deal called Class V Funding III and created by the Wall Street company in 2007.
- Auto Dealers Oppose Gas Rules. The nation's politically influential automobile dealers, emboldened by the Obama administration's recent retreat on tougher smog regulations, are revving up a lobbying effort to block fuel-economy rules proposed by the administration. More than 400 dealers are set to fly to Washington in coming days to press legislation that would block the automobile rules for at least a year. They argue the new rules—which would raise the average fuel economy of new cars and light trucks to 54.5 miles a gallon over the next 14 years—would be too costly and lead to job losses.
- Commodity Fund Faces Shake-Up. High-profile commodity hedge-fund manager Paul Touradji, facing what could be his flagship fund's first losing year, is stepping back in to run his firm's trading business full-time. Mr. Touradji, a former protege of Julian Robertson's at Tiger Management, plans to drop responsibility for day-to-day management of Touradji Capital Management LLC to fully focus on trading, according to people familiar with the matter. As part of the shake-up, two other executives will leave the firm, and Touradji Capital plans to bring on new employees who can help expand the firm's business with institutional investors, the people said.
- Hedge Fund State of Mind. As many hedge funds found out during the financial crisis, the most-sophisticated investors can lose patience quickly when performance lags. Could state pension funds prove more forgiving? Such public funds from Alabama to Arkansas, which manage over $2 trillion in assets, have historically been slow to trust complex investment strategies. Pensions had 10% in alternatives like hedge funds and private equity in 2010, according to the National Association of State Retirement Administrators. While that's an increase from 3% in 2001, it still falls far short of many university endowments. One alternative asset class that may get a welcome boost is the struggling "funds of funds" business. These entities charge an extra layer of fees to build portfolios from individual hedge funds, which charge their own high fees. The funds of funds sector peaked at nearly $800 billion in assets in 2007. But after hedge funds' performance slumped during the financial crisis, the sector saw $171 billion in outflows between 2008 and 2010, according to Hedge Fund Research. The number of funds of funds has also shrunk. Many that did survive lost a large portion of their investors, leaving them heavily exposed to a few key investors. This year, though, funds of funds have seen slight net inflows of money. Helping tip the scale are pension funds like Kentucky Retirement Systems, which had no hedge fund investments before the crisis. It recently committed $1.2 billion of its $14.9 billion portfolio to funds of funds. A key reason for the move: overexposure to equities. State pension funds had 50.9% of their portfolios in equities at the end of 2010. The problem with elevated equity exposure became obvious in times like August, when many pensions experienced wild swings in their portfolios. And stocks have been volatile over the long term. The S&P 500 has generated an average annual return of 8.5% including dividends since 1990, while funds of funds generated 7.9%, according to Hedge Fund Research. But those statistics don't capture much higher volatility in the S&P 500. Hedge Fund Research found volatility in the broader market was nearly three times that of its index of funds of funds.
- Hedge Fund Titans Ponder Greece Doomsday. Some of the stars of the hedge fund world on Wednesday afternoon were playing a game of “what if?” Namely, what if Greece defaults?
- Economy Clips Factories. The earnings outlook for American manufacturers, whose rebound propelled the U.S. recovery last year, is deteriorating as the global economy sputters. Big industrial companies generally haven't begun chopping their own forecasts, but analysts are starting to do it for them. The average Wall Street forecast for 2012 earnings growth by 35 industrial companies included in the Standard & Poor's 500-stock index stood at about 16% Wednesday, down from 19% as of June 30, according to FactSet Research Systems.
- A Blue-State Bailout in Disguise. Our new study shows that under the Obama jobs bill, debt-ridden states will get another big handout. Last Thursday, the president urged Congress to pony up roughly $200 billion in taxpayer money to "provide more jobs for teachers [and] more jobs for construction workers" and more money to carry out other state and local activities. He urges Congress to spend this money even after handing out hundreds of billions of dollars for similar purposes as part of the 2009 stimulus package, as well as a score and more billion dollars again in 2010. These vast contributions to the coffers of state and local governments, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments. They are of special benefit to states in the blue regions of the country where the president's most fervent supporters reside.
- China's BYD Suffers Mounting Troubles. What Chinese call “white terror” is gripping sales teams at BYD Auto dealerships around the country, as the once-rising star of the domestic car industry struggles with a slowdown. “White” refers to silence: Employees have been clamming up when asked about the business climate and an alleged staff shake-up that may lead to thousands of layoffs or dealer shop-to-factory job transfers by the end of September. The “terror” is about jobs. An Aug. 29 report by a microblogger named Yaluzang said: “All marketing and sales divisions of BYD Auto are being dissolved. (Employees) have to go by Sept. 30.”
- China's Role in World Overestimated, Says CCB Head. Some countries have overestimated China's role in the global economy, Guo Shuqing, chairman of state-run China Construction Bank Corp. (0939.HK), said Thursday. Speaking at the World Economic Forum in China's northeastern coastal city of Dalian, Guo, a former deputy governor of China's central bank, said he doesn't think China can purge the world of the economic crisis. He also said China doesn't have a big say in the pricing of raw materials although it's now the world's largest buyer of commodities.
Zero Hedge:
- SAT Reading Scores Hit All-Time Low. (graph)
- First Anti-Euro Protest in Front of the ECB.
- Shadow Banking Contagion Approaches as European Banks Sign Private Repo Agreements With US Counterparts.
- Judge Says Hedge Funds May Have Used Inside Information. There have long been whispers on Wall Street that hedge funds have hijacked the bankruptcy process, using their influence as debt holders to obtain and trade on insider information about when and how a company will restructure. A federal court ruling highlighted such concerns late Tuesday when a judge raised the possibility that four large hedge funds might have used confidential information to trade in the debt of Washington Mutual. The four hedge funds are Appaloosa Management, Aurelius Capital Management, Centerbridge Partners and Owl Creek Asset Management.
Chicago Tribune:
- Exclusive: French Banks Dial Down Asian Oil Derivatives. French banks have scaled back activity in the Asian oil swaps market this week, mainly in crude, traders said on Wednesday. Counterparties and trading partners of Societe Generale, Credit Agricole and BNP Paribas told Reuters they were "watching developments" after credit downgrades for two of the banks and a negative outlook for the third. In the Asian over-the-counter crude swaps market, SocGen and Credit Agricole have reduced activity levels this week compared to last week, having been active in that market for much of this year, the sources, who declined to be named, said. The trade sources said BNP Paribas has been selling aggressively at lower price levels on less liquid back-of-the-curve months, suggesting it was liquidating positions. "I think BNP is not taking positions but liquidating given their aggressive stance," a trading source said. Liquidating positions may help the three banks preserve cash as their borrowing costs have ballooned. None of the three French banks are in the top tier of investment banking in the global commodities markets. Their value at risk in commodities, a barometer of how much money a bank has at stake on any given day, is dwarfed by the big players including Deutsche Bank, Goldman Sachs and Morgan Stanley.
- Goldman(GS) Asset Management CIO Domotorffy Retires. Katinka Domotorffy, the head of Goldman Sachs Group Inc's (GS.N) quantitative investment strategies group, will leave the bank at the end of the year, according to an internal memo, as one of its biggest hedge funds continues to suffer from weak performance. Domotorffy is a Goldman veteran who joined the bank in 1998 as a portfolio manager and researcher. She took on her most recent title as chief investment officer and head of QIS within the asset management division in 2009 when Mark Carhart and Raymond Iwanowski, co-founders of Goldman's prominent Global Alpha Fund hedge fund, retired. Armen Avanessians will be taking over as head of the global quantitative business, according to the memo obtained by Reuters that was sent by Timothy O'Neill and Edward Forst, co-global heads of investment management. Goldman also hired Ron Hua as a partner to serve as chief investment officer and head of quantitative equity alpha businesses. The Global Alpha Fund is down 12 percent this year, according to sources familiar with the matter.
- US SEC: No Investigations Hurt by Destroyed Records. A past practice of destroying certain pre-investigative materials has not harmed any current or future investigations by the Securities and Exchange Commission, the U.S. agency's enforcement chief said on Wednesday. The comments from SEC Enforcement Director Robert Khuzami, which were made in a letter to Senator Charles Grassley, mark the strongest defense by the SEC yet after an internal whistleblower accused the agency of wrongfully destroying important investigative files, including so-called "matters under inquiry," or MUIs.
- World Bank Chief Says Economy in Danger Zone. World Bank President Robert Zoellick said on Wednesday the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy. "Unless Europe, Japan, and the United states can also face up to responsibilities they will drag down not only themselves, but the global economy," Zoellick said in speech at George Washington University. "They have procrastinated for too long on taking the difficult decisions, narrowing what choices are now left to a painful few," he said ahead of meetings of the World Bank and International Monetary Fund next week. His bluntly-worded speech highlighted mounting fears among global policymakers about an escalating sovereign debt crisis in Europe, which has for now overshadowed investor concerns about public finances and reforms in the United States and Japan.
- American Superconductor(AMSC) Sues Chinese Group. A US high-technology company that was once a star of the clean energy sector is suing Sinovel, China’s largest wind turbine manufacturer, over alleged software theft, in one of the most acrimonious conflicts to break out between US and Chinese companies over the sensitive issue of intellectual property.
- Will German Indecision on the Euro Drag the Whole World Down? Monetary union hasn’t worked, but Germany, Europe’s strongest nation, won’t face the consequences.
- Nick Hill, head of French and Benelux financial institutions at Moody's Investors Service, said in an interview that French banks may suffer from tensions in refinancing markets. The longer that market tensions continue, the greater the chance of exceptional measures by French banks that could affect strategy and profitability, Hill said.
- S. Korea's Swap Market Reflects Deep Concerns Over Europe's Fiscal Crisis. South Korea's cross-currency swap market plunged on Wednesday as investors took hefty receiving positions in the market due to deepening concerns over the possible Greek default and the potential credit crunch of the European banks. The cross-currency dollar/won swap rates tumbled by some 35 basis points (bps) in all tenors, with the 1-year and 2- year rates diving to 1.38 percent and 1.20 percent respectively. The 35-basis-point was the largest daily drop since February 2009. The nation's interest rate swap (IRS) rates fell sharply following the sharp falls in the cross-currency swap rates, with the 1-year and 2-year IRS rates sliding to 3.365 percent 3.305 percent each. The swap basis, or the difference between the cross-currency swap rate and the IRS rate, widened sharply, with the 1-year and 2-year basis jumping to 198.5 bps and 210.5 bps respectively. "The cross- currency swap rates dropped relatively sharply as the market reflected negative issues from Europe at one time after the four- day holiday, but it is true that worries about the European fiscal crisis deepened as the possible Greek default may trigger credit crunch among European banks," a swap dealer at the local branch of a European bank, who declined to be identified,told Xinhua.
- China's property market may face risks of "over adjustment," which may cause default on some loans by local government finance vehicles that they've pledged to repay with land sales, citing Ba Shusong, a researcher at the State Council's Development Research Center. Property investments may drop beyond a "reasonable level" by the end of this year or in 2012 as the government further restricts home purchases, curbs borrowing by developers and increases regulation of the "shadow banking" industry, citing Ba.
- None of note
- Asian equity indices are -.50% to +1.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 175.0 -4.0 basis points.
- Asia Pacific Sovereign CDS Index 158.25 -3.5 basis points.
- FTSE-100 futures +.62%.
- S&P 500 futures -.30%.
- NASDAQ 100 futures -.24%.
Earnings of Note
Company/Estimate
- (PIR)/.14
- (DMND)/.44
- (AIR)/.45
8:30 am EST
- The Consumer Price Index for August is estimated to rise +.2% versus a +.5% gain in July.
- The CPI Ex Food & Energy for August is estimated to rise +.2% versus a +.2% gain in July.
- The 2Q Current Account Balance is estimated at -$122.4B versus -$119.3B in 1Q.
- Empire Manufacturing for September is estimated to rise to -4.0 versus -7.72 in August.
- Initial Jobless Claims are estimated to fall to 411K versus 414K the prior week.
- Continuing Claims are estimated to fall to 3710K versus 3717K the prior week.
- Industrial Production for August is estimated unch. versus a +.9% gain in July.
- Capacity Utilization for August is estimated at 77.5% versus 77.5% in July.
- Philly Fed for September is estimated to rise to -15.0 versus -30.7 in August.
- None of note
- The Fed's Bernanke speaking, Fed's Tarullo speaking, ECB's Trichet speaking, Fed's weekly balance sheet/M1, M2 reports, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, BMO Capital Education Conference, (MOH) investor day, (BWC) analyst day, (RENT) investor day and (RBCN) analyst meeting could also impact trading today.
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