Tuesday, September 20, 2011

Tuesday Watch

Evening Headlines

  • Italy Debt Rating Lowered by S&P on Weaker Growth Outlook. Italy's credit rating was cut by Standard & Poor's on concern that weakening economic growth and a "fragile" government mean the nation won't be able to reduce the euro-region's second-largest debt burden. The rating was lowered to A from A+, with a negative outlook, S&P said in a statement. S&P said Italy's net general government debt is the highest among A-rated sovereigns, and the company now expects it to peak later and at a higher level than it previously anticipated. The decision sent the euro sliding for a third day against the dollar as investor concern rises that European policy makers will fail to contain the debt crisis. Greece's government plans another call with its main creditors today as it seeks to stave off default, while U.S. Treasury Timothy F. Geithner urged the region to adopt additional tools. "It's a reminder that we've had the market in control but policy makers have been slow to think in any forward-looking context," said Adrian Foster, head of financial-market research for Asia at Rabobank Groep NV in Hong Kong. "Policy makers across the euro-zone have been well and truly asleep at the wheel for quite a while now and are only taking measures when the market pushes them to it." S&P said it lowered its outlook for Italy's growth to a 0.7 percent annual average for 2011 to 2014, from a prior projection of 1.3 percent. "We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," it said. "We expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges," S&P said. Italy's downgrade may aggravate a volatile political situation -- Berlusconi faces four trials -- after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 percent of gross domestic product last year, more than any euro country after Greece. With austerity in the pipeline, "we now expect the economy to contract in 2012 and 2013," Ben May, an economist at Capital Economics Ltd. in London, said in a Sept. 9 note. Berlusconi pushed through two packages of deficit cuts since mid-July totaling about 100 billion euros. Measures included raising the value-added tax by one percentage point to 21 percent and a levy on incomes of more than 300,000 euros to balance the budget by 2013. The yield on 10-year notes was at 5.6 percent yesterday, pushing the difference investors demand to hold Italian bonds instead of benchmark German bunds to 379 basis points. The cost of insuring Italian debt against default was 488 basis points compared with 240 on Dec. 31, 2010.
  • The cost of protecting Malaysian and Thailand bonds from default shows that traders consider debt of those countries safer investments than AAA-rated France, whose banks are most exposed to a potential default by Greece. Credit default swaps for Malaysia and Thailand are priced at 133 basis points and 157 basis points, respectively, compared with France's 165.
  • Euro Declines for Third Day Versus Dollar After S&P Lowers Italy's Ratings. The euro fell for a third day against the dollar after Standard & Poor’s cut Italy’s credit rating, adding to concern Europe’s worsening debt crisis will raise borrowing costs for countries in the region. The 17-nation euro extended declines versus the yen into a third day before Greece resumes discussions with its creditors over the next installment of rescue funds. The dollar gained versus most major peers before the Federal Reserve’s policy meeting today. Australia’s dollar held losses even after the Reserve Bank said it was “well placed” to respond to economic risks. South Korea’s won dropped to its weakest this year as a slump in Asian stocks curbed demand for emerging-market assets. “We’re going to see the euro continue to come under pressure,” said Chris Weston, an institutional trader at IG Markets in Melbourne. “One of the big things we’re very concerned with is what’s going to happen with Italian borrowing costs and this could see some further selling of bonds.”
  • OPEC's $1 Trillion Cash Quiets Poor On Longest Ever $100 Oil. Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity. Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.
  • Electric Vehicles Fail to Connect Consumers. Klaus Doerrzapf, who has solar panels on his home, has no plans for an emission-free car in his garage. He’s one of the reasons why automakers like Nissan Motor Co. won’t recoup investments in electric vehicles anytime soon. “It’s too early,” the 50-year-old manager at an electrics company said at the International Motor Show in Frankfurt. “Range and price are a problem. Battery life and charging times are also concerns,” Doerrzapf said, while looking at an electric-powered Focus from Ford Motor Co. (F)
  • Obama Courts Wealthy New York Donors After Tax Boost Pitch. President Barack Obama met with wealthy New York donors, including investment bankers, at a campaign fundraiser tonight, hours after calling for new taxes on top earners to help narrow the budget deficit. Speaking to about 60 contributors at a $35,800-per-ticket event at the New York home of Ralph Schlosstein and Jane Hartley, Obama defended his economic record and appealed for help to win “the hearts and minds of America.”
  • Short-Term Stimulus Won't Help U.S. in Long Run: Glenn Hubbard. Joblessness and sluggish growth are hampering the economic recovery and Barack Obama’s political standing. Raising taxes on the rich, as the president called for yesterday, isn’t going to turn things around. To get a sense of how severe the situation is, consider this: Bringing the unemployment rate back to pre-financial- crisis levels by end of the president’s second term (or his opponent’s first term) would require real Gross Domestic Product growth of 4 percent a year over that period -- a rate we have not reached in more than a decade. What sort of fiscal policy can turn things around?
  • Strong Countries, Not Greece, Should Ditch the Euro: Ramesh Ponnuru. Europeans can’t say they weren’t warned. For a decade before the euro was launched, critics -- and many economists -- argued that one currency wouldn’t fit all, or even most, of the nations of the European Union. The unfolding euro-area crisis is proof that the critics were right. Now it’s up to the strongest member countries to put an end to this failed experiment.
  • Food Inflation to Remain a Concern for Governments, FAO Says. Food-price inflation will remain a concern for governments even as wheat prices stay below their peak this year and rice declines, the United Nations said. It will take another year of bumper harvests for wheat and rice and a surplus in corn to bring stockpiles to “healthy” levels and ease inflation concerns, Abdolreza Abbassian, senior economist at the UN Food & Agriculture Organization, said in an interview in Singapore today.
  • 8 Offshore Banks Under Investigation: U.S. Eight offshore banks are under federal grand jury investigation for facilitating tax evasion by U.S. citizens as part of a probe the Justice Department said has dealt “fabled Swiss bank secrecy a devastating blow.”
Wall Street Journal:
  • Partner in Merkel Bloc Sticks by Euro Criticism. Germany's Free Democratic Party, junior partner in Chancellor Angela Merkel's government, vowed to maintain its recently adopted euro-skeptic tone, despite a weekend drubbing in regional elections in Berlin. The pro-business FDP made clear Monday that it will continue to express many ordinary Germans' growing doubts about the bailout of Greece, in defiance of Chancellor Merkel's attempts to keep her coalition partner in line. The FDP's loss of popularity since Germany's last elections in 2009 is making Ms. Merkel's task of governing harder, since her struggling coalition partner is becoming less obedient—particularly on the chancellor's handling of the euro-zone debt crisis.
  • Greek Crisis Exacts the Cruelest Toll. Two years into Greece's debt crisis, its citizens are reeling from austerity measures imposed to prevent a government debt default that could cause havoc throughout Europe. The economic pain is the price Greece and Europe are paying to defend the euro, the centerpiece of 60 years of efforts to unite the Continent. But as Greece's economy shrinks, its society is fraying, raising questions about how long Greeks will be able to take the strain. Gross domestic product in the second quarter was down more than 7% from a year before, amid government spending cuts and tax increases that, combined, will add up to about 20% of GDP. Unemployment is over 16%. Crime, homelessness, emigration and personal bankruptcies are on the rise. The most dramatic sign of Greece's pain, however, is a surge in suicides. Recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, the health ministry says.
  • U.S. Probes Rating-Cut Trades. Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading before the U.S. government's long-term credit rating was cut last month, people familiar with the matter said.
  • Seagate(STX) CFO Sees 'Drastic' Changes Coming To Its Customer Base. Seagate Technology Inc. (STX) expects its customer base to "change in a drastic, drastic manner" over the next five years as the maker of hard-disk drives deals with the decline of computers--its core market--and the rise of more competition.
  • New Fees in Obama Plan Won't Just Hit Millionaires. It's not just millionaires who'd pay more under President Barack Obama's latest plan to combat the deficit. Air travelers, federal workers, military retirees, wealthier Medicare beneficiaries and people taking out new mortgages are among those who would pay more than $130 billion in new government revenues raised through new or increased fees. These fees are advertised as "savings" in administration budget documents. Airline passengers, for instance, would see their federal security fees double from $5 to $10 for a nonstop round-trip and triple to $15 by 2017, raising $25 billion over the coming decade. Federal employees would contribute $21 billion more to their pensions over the same period. Military retirees would pay a $200 fee upon turning 65 to have the government pay their out-of-pocket Medicare expenses. They'd also pay more for non-generic prescription drugs. And it'll cost corporate jet owners a new $100 fee for each flight.
  • China Bank Stops Some FX Trades With European Banks. A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday. The European banks include French lenders Societe Generale, Credit Agricole and BNP Paribas. "Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters. The Chinese state bank, a primary player in China's onshore foreign exchange market, has also stopped trading with UBS in the wake of that bank's $2.3 billion loss from a rogue trading scandal.
  • US to Announce Major China Trade Enforcement Action. U.S. trade officials will announce a major trade enforcement action against China on Tuesday, according to an advisory from the U.S. Trade Representative's office. The advisory, which was obtained from a business group, said U.S. Trade Representative Ron Kirk "will hold a press conference to announce a major trade enforcement action against China." It gave no other details. One possible action could target China's export restrictions on rare earths, which are crucial for global electronics production and the defense and renewable energy industries. They are also used in a wide range of consumer products from iPhones to electric car motors.
Business Insider:
Zero Hedge:
NY Times:
  • ConAgra(CAG) Withdraws $5.2 Billion bid for Ralcorp(RAH). ConAgra Foods said on Monday that it was dropping its $94-a-share cash offer for Ralcorp Holdings. “This follows Ralcorp’s failure to enter into a constructive dialogue with ConAgra Foods,” the company said in a statement. Earlier on Monday, Ralcorp said that it still considered ConAgra’s $5.2 billion takeover offer insufficient. That all but ensured that the offer will expire without deal talks beginning.
  • Greece Nears the Precipice, Raising Fear. Slower economic growth throughout Europe, and probably in the United States. Huge losses by major European banks. Declining stock markets worldwide. A tightening of credit, making it harder for many borrowers to get loans. As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.
The Blaze:
  • Obama Deficit Reduction Plan Embraces The Left. President Barack Obama finally gave his liberal critics exactly what they wanted. His tough opening bid on deficit reduction and his feisty, defiant speech from the White House Monday were greeted with almost incredulous joy by progressives who have urged Obama to take this kind of hard line with Republicans since the day he was elected.
Financial Times:
  • Siemens shelters up to €6bn at ECB. Siemens AG withdrew more than $684 million in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, citing a person with direct knowledge of the matter. In total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, citing the person. It isn't clear from which bank Siemens withdrew its deposits.
  • Greece May Hold Referendum on Euro Zone Membership. Greek Prime Minister George Papandreou is considering holding a referendum on whether his nation should remain or exit from the euro common currency. Papandreou hopes to use the vote to give his government a mandate for austerity measures asked for by international lenders. A bill to set up a referendum on the euro may be submitted to parliament and discussed in coming days.
Commercial Times:
  • TSMC to Cut Capex by 19% in 2012. Taiwan Semiconductor Manufacturing Co. plans lower capital spending by 19% to $6 billion in 2010, from $7.4 billion budgeted this year.
21st Century Business Herald:
  • China's non-performing loans to local government financial vehicles may exceed 1 trillion yuan in two years, citing a report from China Orient Asset Management. The non-performing loan ratio for financing vehicles may reach as high as 15%. The ratio for high-speed rail construction is "very likely" to hit 11.65%. Bad loan risk at banks will mainly come from local financing vehicles, high-speed rail construction, renewable energy and steel industries, according to 72.54% of respondents of the China Orient Asset Management Survey.
Evening Recommendations
  • Reiterated Buy on (APEI), target $55.
Night Trading
  • Asian equity indices are -2.0% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 205.0 (new series).
  • Asia Pacific Sovereign CDS Index 154.50 +.5 basis point.
  • FTSE-100 futures n/a.
  • S&P 500 futures -.70%.
  • NASDAQ 100 futures -.47%.
Morning Preview Links

Earnings of Note
  • (FDS)/.95
  • (AZO)/6.98
  • (CAG)/.31
  • (JEF)/.20
  • (CCL)/1.63
  • (ADBE)/.54
  • (CPRT)/.59
  • (ALOG)/.62
  • (ORCL)/.47
Economic Releases
8:30 am EST
  • Housing Starts for August are estimated to fall to 590K versus 604K in July.
  • Building Permits for August are estimated to fall to 590K versus 597K in July.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The weekly retail sales reports, RBC Industrials Conference, BofA Merrill Power Conference, Goldman Sachs Communicopia Conference and the JPMorgan Investment Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.

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