Tuesday, September 27, 2011

Tuesday Watch


Evening Headlines

Bloombe
rg:
  • Geithner to Europe: 'Get on With' Crisis Response. U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region’s debt crisis after a chiding from counterparts around the world. “They heard from everybody around the world” in Washington meetings last week, Geithner said on ABC’s “World News With Diane Sawyer” program. Europe’s crisis is “starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea.
  • China Banks Shunned by Investors Eying 2003 Low in Credit Bust. The cheapest Chinese bank stocks since 2004 may drop further as the three-year credit boom that created the world’s most profitable lenders shows signs of turning into a bust. The MSCI China Financials Index sank 24 percent this month, falling more than benchmark bank gauges for Europe, the U.S., Japan and emerging markets. Valuations in China dropped below levels reached during the global financial crisis for the first time last week, even after Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. said first-half profits hit a record and analysts raised forecasts for next year. While banks in the MSCI index reported $104 billion of earnings in the past 12 months, bad loans to local governments, a fading real estate boom and slower economic growth are making some of the most successful investors bearish. Jim Chanos, the short seller who predicted Enron Corp.’s collapse, says Chinese banks will fall below the value of their net assets for the first time since December 2003, from an average premium of about 20 percent. Fund managers at Vontobel Asset Management Inc. and International Value Advisers LLC who beat 99 percent of peers this year are avoiding the stocks. “China’s economy is very distorted, and the banks, as ever, are at the epicenter of the distortions,” Edward Chancellor, who helps oversee about $106 billion as a strategist at Grantham Mayo Van Otterloo & Co. in Boston and warned of a “sucker’s rally” in Chinese stocks three days before the benchmark index peaked in August 2009, said in an interview. “If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing.” Bad debts may cut China’s growth rate to near zero from 9.5 percent, hurting a global economy that’s already weighed down by Europe’s sovereign debt crisis and a stagnant U.S. job market, according to Chanos, founder of New York-based hedge fund Kynikos Associates LP. “The main concern we have, and the reason we’re not touching the banks, is we’re not sure that the Chinese economy is sustainable as it is,” said Charles de Lardemelle, whose $2.3 billion IVA International Fund slipped 5 percent this year through Sept. 23, compared with an 18 percent average drop for peers, according to data compiled by Bloomberg. Similar surges in credit and investment in Japan, Thailand and South Korea all ended with a collapse in economic growth, he said in a phone interview from New York. Evidence is building that Chinese property developers and local government financing vehicles, used to get around laws prohibiting direct borrowing, are struggling to repay their obligations as the economy slows. About 85 percent of the government financing vehicles in China’s Liaoning province, on the border with North Korea, had insufficient income last year to cover debt-servicing payments, according to a July speech by the provincial auditor.
  • China's Developers Facing 'Increasingly Severe' Credit Outlook, S&P Says. Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said. A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said after conducting stress tests of the nation’s real estate companies. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said. “The worst isn’t over for China’s real estate developers,” S&P analysts led by Frank Lu wrote in a report today. “Developers are bracing themselves for slower sales and lower property prices ahead.”
  • Freddie Mac Mishandled Loan Reviews, May Have Spared Banks, Watchdog Says. Freddie Mac is reviewing its procedures for examining mortgages after auditors faulted its handling of lapsed loans issued before the 2008 credit crisis, a government watchdog said in a report on the finance firm. The mortgage-finance firm, which is operating under U.S. conservatorship, didn’t do enough to find flaws that could’ve increased recovery of money from banks that sold defective loans, the Federal Housing Finance Agency’s inspector general said in the report released today. FHFA, the regulator that oversees Freddie Mac and larger rival Fannie Mae, suspended loan-repurchase agreements while the agency and the McLean, Virginia-based company explore ways to uncover more defective loans, according to the report. “It is critical that this issue be resolved, as it involves potentially considerable recoveries for Freddie Mac and ultimately taxpayers,” the inspector general’s office said in the report.
  • Gold Rebounds From Slump on Speculation Greece Is Set to Default on Debt. Gold rallied as the biggest three- day drop since the failure of Lehman Brothers Holdings Inc. in 2008 encouraged purchases by investors seeking a store of value amid market turmoil. Silver also advanced. Immediate-delivery gold gained for the first day in five, climbing as much as 0.9 percent to $1,641.40 an ounce and trading at $1,640.75 at 10:41 a.m. in Singapore. The price had lost 8.8 percent in the previous three days as some investors sold the metal to cover losses in other markets, which plunged on concern that the global economy may lapse into recession. The European Central Bank is likely to debate next week restarting covered-bond purchases and may discuss interest-rate cuts to ease funding strains, a euro-region central bank official said. Policy makers are under pressure to halt the European debt crisis that has Greece on the brink of default. “The facts haven’t changed,” said Gijsbert Groenewegen, a partner at Silver Arrow Capital Management. “They’re just postponing what will happen in three months or six months or whatever, but we will get default.”
  • JPMorgan(JPM) Differs With JPMorgan(JPM) on Apple(AAPL) iPad. JPMorgan Chase & Co. (JPM) analyst Mark Moskowitz said research from his colleagues in Asia about a cut in Apple Inc. (AAPL) iPad orders doesn’t represent the views of the securities firm’s U.S. team. “Apple is fine,” Moskowitz wrote.
Wall Street Journal:
  • Stopgap Fix Ends Budget Impasse. A budget deadlock that had raised the risk of a federal government shutdown was broken Monday, as the Senate approved a short-term funding measure and the House appeared likely to follow suit. The Senate, on a 79-12 vote, approved a bill late Monday to fund the government through Nov. 18. The vote came after the main sticking point in negotiations between the two parties was resolved.
  • New Capital Rules Likely for Banks. International regulators are set to rebuff heavy lobbying by banks and stick with a plan to require some of the world's largest financial institutions to hold extra capital, according to people familiar with the matter. The watchdogs that make up the Basel Committee on Banking Supervision are gathering Tuesday in the Swiss city to consider comments on a planned rule requiring big banks to maintain thicker capital cushions than other institutions.
  • Welcome to the Boardroom: Chelsea Clinton Joins Diller. She's 31. She's still a graduate student. And she's held many different jobs in different industries over the last five years. But those factors didn't prevent Chelsea Clinton from landing a plum assignment: joining the board of Barry Diller's Internet media holding company. In her new role, the daughter of former President Bill Clinton and U.S. Secretary of State Hillary Clinton will be the youngest member of IAC's board by seven years.
  • Mr. Buffett's Tax Secrets. The least he can do is show Americans why he pays so little.
CNBC:
  • Greece Set to Approve Tax; Unions Prepare to Strike. Lawmakers are expected to approve an unpopular property tax on Tuesday to open the way for the return of inspectors from Greece's bailout lenders and the release of vital aid, despite growing anger among austerity-hit Greeks.
Zero Hedge:
IBD:
NY Times:
  • Two Tibetan Monks Set Themselves on Fire in Protest. Two young Tibetan monks set themselves on fire on Monday at an embattled monastery in western China to protest Chinese policies in the area, according to a Tibet advocacy group. The monks were apparently taken to a hospital, and it was unclear what condition they were in on Monday night.
  • Goldman Sachs(GS) Draws Up Deeper Job Cuts. Goldman Sachs, bracing for what could be one of its worst quarters since it went public 12 years ago, is preparing to expand its cost-cutting initiative by hundreds of millions of dollars, a move that could lead to additional job losses at the Wall Street bank.
Forbes:
  • Buckeye Oil Billions Will Unleash an Ohio Manufacturing Tech Boom. A prediction. The Ohio Valley is on track to become a hotbed of innovation. And one which will almost certainly focus on 21st century manufacturing. The catalyst for this seemingly counter-intuitive claim? Money. Black gold. Ohio is about to be awash in both.
CNN:
  • 10 Highest-Paid Bank CEOs. J.P. Morgan Chase's Jamie Dimon made $20.8M in 2010, a hefty 1,541% increase from the dark paydays of 2009. See which other bank executives raked in big bucks last year.
LA Times:
Reuters:
  • ECB's Liikanen - Risks to Growth "Substantially" to Downside. European Central Bank Governing Council member Erkki Liikanen said on Monday he thought risks to euro zone growth were now "substantially" to the downside, when asked whether the ECB should cut interest rates next month. Asked if the ECB could reverse this year's rate hikes at its October 6 meeting --a move markets currently expect-- Liikanen stressed that the economic situation had continued to deteriorate since the ECB last met earlier this month. "We said (at last meeting) risks to inflation are balanced and risks to growth are balanced. And my personal opinion is that the growth is substantially to the downside."
Financial Times:
  • Hedge Funds: Concern Over ETFs' Shorting Role. Which came first, a hedge fund wanting to profit from the fall of an index inexpensively or the security that allowed it do so? As exchange traded funds race to provide easy access to ever more exotic indices, sectors, geographies and asset classes, this is a question that is increasingly on the minds of long-oriented asset managers and retail investors. They are concerned that by buying ETFs they may inadvertently be facilitating, or in some cases funding, the short positions of hedge funds. This is especially the case when ETFs are structured synthetically utilising swaps. “Both parties use these long and short, though hedge funds do use them more on the short side, while retail investors will do it the other way,” says Ken Heinz, president of Hedge Fund Research of hedge fund monitoring agency HFR.
Telegraph:
  • Germany at War Over Eurozone Bail-Out. European officials have confirmed that discussions are afoot to boost the eurozone bail-out fund's firepower as part of a grand plan to contain the region's sovereign debt crisis in Greece. Confirmation of the talks, however, sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday. The head of Germany's constitutional court also piled on the pressure by warning the government not to circumvent the law "by the back door".
  • German Turmoil Over EU Bail-Outs as Top Judge Calls for Referendum. Germany's top judge has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new constitution and a popular referendum, vastly complicating plans to boost the EU's rescue machinery to €2 trillion (£1.7 trillion).

Securities Times:
  • China's conditions aren't ready for the government to cancel limits on home purchases, introduced a year ago, citing Wang Juelin, a researcher at the Ministry of Housing and Urban-Rural Development.
People's Daily:
  • China should maintain a proactive fiscal policy along with prudent monetary policy because it helps curb inflation and prevent "over adjustment" of polices, Jia Kang, head of Chinese Ministry of Finance's research institute for fiscal science, writes in a commentary.
Oriental Morning Post:
  • Chinese regulators plan to conduct spot checks on some banks next month to ensure borrowers use their money for their stated purposes, citing a person familiar with the situation. Regulators will check banks whose borrowers may use their lending for high-yielding loans to a third party.
China National Radio:
  • The possibility of a global double-dip recession is rising because of a slowdown in the world's economic growth, citing Ba Shusong, a researcher at the State Council's Development Research Center.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are +1.0% to +3.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 216.0 -7.0 basis points.
  • Asia Pacific Sovereign CDS Index 174.25 +9.75 basis points.
  • FTSE-100 futures +1.9%.
  • S&P 500 futures +.13%.
  • NASDAQ 100 futures +.19%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (AM)/.25
  • (WAG)/.55
  • (JBL)/.56
  • (PAYX)/.38
  • (PRGS)/.28
Economic Releases
9:00 am EST
  • S&P/CS 20 City MoM% SA for July is estimated to rise +.1% versus a -.06% decline in June.
10:00 am EST
  • Consumer Confidence for September is estimated to rise to 46.0 versus a reading of 44.5 in August.
  • The Richmond Fed Manufacturing Index for September is estimated to fall to -11 versus -10 in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fisher speaking, Fed's Lockhart speaking, 2-Year Treasury Note Auction, weekly retail sales reports, CSFB Small/Mid-Cap Conference, Jefferies Healthcare Conference, (CY) analyst event, (PRGO) analyst day and the (OKE) investor conference could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by financial and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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