Wednesday, September 28, 2011

Wednesday Watch


Evening Headlines

Bloomb
erg:
  • Euro Crisis Makes Fed Lender of Only Resort as Funding Dries Up. The Federal Reserve, chastised by Congress for lending money to foreign institutions such as the Central Bank of Libya, is once again the lender of last resort for banks around the world it knows little about. Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data. The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the biggest U.S. banks. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed. The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus. Republican leaders including Representative John Boehner of Ohio and Senator Mitch McConnell of Kentucky wrote Chairman Ben S. Bernanke and the Board of Governors on Sept. 19, asking them to “resist further extraordinary intervention in the U.S. economy.” Representative Ron Paul, a Texas Republican who wants to abolish the Fed, and Senator Bernard Sanders, a Vermont independent, have criticized its loans to foreign institutions.
  • Basel Regulators Are Said to Keep Capital-Surcharge Plans for Big Banks. Global regulators may largely stick to planned capital surcharges of up to 2.5 percent for the world’s biggest banks while adjusting how the levies are calculated, according to three people familiar with the talks. The Basel Committee on Banking Supervision discussed yesterday how to respond to criticisms from banks including BNP Paribas SA and Citigroup Inc. (C) that the measures are flawed and may stymie the financial system’s recovery, according to the people, who spoke on condition of anonymity because the talks are private.
  • U.S. Real Estate Deals Hindered by Financing, Investors Say. Rising borrowing costs and anemic economic growth are hindering investments in U.S. commercial real estate, said panelists at the Bloomberg Dealmakers Summit in New York today. “In the last 60 days, it’s really slowed down,” Related Cos. President Jeff Blau said at the conference. “People are throwing term sheets around, but I don’t think anyone’s really closing deals.”
  • Oil Declines After Biggest Gain in Four Months on Concern Over Europe. Oil fell in New York, after the biggest gain in four months yesterday, as investors speculated that European leaders are divided on plans to tame a debt crisis that threatens to slow the economy and commodity demand. Crude for November delivery slid as much as $1.40, or 1.7 percent, to $83.05 a barrel in electronic trading on the New York Mercantile Exchange and was at $83.49 at 10:36 a.m. Sydney time. The contract yesterday climbed $4.21, or 5.3 percent, to $84.45. It was the biggest gain since May 9. Oil is down 6 percent this month and 9 percent this year. Prices have dropped 13 percent from the end of June, the biggest quarterly loss since the three months ended December 2008.
  • Bond investors are concerned consumer price-gains in South Korea and Brazil may accelerate as plunging currencies boost import costs even amid slowing growth, inflation-linked notes show. The so-called breakeven rate on South Korea's inflation-protected security due March 2017 rose 16 basis points this month to 2.93% yesterday, the most since February, as the won weakened 9.1%. In Brazil, the two-year breakeven rate jumped 40 basis points to 6.21% as the real slid 12.9%.
  • China Warns Asia Not to Hide Behind U.S. Military. Asian countries should be on guard against the “danger” of feeling they can “do whatever they want” because of the U.S. military presence in the region, the Chinese Communist Party’s People’s Daily said in a commentary. The opinion piece said it was understandable that some Asian countries may be uncomfortable with China’s rise and emphasized that the government in Beijing was working for “peaceful solutions” to conflicts such as territorial disputes in the South China Sea. The commentary comes as countries such as the Philippines and Vietnam are increasingly voicing concerns over China’s claims to the waters. “Asia remains a fertile ground for a Cold War mentality,” the commentary said. “Asia is advancing, will never return to the Cold War, and China must have an important role in the future of Asian security.”
Wall Street Journal:
  • Fed Wary of Bank Stock Buybacks. The Federal Reserve is taking a cautious stance with U.S. banks that have approached it in recent weeks for permission to buy back more of their shares, according to people familiar with the matter. Some of the biggest U.S. banks have gone individually to the Fed in recent weeks seeking approval for additional or accelerated buybacks, and regulators are pushing back, these people said. The requests are being handled on a case-by-case basis and granted depending on an individual bank’s capital situation, the people said. Some banks are being told it is too early to use capital that way.
  • Rivals Scout Paulson Assets. John Paulson already has lots to worry about: turbulence in the stock market, a rocky economy and volatile gold prices. As the hedge-fund manager suffers through the worst losses of his career, Mr. Paulson now is facing a flock of vulture investors who hope he will be forced to conduct a fire sale of stock and debt holdings. Rival hedge funds, brokers and other firms are combing through Paulson & Co.'s investments, trying to anticipate what Mr. Paulson might sell if he needs to return cash to investors.
  • Solyndra Violated Terms of Its U.S. Loan. Solyndra LLC had such steep financial problems in late 2010 that the company violated terms of its loan-guarantee agreement with the Department of Energy and technically defaulted on its $535 million loan, according to people familiar with the matter. The failed solar-panel maker, which is under numerous criminal and congressional investigations, ran so short of cash in December 2010 that it was unable to satisfy certain terms of its U.S. loan agreement, these people said. The agreement required Solyndra to provide $5 million in equity to a subsidiary building its factory but cash-flow problems prevented those payments.
  • Benefits Tax Hits Business Twice. State and federal taxes are rising for employers across the U.S. as states struggle to repay federal loans for unemployment benefits, including more than $1 billion in interest due Friday. The increases in state and federal unemployment-insurance taxes—paid primarily by businesses—are hitting as the recovery appears close to stalling, consumer confidence is low and unemployment remains high at 9.1%. These tax increases come on top of measures intended to tame government budgets, including other state tax increases and spending reductions as well as federal cuts. The higher tax tab could discourage hiring.
  • China Train Crash Spurs Safety Fears. Subway Collision Injures 260 and Is Latest in String of Accidents to Mar Country's Rapid Railway Expansion Efforts.
  • Beyond 'Repeal and Replace'. Paul Ryan's new health-care roadmap.
Business Insider:
Zero Hedge:
  • "The Carnage... The Carnage..." - Presenting the Complete September and YTD Hedge Fund Bloodbath.
  • Euro TARP - Why It Will Be A Screaming Failure. If the expansion of the EFSF, including the SPV, isn't legal from a German perspective without a formal vote of the people, then this deal is most likely dead before it starts. However, if Europe is going all in with leveraged bets that will water down the credit quality of both France and Germany -- which leaves no strong credits in the Eurozone --then there will be further complications down the road as borrowing costs for Germany and France push higher dropping the Eurozone into a deeper recession. Of course, SPV's have a dubious and disastrous history to start with and it is highly likely that this whole process will end badly. The reality is that PIIGS need an orderly mechanism to default, figure out what banks to save and which ones can be let go and start the process of clearing the years of bad debt and excesses from the system. The only question is not whether this "clearing process" will occur it is only a function of when and under what terms.
NY Times:
  • Europe Readies Plan for Tax on Financial Transactions. The European Commission is expected to unveil a detailed plan on Wednesday to create a financial transaction tax, despite the opposition of several member countries and a formal acknowledgement that it could have a significant negative impact on the European Union’s gross domestic product. ‘‘With a tax rate of 0.1% the model shows a drop in G.D.P. (-1.76 percent) in the long run,’’ according to a draft of the plan.
USA Today:
Financial Times:
  • Split Opens Over Greek Bail-Out Terms. The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July. While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.
Telegraph:
  • Germany Slams 'Stupid' US Plans to Boost EU Rescue Fund. Germany and America were on a collision course on Tuesday night over the handling of Europe's debt crisis after Berlin savaged plans to boost the EU rescue fund as a "stupid idea" and told the White House to sort out its own mess before giving gratuitous advice to others. German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank. "I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said. Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world". "It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said. The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into "cascading default, bank runs and catastrophic risk" without dramatic action. The danger for Germany is that America will lose patience, with unpredictable consequences. The US Federal Reserve is currently propping up the European banking system in a variety of ways, including dollar swaps. Markets across the world ignored the mixed signals about the true scope of EU rescue measures, convinced that EU leaders have a "grand plan" up their sleeves and will unveil the details after the Bundestag has voted on Thursday on the earlier July deal to revamp the fund.
The Independent:
  • BofA(BAC) Was 'Let Off Lightly' Over Sub-Prime Fiasco. Bank of America was treated too leniently in settlement talks over mortgage fraud at the company, robbing the US taxpayer of billions of dollars of potential compensation, according to a damning report. BofA and Countrywide Financial, the mortgage lender it acquired in 2008, were among the biggest providers of sub-prime loans in the run-up to the financial crisis, but government-run finance giant Freddie Mac failed to extract more than $1.35bn in compensation for the dodgy loans it purchased from the pair. The settlement between BofA and Freddie Mac last December was signed over the objection of a senior official at Freddie Mac's regulator, the Federal Housing Finance Agency, and a report by its inspector-general said it should never have gone ahead.
Financial Times Deutschland:
  • Euro-area members have started talks on renegotiating the second aid package for Greece that was agreed on in July, Banks and insurance companies could have to increase their contribution to the rescue package as Greece's economy has deteriorated, FTD said.
Handelsblatt:
  • Volker Beck, a member of the German opposition Green Party, said Chancellor Angela Merkel's government should resign if she cannot obtain majority support within her coalition for the reform of the European Financial Stability Fund, citing an interview.
N-TV:
  • Klaus-Peter Willsch, a German lawmaker from Chancellor Angela Merkel's Christian Democrats party, told the N-TV television program Das Duell that Greece is unable to repay its debts. German taxpayers cannot be expected to permanently compensate for Greece's deficit, Willsch said, according to an e-mailed summary of the interview. The euro monetary union should continue with fewer members, Willsch said.
Financial News:
  • China's export and import growth in Q4 this year may slow, citing Li Jian, a researcher at the Ministry of Commerce's international trade and economic cooperation research department. China faces the problem of sustaining growth of its trade in the next few years, Li says. Li does not rule out the risk of debt crises, including those in Europe and the U.S., leading to another financial crisis and global economic downturn.
Evening Recommendations
Wedbush:
  • Rated (CMG) Outperform, target $400.
  • Rated (BWLD) Outperform, target $82.
Barclays Capisl:
  • Rated (ETN) Overweight, target $53.
  • Rated (CAT) Overweight, target $114.
  • Rated (CMI) Overweight, target $130.
  • Rated (DE) Overweight, target $100.
  • Rated (MTW) Overweight, target $14.
Night Trading
  • Asian equity indices are -.75% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 226.50 +10.5 basis points.
  • Asia Pacific Sovereign CDS Index 161.0 -13.25 basis points.
  • FTSE-100 futures -1.27%.
  • S&P 500 futures -.40%.
  • NASDAQ 100 futures -.43%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (ATU)/.46
  • (DRI)/.78
  • (TXI)/-.26
  • (MOS)/1.30
  • (WOR)/.39
  • (THO)/.61
  • (FDO)/.63
  • (MKC)/.65
Economic Releases
8:30 am EST
  • Durable Goods Orders for August are estimated to fall -.2% versus a +4.0% gain in July.
  • Durables Ex Transports for August are estimated to fall -.2% versus a +.7% gain in July.
  • Cap Goods Orders Nondef Ex Air for August are estimated to rise +.4% versus a -1.5% decline in July.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,050,000 barrels versus a -7,336,000 barrel decline the prior week. Distillate inventories are estimated to fall by -400,000 barrels versus an -874,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a +3,295,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.5% versus a +1.3% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking, 5-Year Treasury Note Auction, weekly MBA mortgage applications report, (SNPS) analyst meeting, (TTMI) analyst day and the (KMT) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

No comments: