Thursday, November 10, 2011

Thursday Watch


Evening Headlines

Bloomb
erg:
  • Too Big to Rescue Italy Forces EMU to Crossroads: Euro Credit. Italy is forcing Europe to choose between increased bond buying by the European Central Bank or a possible breakup of the euro. Italian 10-year yields have breached the 7 percent level that locked Greece, Portugal and Ireland out of the capital markets and forced them to seek aid. With debt of 1.9 trillion euros ($2.6 trillion), more than those three countries combined, Italy has to refinance about 200 billion euros of maturing bonds next year and more than 100 billion euros of bills. The future of the European monetary union is at stake after bond vigilantes claimed their fifth political scalp by driving Italy's borrowing costs to records, prompting Prime Minister Silvio Berlusconi to offer his resignation. ECB member Jens Weidmann said Nov. 8 his institution cannot print money to bail out governments. "There is now a full-scale run on the world's third- largest bond market," said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London. "If Italy fails, the euro zone fails. The worse things get in Italy, the greater the pressure on the ECB to intervene on a massive scale." German Finance Minister Wolfgang Schaeuble told lawmakers that Italy should request aid from the European Financial Stability Facility if it needs it, said two people who were present at a private budget meeting yesterday in Berlin. Investors demand a premium of more than 550 basis points to lend to Italy for 10 years rather than Germany, more than double the average gap of the past year. Credit-default swaps on Italy jumped 38 basis points to 562, surpassing the previous record of 534 set Sept. 22, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 13 basis points to a one-month high of 341.
  • Merkel's Party May Adopt Euro-Exit Clause in Platform, CDU's Barthle Says. German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area, a senior CDU lawmaker said. A motion that proposes allowing a euro member that doesn’t want to or is unable to comply with the common currency rules to leave the euro without losing membership in the European Union has been accepted by the party for debate at the CDU’s annual congress, Norbert Barthle, the ranking CDU member of parliament’s budget committee, said in a phone interview in Berlin. It probably has enough support to be passed by delegates at their meeting in the eastern German city of Leipzig on Nov. 14-15, he said. “This motion will go through, I am sure of it,” Barthle said late yesterday. “Any country that wants to leave the euro on its own should not be prevented from doing so.” Any German move to allow a state to exit the currency area, which is not envisaged under current euro rules, would require changes to the bloc’s guiding treaty to come into force. That can only happen with the backing of Germany’s EU partners. “It will become part of our party platform for future policy with regard to amending the framework treaties of the euro,” Barthle said. To become government policy, it would have to be agreed by all three parties in Merkel’s coalition and may need opposition support in a full parliamentary vote.
  • Derivatives Erase October Optimism on Stresses: Credit Markets. October's optimism that Europe would solve its sovereign-debt crisis has evaporated in the bond market. Credit-default swaps tied to an index of European banks from Italy's UniCredit SpA to London-based HSBC Holdings PLC are at the highest level since Oct. 5. In the U.S., a benchmark index of the cost to protect corporate debentures from losses rose the most in almost seven weeks. Interest-rate swap spreads, a gauge of stress in credit markets, are the widest in 17 months.
  • Derivatives Signal Bank Funding Pressures to Rise on Europe Debt. Derivative traders are wagering that U.S. and European banks' willingness to lend will ebb as financial institutions further shore up balance sheets amid signs the euro-zone debt crisis is worsening. The difference, or spread, between the dollar London interbank offered rate and the overnight index swap rate projected by contracts trading in the forward market rose yesterday to 56 basis points, the wides since June 2010, according to UBS AG data. The FRA/OIS spread for the March to June 2012 period projects a widening of nearly 20 basis points in the current spot dollar Libor-OIS spread, which is an indirect measure of the availability of funds in the money market and of banks' willingness to lend.
  • Euro Trades Near One-Month Low Before Italy Tests Demand at Bill Auction. The euro traded 0.2 percent from its lowest level in a month before Italy sells 5 billion euros ($6.8 billion) of one-year bills today, testing investor appetite after borrowing costs surged to euro-era records. The 17-nation currency touched a two-week low against the yen after Italian yields yesterday climbed above 7 percent, the level at which Greece, Ireland and Portugal sought international bailouts. Italy will sell five-year debt on Nov. 14. New Zealand’s currency weakened for a third day versus the yen as Asian stocks dropped. Australia’s dollar pared declines after the unemployment rate fell as energy companies ramped up hiring. “The success of those auctions will be crucial to the near-term direction in euro,” said Richard Grace, the Sydney- based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “The risk is euro goes lower. The low $1.30s is certainly a risk over the next week or so.”
  • China Exports Slow as Europe Dims Outlook. China’s exports rose at the slowest pace in almost two years in October as Europe’s deepening debt crisis crimped demand, adding pressure on policy makers to support growth in the world’s second-biggest economy.
  • Solar Glut to Worsen After Prices Plunge 93% on Rising Supply: Commodities. The cost of solar cells and microchips has nowhere to go but down because of a supply glut for the commodity they’re made from, a brittle charcoal-colored semiconductor baked in ovens at 600 degrees centigrade. Polysilicon has plunged 93 percent to $33 a kilogram from $475 three years ago as the top five producers more than doubled output, data compiled by Bloomberg shows. The industry next year will produce 28 percent more of the raw material than will be consumed, up from 20 percent this year, said Robert Schramm- Fuchs and Shai Hill, analysts at Macquarie Group Ltd. “Polysilicon is a grossly, grossly, grossly oversupplied commodity product,” said Paul Leming, director of research at Ticonderoga Securities in New York. “We’re staring at years of stability where polysilicon pricing sits at something approaching cost of production and doesn’t move.”
  • CMBS Sales Seen Little Changed in 2012 as Lenders Cut Back. Sales of commercial mortgage-backed securities aren’t likely to increase much next year as borrowing costs remain high and lenders back off making new loans, according to CMBS executives. “The Street’s not really taking risk, they’re very concerned,” Steven Schwartz, managing director of loan acquisitions for Torchlight Investors, said at the Bloomberg Commercial Real Estate Summit in New York. “The first quarter’s going to be grim.” Europe’s fiscal crisis has roiled credit markets since July, causing gyrations in the value of securities tied to shopping malls, skyscrapers and hotels and leading to a pullback in loan originations. CMBS issuance in the U.S. has totaled about $26 billion this year. While that’s up from $11.5 billion in 2010, it’s a fraction of the record of more than $200 billion in 2007 when commercial real estate peaked, according to data compiled by Bloomberg.
  • Syria Violence May Trigger Libya-Like Civil War, UN Predicts. Syria is at risk of becoming like Libya, where an uprising against a long-standing dictator unleashed a civil war, the United Nations human rights chief predicted. “It happened in Libya; it may happen in Syria,” UN High Commissioner for Human Rights Navi Pillay told the Security Council today in New York. “More and more soldiers refuse to become complicit in international crimes and are changing sides.”
  • Japan Machine Orders Fell More Than Forecast in September. Japan’s machinery orders fell more than forecast in September, indicating that companies may hold off on outlays on concern a global slowdown and a strong yen will hurt business. Bookings, an indicator of future capital spending, fell 8.2 percent in September from August, the Cabinet Office said in Tokyo today. The median forecast of 29 economists surveyed by Bloomberg News was for a 7.1 percent fall.
  • APEC Finance Officials Concerned by Impact of Europe Debt Crisis on Region. Deputy finance ministers meeting at the Asia-Pacific Economic Cooperation forum in Honolulu expressed concern over the danger posed by contagion from Europe for a global economy still recovering from the 2008 financial crisis.
Wall Street Journal:
  • Italy Fears Rattle World's Investors. Markets in U.S. and Europe Drop as Turmoil Fuels Fears Crisis Could Ricochet Across Atlantic, Endanger Common Currency.
  • Paterno Ousted at Penn State. In its fifth day, the metastasizing scandal at Pennsylvania State University ended the career of Joe Paterno—the longest-tenured coach in major-college football—and resulted in the ouster of the university's president. After an emergency meeting Wednesday evening, the school's Board of Trustees announced at a news conference that they had dismissed Mr. Paterno and Graham Spanier, the school's president for the past 16 years.
  • Sprint Stalks Free Growth. Brenda Parker lives in government housing, can't work because of chronic medical problems and depends on federal disability checks. She is just the kind of customer Sprint Nextel Corp. is looking for. Ms. Parker, of Shallotte, N.C., is one of millions of low-income Americans who get 250 minutes a month of free cellphone service through a little-known government subsidy program called Lifeline. The program, funded by charges levied on cellphone bills nationwide, pays carriers such as Sprint as much as $10 a month per customer to be used toward a free or discounted wireless plan.
  • Hedge Funds Getting Queasy On Wild Market Ride. Just when some managers thought it was getting safe to re-enter and start buying stocks again, events in Europe have overwhelmed the markets, especially on Wednesday. “This market is like Chinese water torture – managers are reaching exhaustion point in this guessing game,” said Vidak Radonjic, of The Beryl Consulting Group LLC, which advises investors on hedge funds.
  • Farmer Mac Swings To 3Q Loss, Stung By Derivatives. Federal Agricultural Mortgage Corp. (AGM), commonly known as Farmer Mac, swung to a third-quarter loss as write-downs on derivatives weighed down the bottom line, masking a stronger core profit from improving interest income.
  • Bank Quandary: Valuing the Assets. Goldman Sachs Group Inc.(GS) and Morgan Stanley(MS), which became bank-holding companies to help them survive the financial crisis, are considering an accounting change that would make them look even more like a traditional bank. The two firms are discussing whether to reduce their use of mark-to-market accounting, in which companies immediately take profits or losses as asset values fluctuate, according to people familiar with the situation. Such swings routinely affect the bottom line at Goldman and Morgan Stanley, including in the third quarter.
  • Nations Diverge on Pressing Iran. The U.S. and its European allies struggled to present a unified international stance against Iran a day after the United Nations' nuclear agency said it had uncovered extensive evidence that Tehran has been developing the technologies needed to produce nuclear weapons. Russia on Wednesday formally vowed to block any move at the U.N. Security Council to impose new sanctions against Iran, saying it wasn't convinced by the new intelligence presented by the International Atomic Energy Agency on Tuesday. China called for the IAEA to be "objective" in its work.
Business Insider:
  • Mayhem at Penn State: Students Pour Into Streets As Riot Fears Grow. (pics) Angry Penn State students are back in the streets tonight after Joe Paterno was abruptly fired by the board of trustees. CNN is on the ground, and the situation is really tense right now. We'll update you here with pictures, video, and any news from State College.
  • Jefferson County Just Filed For The Largest Municipal Bankruptcy In U.S. History. Commissioners of Jefferson County, Alabama, voted today to file for the largest-ever municipal bankruptcy today, ending nearly three years of drama over the county's $3.1 billion sewer debt. The decision comes less than two months after the county reached a provisional agreement with its creditors, that included $1.1 billion in concessions. But county officials have been unable to get signed commitments from its creditors before today's vote, according to Bloomberg.
Zero Hedge:
CNBC:
  • Debate Recap: Economy Can Thrive With Less Government. Herman Cain swatted away character issues, Rick Perry couldn't remember which federal agencies he wants to eliminate, and a still-crowded field of Republican candidates agreed that the way to save the government is by shrinking it.
  • ECB's Stark to Europe: We Are Not 'Lender of Last Resort'. European Central Bank policymaker Juergen Stark warned European governments on Wednesday against asking the ECB for support in dealing with the region's sovereign debt crisis, saying this would put the central bank's independence at risk.
NY Times:
Rasmussen Reports:
Reuters:
  • Green Mountain(GMCR) Sales Miss Raises Growth Fears. Green Mountain Coffee Roasters' weak quarterly revenue raised fears about the company's growth potential, as sales of its Keurig coffee makers did not rise as much as Wall Street had expected, sending its shares down 34 percent.
  • Republican Candidates: No U.S. Bailout of Europe. Leading Republican candidates for the U.S. presidency said on Wednesday the United States should stay out of the financial problems in Europe and resist any calls for direct infusions of cash.
  • Cisco(CSCO) Q2 Beats Cautious Street View. Cisco Systems Inc forecast revenue and earnings above Wall Street expectations as demand from government and enterprises for its network equipment remained resilient despite global economic troubles. Analysts had expected conservative quarterly guidance, given the economic uncertainty.
  • US May Delay Pipeline Decision Past 2012 Election. The United States may choose to reroute a proposed Canada-to-Texas oil pipeline, a move that could defer a decision on approving the politically charged project beyond the 2012 U.S. election, a U.S. official said on Wednesday.
Financial Times:
  • Subprime Loans Come Back to Haunt HSBC. For a bank that is keen to trumpet its global footprint at every opportunity, HSBC is struggling to shake-off one very parochial issue. Almost three years after it began to wind down its US consumer finance business, the bank is facing another severe bout of losses linked to subprime mortgages in the country.
Telegraph:
  • Europe Pushes Italy Into The Abyss. It has taken three trading days since the failure of the G20 summit to detonate the explosive charge on Italy's €1.9 trillion (£1.6 trillion) bond market, the world's third-largest stock of public debt. Europe's purported "firewall" to safeguard Italy does not, in fact, exist. The EU's vague plans to leverage its EFSF rescue fund to €1 trillion have come to nothing. Investors could see at once that plans to use the fund as a "first loss" bond insurer concentrates risk, dooming France's AAA rating and accelerating contagion to the core. The European Central Bank (ECB) has been buying Italian bonds, but too slowly to stop the debt spiral. The ECB's new chief, Mario Draghi, kicked off his term with a blunt warning that it would be "pointless" for the bank to try to cap the yields of struggling debtors for long. It was an invitation for frightened investors to dump their bonds. With almost nothing in place to halt contagion, the market verdict has been swift and brutal. Capital Economics said "the Rubicon may have been crossed" after yields on 10-year Italian bonds smashed through 7pc on Wednesday.
Kleine Zeitung:
  • Standard & Poor's Ratings Service may comment next week about Austria's AAA debt rating, and officials are worried it may change the rating outlook to "negative". S&P may comment as soon as Nov. 15.
Sankei:
  • Iran and North Korea jointly operate three nuclear research institutes beneath Iranian military facilities, citing a person familiar with the matter. About 10 North Korean scientists visited the research centers this year to help Iran develop nuclear weapons.
liveMint.com:
Hong Kong Economic Journal:
  • More Chinese companies may delist in the U.S because of close scrutiny by regulators there, citing Terence Ho, a partner at Ernst & Young LLP. Chinese companies that listed by means of reverse takeover face "confidence risk".
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -4.0% to -1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 215.50 +22.0 basis points.
  • Asia Pacific Sovereign CDS Index 155.25 +7.0 basis points.
  • FTSE-100 futures -1.41%.
  • S&P 500 futures +.28%.
  • NASDAQ 100 futures +.32%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (FLO)/.23
  • (KSS)/.79
  • (VIA/B)/1.02
  • (JWN)/.59
  • (DIS)/.54
  • (NVDA)/.31
  • (MCP)/.68
  • (KLIC)/.26
Economic Releases
8:30 am EST
  • The Import Price Index for October is estimated unch. versus a +.3% gain in September.
  • The Trade Deficit for September is estimated to widen to -$46.0B versus -$45.6B in August.
  • Initial Jobless Claims are estimated to rise to 400K versus 397K the prior week.
  • Continuing Claims are estimated to fall to 3680K versus 3683K prior.
2:00 pm EST
  • The Monthly Budget Deficit for October is estimated at -$102.5B versus -$140.4B.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Lockhart speaking, Fed's Evans speaking, BoE Rate Decision, 30-Year Treasury Bond Auction, ECB's Stark speaking, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, Deutsche Bank Hospitality/Gaming Conference, Sidoti Emerging Growth Forum, BMO Digital Entertainment Conference, RBC Gold Conference, Suntrust Government Services Conference and the (BX) Investor Day could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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