Wednesday, February 29, 2012

Wednesday Watch

Evening Headlin
  • Irish Open New Front in European Debt Crisis as Treaty Vote Plays on Euro. Ireland will hold a referendum on ratifying the European fiscal compact after government ministers sought to frame the campaign as a vote on the nation’s determination to keep the euro. Prime Minister Enda Kenny, speaking in the Dublin parliament, said the government will name a date for the ballot in the coming weeks. In contrast to two previous Irish referendums on European policies, a rejection wouldn’t sink the treaty, which requires support from just 12 of the 17 euro countries to take effect. The vote will give the Irish a chance to reaffirm the nation’s commitment to the euro, Kenny said yesterday. In December, Finance Minister Michael Noonan said a ballot on the treaty would effectively be a vote on Ireland’s membership of the currency, as the government sought to avoid a repeat of 2001 and 2008 rejections by voters of European treaties. “This referendum carries huge risks,” said Thomas Costerg, an economist at Standard Chartered Bank in London, said. “The euro area is already very busy with Greece. Opening another front in Ireland is not good in terms of timing. It may increase nervousness about the future of the euro area’s perimeter.”
  • Goldman(GS), Wells Fargo(WFC) May Face SEC Mortgage-Securities Claims. Goldman Sachs Group Inc. and Wells Fargo & Co. were warned by federal regulators that they may face civil claims tied to sales of mortgage-backed securities. Goldman Sachs received a so-called Wells notice Feb. 24 from the Securities and Exchange Commission relating to disclosures for a late-2006 offering of $1.3 billion in subprime residential mortgage-backed securities, the firm said today in an annual financial report. Wells Fargo said it also got an SEC notice as the government examines whether it properly described facts and risks in offering documents.
  • China's Stocks Snap Eight-Day Gain on Housing Policy Reversal; Vanke Falls. China’s stocks fell, dragging the benchmark index lower for the first time in nine days, on concern the government will retain measures to curb gains in housing prices this year. China Vanke Co. (000002) led a gauge of developers down the most in four weeks after the China Securities Journal said Shanghai scrapped a plan allowing some non-local residents to buy second homes. “The property policy reversal has damped investors’ expectations that an easing of policies would put the economy back on track,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “That will weigh on sentiment given we’ve had a good rally this year.”
  • Treasury Yield Descending Since January Seen Signaling Slowing U.S. Growth. The $10 trillion market for U.S. Treasuries is signaling that the economic recovery may be poised to weaken even as consumer confidence rises toward pre-recession levels. Yields (USGG10YR) on 10-year Treasury notes, the benchmark for everything from mortgage rates to corporate bonds, fell as low as 1.89 percent yesterday, down from this year’s high of 2.09 percent on Jan. 23, according to data compiled by Bloomberg. Bond investors are focused on Europe’s sovereign-debt crisis, oil prices that exceed $100 a barrel again and home prices that have dropped to the lowest level since 2003. “You have an economy that’s not yet firing on all cylinders,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of primary dealers that are required to bid at Treasury auctions, said yesterday in a telephone interview.
  • JPMorgan's(JPM) Dimon Assails Newspaper Pay Levels in Bank's Defense. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon assailed the pay practices of the newspaper industry today as he sought to deflect criticism of bank pay as viewed through the compensation ratio. “Obviously our business, in investment banking in particular, all of our businesses, we have high capital and high human capital,” Dimon said today at a presentation in New York, where the bank is based. “Newspapers -- I went and got this one day just for fun -- 42 percent payout ratio, which I just think is just damned outrageous.” Lawmakers and journalists have criticized bankers for the size of their salaries and bonuses and regulators have blamed compensation for fueling the financial crisis. Dimon, who runs the biggest and most profitable U.S. bank, previously cited the media industry during a January investor call in which he sought to show why using compensation payout ratios is wrongheaded. JPMorgan paid the 25,999 employees in the investment bank an average of $341,552 last year, or about 34 percent of the unit’s revenue, according to figures posted Jan. 13. “Worse than that, you don’t even make any money!” Dimon said, directing his comments to those in the media covering the company’s investor day and drawing laughter from his audience. “We pay 35 percent. We make a lot of money.” JPMorgan posted $19 billion in profit last year.
  • Sokol Gets $1 Million A Year In Retirement Pay, Berkshire(BRK/A) Says. David Sokol, the executive who left Warren Buffett’s Berkshire Hathaway Inc. amid accusations of violating insider-trading rules last year, is receiving $1 million annually from the company in retirement payments. Sokol, who stepped down from Berkshire’s MidAmerican Energy Holdings Co. in April, collected $750,000 last year tied to the supplemental executive retirement plan, or SERP, MidAmerican said yesterday in its annual statement. Sokol was the unit’s chairman. Sokol, 55, broke company regulations by trading in the stock of one of Buffett’s takeover targets, Omaha, Nebraska- based Berkshire said in April. Sokol bought shares of Lubrizol Corp. in January 2011, less than three months before Berkshire announced a $9 billion agreement to acquire the company.
Wall Street Journal:
  • Romney Wins in Michigan, Arizona. Mitt Romney won the Michigan and Arizona primaries Tuesday, giving his campaign a much-needed boost and disappointing supporters of Rick Santorum who had hoped their candidate could prevail in Mr. Romney's native state of Michigan.
  • Voters Cite Economy as Top Issue. For all the attention paid to social issues in the run-up to two state primaries Tuesday night, voters in Michigan and Arizona identified the economy as their overriding concern—a preference that turned out to benefit Republican presidential candidate Mitt Romney, who won both contests.
  • Wells Fargo(WFC) Will Refinance 20,000 Borrowers Thanks To Settlement. Wells Fargo, the biggest mortgage servicer in the country, says the settlement that mortgage servicers and federal and state regulators reached will cost the bank about $720 million in expected income from refinancings.
  • Greece Feels Collateral Damage From Bank. The European Central Bank said it would no longer accept Greece's bonds as collateral for loans after the country was downgraded to a default rating, but added that the move was a temporary one that could be reversed once the new bailout package goes into effect. Until then, the ECB said it would be up to national central banks to decide whether to accept the bonds as collateral for their own emergency lending facilities. Greek banks, which would collapse without the support, would still be able to access loans directly from the Greek central bank, albeit at higher interest rates.
  • Banks Rev Up Lending. The lending expansion—detailed in the industry's latest report card from a top regulator—is good news for the U.S. economy at a time when the unemployment rate is 8.3% and investors remain anxious about the prospect of an economic downturn or market shock spurred by Europe's debt crisis.
  • New York Fed Spends $207.5 Million To Buy Additional Office Space. The Federal Reserve Bank of New York said Tuesday it had decided to buy a building it has been leasing for additional office space.
  • Geithner and the 'Privilege' of Being American by Lawrence B. Lindsey. The Founders argued that life, liberty, and the pursuit of happiness were rights that preceded government—not things to be granted by it.
Business Insider:
  • Ray Dalio Is The NEW King Of Hedge Funds. Not only does Bridgewater Associates' Ray Dalio run the world's largest hedge fund, but he just took George Soros' title as the "world's most successful hedge fund manager," reports the Financial Times. The fund's rank jumped from the No. 6 spot to No. 1 according to LCH Investments. LCH ranks hedge funds based on their net gains since their founding.
Zero Hedge:
  • Next Big Financial Crisis Will Be Made in China. The next big global financial crisis will emanate from China. That is not a firm prediction. But few countries have avoided crises after financial liberalization and global integration. Think of the U.S. in the 1930s, Japan and Sweden in the early 1990s, Mexico and South Korea in the later 1990s and the U.S., UK and much of the eurozone now. Financial crises afflict every kind of country. As Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard have remarked, they are “an equal opportunity menace”. Would China be different?
  • Is Warren Buffett's Berkshire Hathaway(BRK/A) Losing Its Edge?
  • Could Take 5 Years to Get 6% Unemployment: Fed's Pianalto. The U.S. economic recovery is "frustratingly slow" and it could take four to five years to ratchet the unemployment rate down to about 6 percent, from more than 8 percent now, a top Federal Reserve official said on Tuesday. The recovery is held back by the housing market and Europe's debt crisis among other headwinds, but monetary policy is now appropriately positioned to eventually achieve this "maximum employment" level, said Cleveland Fed President Sandra Pianalto.

NY Times:

  • Europe Delays Debt Talks After Signs of Uncertain Support. Domestic politics in euro zone countries emerged again on Tuesday as a serious obstacle to resolving the European debt crisis, contributing to a decision by officials to postpone a crucial meeting they had planned for Friday. The setbacks illustrated again how hard it has been to reconcile impatient financial markets with democratic processes.
  • White House Quietly Increases Budget for Obamacare's Exchange Subsidies by $111 Billion. I’ve written extensively about how the most fiscally dangerous aspect of Obamacare is its creation of a new entitlement for subsidized private insurance, through the law’s state-based exchanges. If employers dump many of their workers onto the exchanges, as numerous independent analyses suggest is likely, taxpayers may need to spend as much as $200 billion a year extra on these exchange subsidies. It turns out that the Obama Administration agrees that initial spending estimates are too low. The White House’s fiscal year 2013 budget adds $111 billion in exchange spending between 2014 and 2021, with even more spending to come in future years.
  • Small Firms Prep For Rise In Gas Prices. Businesses that rely on fuel to get their products directly to customers are bracing for a sharp rise in gas prices. "We're terrified," Fain-Rossen said. "We don't want to let anyone go, but we have a family to support. We're actually wondering if we should raise prices now in anticipation of prices going up so that we don't get hit later unexpectedly."
  • Feds Level Charges In Largest Medicare Fraud. Dr. Jacques Roy, a Dallas area physician, allegedly led a scheme that bilked Medicare for nearly $375 million over five years, in the largest healthcare fraud committed in the United States, federal authorities announced Tuesday. Roy, 54, his office manager, and five owners of home health agencies, were arrested and indicted on charges related to their alleged participation in the scheme that involved fraudulent claims for home health services.
  • Exclusive: Justice Department Conducting Criminal Libor Probe. The Justice Department is conducting a criminal probe into whether the world's biggest banks manipulated a global benchmark rate, according to a person familiar with the situation. While the Justice Department's inquiry into how the London interbank offered rate, or Libor, is set had been known, the criminal aspect of the probe was not. A criminal inquiry underscores the serious nature of a worldwide investigation that includes regulators and law-enforcement agencies in the United States, Japan, Canada and the UK.
  • China Higher Court Begins Hearing Apple(AAPL) iPad Appeal. A long-running legal fight between Apple Inc and a debt-laden Chinese firm over the iPad trademark moved to a higher court on Wednesday, in a potentially decisive hearing that will set a precedent for the rest of mainland China.
  • BOJ's Kamezaki: Europe Debt Woes Hold Lessons For Japan. Japan needs to learn from Europe and act steadily to restore its fiscal health to avoid a sudden spike in bond yields, a central bank policy maker said on Wednesday. "The lesson from Europe's debt problems is that once trust in a country's finances declines, government bonds may not be considered a safe asset," Bank of Japan board member Hidetoshi Kamezaki said in a speech to business leaders in Fukuoka, in southern Japan. "It would be inappropriate to assume that just because Japanese government bonds have been stably absorbed in the market, there is no need to worry about the future."
  • First Solar(FSLR) Hit by Steep Loss, Shares Slip. U.S. solar maker First Solar Inc (FSLR.O) posted a quarterly loss on Tuesday, hit by charges to cut production costs and replace faulty panels, and it trimmed its forecast for 2012 sales, sending its shares 8 percent lower.
Financial Times:
  • Insider Trading Probe Broadens to Pharma Stocks. The US investigation into insider dealing on Wall Street has broadened to include trading of biotechnology and pharmaceutical stocks, according to a person familiar with the matter. The Federal Bureau of Investigation and the US attorney’s office in Manhattan are honing in on trades by hedge funds in biotech and pharmaceutical stocks around important drug approval announcements and corporate takeovers, this person said.
  • Irish EU Treaty Vote Threatens Chaos. Ireland has shocked Europe with plans for a referendum on the EU's fiscal treaty, a move that risks an unprecedented fragmentation of the eurozone and a major clash with Germany. Premier Enda Kenny said Dublin was acting on legal advice from Ireland's attorney-general that "on balance" the fiscal compact requires a vote under the country's constitution. "It gives the Irish people the opportunity to reaffirm Ireland's commitment to membership of the euro," he told ashen-faced members of the Dail. All three major parties back the treaty but analysts say there is a high risk of rejection by angry voters in the current fractious mood.
  • Ireland Is Getting A Choice - Which Is More Than Other Eurozone States. Democracy continues to interfere with the European Union's best laid plans.

  • Josef Ackermann, chief executive officer of Deutsche Bank(DB), called for the additional transfer of national sovereign rights to the European level from EU member states, citing an interview. Ceding more power to Europe is a gain for member countries because without a more strongly integrated Europe, "there will be, even for Germany no successful future, not only economically, but politically and culturally as well," the CEO said. The EU needs to be empowered with automatic hard sanctions as well as strict supranational oversight, he said.
Economic Information Daily:
  • China's highway construction debt-asset ratio is more than 70%, higher than high speed rail construction's ratio of 58%, citing a report by Beijing Jiaotong University. The National Development and Reform Commission requested the report from the university. Funds for public road construction takes up a "relatively large" proportion of financing from local government financing vehicles and poses a "relatively large" risk to banks, the report cites Guo Wenlong, a NDRC researcher as saying. Fees from highways in China's central, western regions aren't enough to cover interest payments on loans used to fund the projects, the report cites Guo as saying.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.25% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 161.0 -3.0 basis points.
  • Asia Pacific Sovereign CDS Index 131.50 -2.5 basis points.
  • FTSE-100 futures +.34%.
  • S&P 500 futures +.12%.
  • NASDAQ 100 futures +.10%.
Morning Preview Links

Earnings of Note
  • (SPLS)/.41
  • (LIZ)/.13
  • (CRI)/.44
  • (JOY)/1.36
  • (COST)/.87
  • (ITT)/.35
  • (EIX)/.46
  • (MTZ)/.14
  • (FNSR)/.22
  • (PETM)/.90
  • (PEGA)/.05
  • (MDR)/.19
  • (BID)/1.25
  • (TIE)/.15
Economic Releases
8:30 am EST
  • 4Q GDP is estimated to rise +2.8% versus a prior estimate of a +2.8% gain.
  • 4Q Personal Consumption is estimated to rise +2.0% versus a prior estimate of a +2.0% gain.
  • 4Q GDP Price Index is estimated to rise +.4% versus a prior estimated of a +.4% gain.
  • 4Q Core PCE is estimated to rise +1.1% versus a prior estimate of a +1.1% gain.

9:45 am EST

  • Chicago Purchasing Manager for February is estimated to rise to 61.0 versus a reading of 60.2 in January.

10:30 am EST

  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,100,000 barrels versus a +1,633,000 barrel gain the prior week. Distillate supplies are estimated to fall by -750,000 barrels versus a -208,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -425,000 barrels versus a -649,000 barrel decline the prior week . Finally, Refinery Utilization is estimated to rise by +.5% versus a +1.5% gain the prior week.

2:00 pm EST

  • Fed's Beige Book

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Fed's Bernanke speaking, Fed's Plosser speaking, Fed's Fisher speaking, ECB's LTRO Program Results, NAPM-Milwaukee for February, weekly MBA mortgage applications report, China Manufacturing PMI, Lazard Medical Tech Conference, Robert Baird Business Solutions Conference, KeyBanc Consumer Conference, Keefe Bruyette & Woods Bank Conference, BofA Merrill Ag Conference, (FE) Analyst Meeting and the (CMS) Investor Meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology 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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