Tuesday, May 08, 2012

Tuesday Watch

Evening Headlin
  • Greek Government Mandate to Pass to Syriza as Samaras Fails. Greek political leaders will meet for a second day today in a bid to form a government, with the mandate for the task being handed to the second-biggest party after New Democracy leader Antonis Samaras said he failed to forge agreement after an election that raised questions about the country's euro membership. Samaras gave up his bid after nearly six hours of talks in Athens yesterday. The attempt to form a government will pass to Alexis Tsipras, the head of Syriza, the second biggest party, which has vowed to cancel the bailout terms. Tsipras will see President Karolos Papoulias today at 2 p.m. Athens time. "I tried to form a coalition government with two goals: that the country remain in the euro and bailout policies change to include growth measures," Samaras said in a statement on state-run NET TV yesterday. "I did what I could to get a result but it was not possible. As such, I have informed the president of the republic and handed back the mandate."
  • Greek Default Risk Returns as Bond Maturity Nears: Euro Credit. Two months after forcing through the biggest-ever sovereign bond restructuring, Greece once again faces the prospect of becoming the first developed nation to default on its debt. The government taking office after this weekend's election has 30 days to decide whether to make today's interest payment on 20 billion yen of 4.5% notes maturing in 2016, or default. Then, by May 15, officials must decide if they're going to pay the 436 million euros due on a floating-rate note issued a decade ago. These are among about 7 billion euros of bonds whose holders took advantage of being governed by foreign rather than Greek law to sidestep losses suffered under the private-sector involvement rescheduling, or PSI. Paying the holdouts in full would arouse the ire of Greek taxpayers, as well as investors who cooperated with PSI. A failure to pay would signal Europe's debt crisis is worsening.
  • Euro Area Must Take Austerity Pain Now, Dombrovskis Says. Europe’s most indebted nations shouldn’t use their recessions as an excuse to avoid committing to austerity plans if the region is ever to emerge from its debt crisis, Latvian Prime Minister Valdis Dombrovskis said. “It’s important to do the adjustment, if you see that adjustment is needed, to do it quickly, to frontload it and do the bulk already during the crisis,” Dombrovskis said yesterday in an interview in Stockholm. “Certainly austerity is never a very popular subject and in this case the question is, are there really alternatives,” Dombrovskis said. “Of course, a country can say we don’t like austerity, but then the question they should ask first is who is going to finance the budget deficits, financial markets aren’t in the mood to finance large deficits right now.”
  • Euro Near Three-Month Low on Greek Leadership Concern. The euro traded 0.6 percent from a three-month low as Greece’s political leaders meet for a second day in a bid to form a new government, after an election raised questions about the country’s membership of the euro bloc. The 17-nation currency maintained a two-day decline against the yen after French President Nicolas Sarkozy, German Chancellor Angela Merkel’s preferred partner for enforcing debt reductions, was defeated by Socialist Francois Hollande. Demand for the yen was limited as Asian stocks climbed before data that may show German industrial production rebounded. The Australia’s dollar dropped against all of its 16 major peers after the country’s trade deficit more than doubled in March. “Regardless of which party eventually manages the Greek government, the next period here looks to be full of uncertainty,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC), Australia’s second-largest lender. “That’s going to be a negative for the euro.”
  • Morgan Stanley(MS) Sees $9.6 Billion Collateral Call If Cut 3 Grades. Morgan Stanley (MS) boosted estimates for additional collateral and termination payments it would have to post to counterparties if its credit-rating is cut as Moody’s Investors Service considers downgrades across the industry. Counterparties may call $7.21 billion in additional collateral or termination payments if Morgan Stanley’s rating is lowered three levels by Moody’s and two grades by Standard & Poor’s, the investment bank said today in a regulatory filing based on March 31 data. It would also have to post $2.4 billion in collateral to certain exchanges and clearinghouses, it said. The total, $9.61 billion, was up from an estimated $6.52 billion as of Dec. 31.
  • Wynn Resorts(WYNN) Earnings Miss Estimates on Vegas Shortfall. Wynn Resorts Ltd., the casino company founded by billionaire Steve Wynn, reported first-quarter earnings fell 19 percent, missing analysts projections on lower winnings in Las Vegas. Net income fell to $140.6 million, or $1.23 a share, from $173.8 million, or $1.39, a year ago, Las Vegas-based Wynn said today in a statement (WYNN). Excluding items, profit of $1.33 a share missed the $1.41 average of 21 estimates compiled by Bloomberg.
  • Fannie Refused to Punish Countrywide for Bad Debt, Lockhart Says. Fannie Mae refused to seek large amounts of mortgage repurchases from Countrywide Financial Corp. as housing began to crash, according to the former head of its regulator. James Lockhart, who led the Federal Housing Finance Agency until 2009 and its predecessor, the Office of Federal Housing Enterprise Oversight, “spent a lot of time” pushing Fannie Mae executives to seek more so-called putbacks on Countrywide loans that failed to match their promised quality, he said today. “They didn’t want to offend their largest customer,” Lockhart, now the vice chairman at investment firm WL Ross & Co., said during a speech at a Mortgage Bankers Association conference in New York. Trends in mortgage-repurchase demands are among “procyclical” issues in the market, or items that can lead to looser credit during a boom and tighten standards during tougher times, Lockhart said. Policy makers should strive to lessen the dynamic as they remake the housing-finance system, he said. “If people had known how bad the repurchases were going to get, we’d certainly have had a lot more disciplined underwriting,” Lockhart said in an interview.
  • Barneys New York Taken Over by Perry Capital in Debt Swap. Barneys New York has been taken over by Perry Capital in a debt-for-equity swap that reduces the luxury retailer's borrowings by $540 million, allowing the chain to invest more in its rebounding business. Perry, which takes over majority control from Istithmar World PJSC, partnered with billionaire Ron Burkle's Yucaipa Cos. investment firm in the conversion, the New York-based company said today in an e-mailed statement. The transaction will reduce Barneys's debt to $50 million from $590 million.
  • SEC Hiring Outside Investigator to Study Claims Against Watchdog. The U.S. Securities and Exchange Commission is hiring an outside investigator to study complaints about current and former employees in the agency’s internal watchdog unit, an agency spokesman said. “An individual has raised allegations of misconduct by former and current employees in the Office of Inspector General,” the SEC’s John Nester said today in an e-mail. “The matter was promptly referred to the Council of Inspectors General on Integrity and Efficiency. We are also in the process of hiring an independent investigator to review the claims.”
  • Drug-Defying Germs From India Speed Post-Antibiotic Era.
Wall Street Journal:
  • Jetliner Bomb Plot Is Foiled. The U.S. thwarted a bomb plot by al Qaeda's Yemeni branch aimed at bringing down a jetliner with a more advanced version of an underwear bomb used in a failed 2009 Christmas Day attempt, officials said Monday. The Central Intelligence Agency, working with foreign security services, was able to seize the bomb—which they believed was intended for a U.S.-bound flight—before the would-be suicide bomber was able to move ahead with his plot, officials said. Because the plot was headed off in its early stages, officials said the effort never represented a threat to Americans or to U.S. allies, nor did airlines face a direct threat. The bomb was "viable," a senior U.S. counterterrorism official said. The official added that it probably would have gone off but it did have some flaws that may have impacted its ability to detonate properly.
  • Santorum Endorses Onetime Rival Romney.
  • Merger-Arbitrage Hedge Funds Declined In April Despite M&A. April was the most active month for U.S. mergers and acquisitions since October, but hedge fund managers failed to take advantage of the increase in deal activity. Managers who trade on deal news, and other corporate developments that can impact share prices significantly, were the worst performers last month, losing 0.64%, according to the Dow Jones Credit Suisse Hedge Fund Index. Average hedge fund managers lost 0.33% and the Standard & Poor's 500 index declined by 0.7%.
  • Bank of Japan Buys Record Amount of Stock ETFs. The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date, though the move failed to prevent a sharp fall for the Tokyo equity market.
Business Insider:
Zero Hedge:
  • Electronic Arts(EA) Shares Skid as Outlook Disappoints. Electronic Arts reported quarterly earnings that beat analysts' expectations, but shares plunged more than 8 percent after-hours as the company's full-year revenue outlook fell short.
  • Raising Inflation Target Would Be 'More Than Reckless': Fed's Fisher. The president of the Federal Reserve Bank of Dallas, Richard Fisher, rejected the idea that higher inflation would spur the economy on Monday. Saying the last thing businesses needed in this economy was uncertainty, Fisher sided with Federal Reserve Chairman Ben Bernanke in his public feud with Paul Krugman, the Nobel Prize-winning economist and New York Times columnist. Called “The Battle of the Beards” by The Washington Post, the back-and-forth between the two economists began when Krugman called on the Fed to raise inflation targets, a move Bernanke called “reckless.” “I would say that Ben Bernanke’s guilty of understatement. It would be more than reckless. It’s a silly thing to recommend,” Fisher said on CNBC’s “The Kudlow Report.”
  • US and Europe Have Run Out of Monetary Tricks: Andy Xie. The following is an opinion piece from Caixin, a Beijing-based media group specializing in Asia business news and financial information. Industrial production is stalling in India, and its credit rating may be downgraded to junk. Power consumption in China has slowed to about half of last year's level, while consumer price inflation remains stubbornly high. It's obvious the world's largest emerging economies are no longer in a position to carry the global economy through tough times, as they did during the "recovery" years of 2009-'11. And that spells trouble for the United States and Europe.


NY Times:

  • Chinese Exporters' Weakness at Fair Points to Broader Economic Anxiety. The Canton Fair, China’s biggest marketplace for exporters and buyers, announced over the weekend an unexpected decline in contracts signed over the last month at the fair’s spring session. The weak result was the latest sign that exporters across China are struggling to maintain their global competitiveness. Falling export orders are also a warning for the Chinese economy because they coincide with steeply rising wages and higher rents for factory space, pushing many export factories to the brink of insolvency.

LA Times:

  • George Soros Backs Pro-Democratic 'Super PAC'. Liberal philanthropist and financial guru George Soros is donating $1 million to American Bridge 21st Century, a “super PAC” that serves as a opposition research clearinghouse for pro-Democratic groups, his spokesman announced Monday evening.
Rasmussen Reports:
  • Lacker Says Fed Can't Ease Structural Joblessness. Further monetary stimulus would not do much for a U.S. labor market that is plagued by longer-term, structural issues like skills mismatches, Richmond Federal Reserve Bank President Jeffrey Lacker said on Monday.
  • Ulta Beauty(ULTA) Raises 1Q Outlook On Higher Store Traffic. Ulta Beauty raised its first-quarter outlook as the beauty products retailer benefited from promotions and new store openings.
  • Rackspace Hosting(RAX) Profit Misses as Costs Weigh. Rackspace Hosting Inc reported a first-quarter profit that missed Wall Street expectations as the company spent more on its data centers and beefed up its workforce to cater to the growing demand for cloud computing. Shares of the company, which has topped profit estimates for the last three quarters, fell 13 percent to $50.25 in extended trade.
Financial Times:
  • Iran Receiving Yuan for Oil to China Through Russian Banks. Iran is receiving yuan payments for oil it's supplying China via Russian banks, citing oil executives in Beijing and Gulf-based bankers.
  • Greece Braces for a Repeat of Elections. Greece is bracing for a repeat general election after its centre-right leader failed to win leftwing support to form a “national salvation government” in the wake of Sunday’s inconclusive outcome at the polls. “We are now heading for a second vote next month in a deeply polarised atmosphere,” said a disappointed government official. The repeat election would probably take place on June 17, he said.

The Independent:
  • Euro Heading for Freefall in Echo of Housing Crash. The euro could go into freefall in the next few weeks as investors come to see it as comparable to a sub-prime mortgage bond, traders warned yesterday after a dramatic day on world stock markets. With European voters giving austerity a clear thumbs-down, currency experts predicted a grim future for the euro, even if some of the countries that use it manage their way though the present difficulty. Jason Conibear, director of the global foreign exchange specialist Cambridge Mercantile, said of the election results: "The initial reaction of the markets after the weekend was to get out of the euro. "There's every chance the euro will go into freefall in the weeks ahead against all the major currencies. Investors are waking up to the fact that the once ridiculous notion that the euro could collapse is increasingly the most likely outcome." That in turn could give a further boost to the UK pound and the US dollar, good for the notion that both nations have "safe-haven" status, but bad for exports which might boost growth. The euro fell sharply in early trading against the dollar yesterday while the pound soared against the euro. Mr Conibear added: "Europe is not the place to be right now. It's got the same appeal for investors as a synthetic CDO." Collateralised debt obligations were one of the dubious financial instruments used to bet on US mortgages that hindsight shows borrowers were never likely to repay. "Whether it was right or wrong, until the French and Greek elections this weekend there was at least a script. The script of austerity has now been torn up and the sovereign peoples of Europe are starting to ad lib," Mr Conibear said.
  • Daimler AG's Mercedes-Benz China sales fall 11% y/y in April to 14,677 vehicles.
Jerusalem Post:
  • Egypt Islamist Vows Global Caliphate in Jerusalem. “The capital of the caliphate – the capital of the United States of the Arabs – will be Jerusalem, God willing,” cleric says. Egypt’s Islamists aim to install a global Islamic caliphate with its capital in Jerusalem, a radical Muslim preacher told thousands of Muslim Brotherhood supporters in a clip released Monday. “We can see how the dream of the Islamic caliphate is being realized, God willing, by Dr. Mohamed Mursi,” Safwat Higazi told thousands of Brotherhood supporters at a Cairo soccer stadium as Mursi – the movement’s presidential candidate – and other Brotherhood officials nodded in agreement.
Evening Recommendations
Wells Fargo:
  • Upgraded (VRTX) to Outperform.
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 169.0 -2.0 basis points.
  • Asia Pacific Sovereign CDS Index 139.50 +2..75 basis points.
  • FTSE-100 futures -.16%.
  • S&P 500 futures -.11%.
  • NASDAQ 100 futures -.09%.
Morning Preview Links

Earnings of Note
  • (TAP)/.43
  • (WEN)/.03
  • (FOSL)/.92
  • (STE)/.59
  • (DTV)/1.05
  • (SMG)/2.06
  • (OMX)/.16
  • (THS)/.60
  • (PCX)/-.34
  • (DISCA)/.60
  • (DIS)/.55
  • (RAH)/.84
Economic Releases
7:30 am EST
  • NFIB Small Business Optimism Index for April is estimated to rise to 93.0 versus a reading of 92.5 in March.

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Fed's Lacker speaking, Fed's Fisher speaking, ECB's Draghi speaking, JOLTs Job Openings report for March, IBD/TIPP Economic Optimism Index for May, weekly retail sales reports, 3Y T-Note Auction, Greek Bill Auction, BofAMerrill Tech Conference, Wells Fargo Industrial/Construction Conference, Robert Baird Growth Stock Conference, UBS Financial Services Conference and the (ISIL) Analyst Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly 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 modestly lower. The Portfolio is 50% net long heading into the day.

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