Wednesday, June 13, 2012

Wednesday Watch

Posted by Gary .....at 12:27 AM

Evening Headlines
Bloomberg:
  • Spain's Record Yields Show Italy Bailout Risk. Spain’s benchmark borrowing costs climbed to a record yesterday, raising the specter of sovereign bailouts for the government in Madrid and then Italy that would stretch European Union finances to their limit. The yield on Spanish 10-year government debt rose for a third day, touching 6.83 percent, the highest since 1997, after Fitch Ratings predicted that Prime Minister Mariano Rajoy will miss budget-deficit targets he’s made the foundation of his economic policy. Italian 10-year yields rose to the highest in almost six months. The bond rout wiped out the effects of 1.1 trillion euros ($1.4 trillion) in official funding for euro-region banks that has held yields in check since December. Spain’s 10-year yield is close to the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. Italy, the second-biggest sovereign borrower in the euro area, may need to seek a rescue within months, said James Nixon, chief European economist at Societe Generale SA (GLE) in London. “The crisis will inevitably roll on to the next domino, and that’s Italy,” Nixon said in a telephone interview. “The southern European economies are effectively in free-fall and market appetite for southern European debt is rapidly drying up. I can’t see anything to turn that dynamic around.” European policy makers face a series of hurdles in the coming days as bond investors spurn the 100 billion-euro rescue package for Spanish banks that the European Central Bank said yesterday would bolster financial stability. Italy is due to sell as much as 9.5 billion euros of bills and bonds at auctions today and tomorrow while auditors are due to report on the extent of Spanish banking losses from next week.
  • Seeds of Next Crisis Sown as Repressive Loans Bite: Euro Credit. European banks have stuffed their balance sheets with domestic government bonds, compelled by rules on capital and tempted by cheap central bank loans, sowing the seeds for the next stage in the sovereign debt crisis. "We're seeing the increasing balkanization of finance," said Toby Nangle, who helps manage the equivalent of about $49 billion as head of multi asset allocation at Threadneedle Asset Management in London. "It represents the single-currency project in reverse gear."
  • Italy Tax Increases Backfire As Monti Tightens Belts. Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect. Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession, government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006. Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity. “This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”
  • Greek Bank Deposit Outflows Said to Have Risen Before Elections. Greek deposit outflows have accelerated before this weekend’s elections, two bankers familiar with the situation said, on concern the nation may move closer to abandoning the euro. Daily withdrawals have increased to the upper end of a 100 million-euro ($125 million) to 500 million-euro range this month, one banker said, asking not to be identified because the figures aren’t public. A second banker said the drawdown may have exceeded 700 million euros yesterday. An official for the Bank of Greece (TELL), the Athens-based central bank, declined to comment.
  • Worst of China Slowdown Seen in Wenzhou as Stimulus Limited. Jiang Xiangsong has 18 days to pay a 2 million yuan ($314,000) bank debt or his suitcase company in eastern China will go bankrupt. He's close to tears as he realizes his last hope, a government-backed office, won't help. "This is totally useless: If I had any collateral, why the hell would I come here?" he yells at an official in Wenzhou's state-run loan service, set up to help small businesses after rising bankruptcies and suicides prompted Premier Wen Jiabao to visit in October and pledge support. Wenzhou's more than 400,000 businesses make everything from shoes in dusty side streets to synthetic leather in dilapidated factories, much of it financed by unregulated lenders that spread during China's record 2009-10 credit boom. The decline of so-called shadow banking in the city, triggered by Wen's move to rein in a national property bubble, has left Wenzhou bearing the brunt of the country's economic slowdown.
  • Gorman Says Three-Level Cut Would Be ‘Somewhat Stunning’. Morgan Stanley (MS) Chief Executive Officer James Gorman said a three-level credit-rating downgrade by Moody’s Investors Service would be “somewhat stunning” given the firm’s increased capital. Moody’s has said it may reduce the rating on New York-based Morgan Stanley by as much as three levels when it announces the results of an industrywide review this month. Morgan Stanley can manage through any potential cut, Gorman said today at an investor conference in New York.
  • JPMorgan(JPM) Traders Didn't Understand Risks, CEO Dimon Says. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said traders in a London unit responsible for a $2 billion loss didn't understand the risks they were taking and weren't properly monitored. "This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks," Dimon said in prepared remarks ahead of his appearance tomorrow before the Senate Banking Committee. "We have let a lot of people down, and we are sorry for it."
Wall Street Journal:
  • Threat Spreads Across Europe. Borrowing Costs Rise Across Continent as World Bank Sees Global Impact From Crisis. Borrowing costs for Italy and Spain continued to surge on Tuesday, escalating calls for bigger steps from euro-zone leaders amid a new warning that the crisis is dragging down even the world's resilient emerging economies.
  • Berlin's Ballooning Bailout Bill. A billion here, a billion there, and soon you are talking real money. A true fiscal union may still be a distant prospect. But each round of the European sovereign-debt crisis has seen Germany make financial commitments that have raised the cost it would bear if the euro failed. This week's Spanish bailout will raise its exposure to financially stressed countries by as much as €25 billion ($31.2 billion) or so. Is Germany now in too deep to risk the single currency collapsing?
  • Pressure Mounts for Italy's Monti. Skittish Investors Fear Economic Overhaul Risks Stalling. Prime Minister Mario Monti's honeymoon is over. Italy's return to the cross hairs of the euro-zone debt crisis has ratcheted up pressure on Mr. Monti to accelerate his turnaround of the country's moribund economy. But the effort is running up against a rising tide of discontent at home. Mr. Monti has passed austerity measures including tax increases and an overhaul of Italy's pension system since taking office in November, garnering widespread praise from investors and world leaders.
  • This Moody's Man Is Giving Banks the Blues. Gregory Winans Bauer and his team could cost Morgan Stanley's shareholders more than $9 billion. Not many people outside major banks and credit-rating firms have heard of Mr. Bauer. But the low-key 57-year-old debt analyst is leading a spate of credit downgrades by Moody's Corp.'s Moody's Investors Service that is forcing some of the biggest European and U.S. banks to put up additional capital and causing controversy on Wall Street.
  • Tin Pan Valley: The Coming Shakeout for App Makers. Like the Early Music Industry, Today's Apps Are 'Made' By Marketing, Sales.
  • U.S. Probes Cable for Limits on Net Video. The Justice Department is conducting a wide-ranging antitrust investigation into whether cable companies are acting improperly to quash nascent competition from online video, according to people familiar with the matter. Justice Department officials have spoken to several online video providers, including Netflix Inc. and Hulu LLC, those people said. Investigators have also questioned Comcast Corp., Time Warner Cable Inc. and other cable companies about issues such as setting data caps, limits to the amount of data a subscriber can download each month, these people said.
  • China Firms Under Fire. Lawmakers investigating spying threats from China are pressing two Chinese telecommunications firms active in U.S. markets for details about their relationship with the Chinese government and with U.S. companies.
Dow Jones:
  • Low Interest Rates Create New Layer of Risk for CMBS Deals. The extended period of unusually low interest rates is creating fresh headwinds for the commercial mortgage-backed securities market as Wall Street dealers prepare to sell at least $2 billion of bonds in coming weeks. As CMBS yields follow benchmark Treasurys lower, banks are grappling with interest-rate risk--the degree that bond prices fall as rates rise--as much as the credit risk that has dominated the conversation for years. The unexpected turn of events may require dealers to offer floating-rate debt or mark down prices on new fixed-rate CMBS in order to attract investors. Lower prices translate into higher yields on fixed-income securities. "It's very difficult to sell 10-year CMBS right now," Harris Trifon, head of CMBS strategy at Deutsche Bank, said while attending the Commercial Real Estate Finance Council's annual conference in Washington. "It's not that people aren't happy with the asset class. It's more about the yield."
Barron's:
MarketWatch:
Business Insider:
Zero Hedge:
CNBC:
  • Full-Scale Bailouts for Italy, Spain in 6 Months: Egan-Jones. Spain and Italy need a full-scale bailout from the European Union because of their high levels of government debt and the credit quality of their banks, and will likely seek help within the next 6 months, according to Sean Egan, Founding Partner and President of Egan-Jones, an independent ratings agency. Poor credit quality of banks usually goes hand-in-hand with poor government finances as the two institutions are “joined at the hip”, Egan told CNBC Asia’s “Squawk Box” on Wednesday. That’s the case for most countries such as the U.S., the U.K., Switzerland and Ireland; Spain and Italy are no exceptions, he said. “It makes little sense to separate the banks’ credit quality from the governments’ credit quality because quite often, they support each other and that’s certainly the case in Italy and Spain,” he said. “We think that Spain will be back at the table, asking for more than the 100 billion euros ($125 billion) that they just asked for, and we think that Italy will also come to the table within the next 6 months.” The worries about Spain’s and Italy’s finances could spread to the rest of Europe, Egan said. Even Germany, seen as the nation with the soundest economy, may not be immune to the crisis. Italy has Europe’s second-highest debt-to-GDP ratio. “When you step back, you see that the combined economies for the EU have a fairly high debt-to-GDP,” Egan said. “There’s the assumption that Germany will be able to pull. That assumption may want to be re-examined.”
  • PIMCO Total Return Fund Raises US Treasury Exposure. Bill Gross's PIMCO Total Return Fund, the world's largest bond fund, increased its exposure to U.S. Treasury-related securities to 35 percent in May, up from 31 percent in April, the company said on its website on Tuesday.
  • Spain to Charge at Least 8.5% for Loans to Banks. Spanish banks which receive public loans in the form of convertible shares as part of an up to 100 billion euros financial package will be charged an interest rate of at least 8.5 percent, a European Commission spokesman said on Tuesday.
  • China Backsliding on Trade Openness, US Tells WTO. China is backsliding on the path of trade openness and economic reform that marked its entry to the World Trade Organization in 2001, the United States said on Tuesday during a biennial review of China's trade policies.

IBD:

NY Times:

  • Bailout in Spain Leaves Taxpayers Liable for the Cost. Many details of the banking bailout remain to be resolved — including which of Europe’s rescue funds will supply the money. The one thing that is clear is that even though the money will be funneled to the banks, the government in Madrid will ultimately be responsible for guaranteeing that $125 billion, adding to the Spanish government’s already rising debt load. That fact, more than any other, probably explains why there was heavy selling of Spanish government bonds on Monday and Tuesday.

Seeking Alpha:

Forbes:
CNN:
  • Fears rise over EU handling of debt crisis. "The crisis is deteriorating at an ever-increasing pace," said Mark Schofield, a senior strategist at Citigroup. "Investors are increasingly pricing in either of the two tail risks -- full eurozone break-up or fiscal union."

Telegraph:

Bild-Zeitung:
  • Germany may cut solar-power subsidies by 20% to 25% annually, citing Michael Fuchs, a lawmaker of the governing Christian Democratic bloc.

Beijing Transportation Research Center:
  • Traffic jams in Beijing have eased to an average 55 minutes during weekdays in the first quarter, from 75 minutes a year earlier.
China Securities Journal:
  • China's interest rate liberalization is better than rate cuts for promoting the healthy development of the nation's economy and financial reform, China Securities Journal said in a front-page editorial today. Raising the cap on the deposit rate will narrow lenders' net interest margin and push them to offer higher-rate loans to smaller companies, the editorial said. This will increase borrowing costs for state-owned companies and local governments, forcing them to invest limited funds into profitable projects, according to the editorial. Rate liberalization will also drive companies to finance from capital markets, the editorial said.
Evening Recommendations
Jefferies:
  • Rated (PIR) Buy, target $20.
Oppenheimer:
  • Rated (LOGM) Outperform, target $40.
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 190.0 -6.0 basis points.
  • Asia Pacific Sovereign CDS Index 156.0 +2.5 basis points.
  • FTSE-100 futures +.23%.
  • S&P 500 futures -.23%.
  • NASDAQ 100 futures -.14%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (KFY)/.27
Economic Releases
8:30 am EST
  • The Producer Price Index for May is estimated to fall -.6% versus a -.2% decline in April.
  • The PPI Ex Food & Energy for May is estimated to rise +.2% versus a +.2% gain in April.
  • Advance Retail Sales for May are estimated to fall -.2% versus a +.1% gain in April.
  • Retail Sales Less Autos for May are estimated unch. versus a +.1% gain in April.
  • Retail Sales Ex Auto & Gas for May are estimated to rise +.4% versus a +.1% gain in April.

10:00 am EST

  • Business Inventories for April are estimated to rise +.3% versus a +.3% gain in March.

10:30 am EST

  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -111,000 barrel decline the prior week. Distillate inventories are estimated to rise by +1,175,000 barrels versus a +2,253,000 barrel gain the prior week. Gasoline supplies are expected to rise by +1,400,000 barrels versus a +3,346,000 barrel rise the prior week. Finally, Refinery Utilization is estimated unch. versus a +1.9% gain the prior week.

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Germany/Italy Bond Auctions, weekly MBA mortgage applications report, Jamie Dimon testimony to Senate Banking Committee, 10Y T-Note Auction, Deutsche Bank Industrials/Basic Materials Conference, (DELL) analyst meeting and the (AGU) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and real estate 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.

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