Thursday, August 22, 2013

Thursday Watch

Evening Headlines 
  • Court Orders Mubarak Release as Islamist Leaders Arrested. Egypt’s longtime autocrat Hosni Mubarak moved closer to possible freedom after a court ordered him released from prison, a move that would aggravate frictions in a nation reeling from the toppling of his elected successor. While Mubarak is unlikely to find a place in the country’s new political order, his release would inject more tension into the violent standoff between the Muslim Brotherhood and the government the military installed after deposing Islamist President Mohamed Mursi last month. Freedom for Mubarak would also provide ammunition to those who accuse Egypt’s new leaders of seeking to restore the kind of police state Mubarak led before he was overthrown in 2011 in a popular revolt. The military “promised the the clock wouldn’t be turned back, yet it’s 2010 all over again. Mursi is in jail and Mubarak is free,” read a posting yesterday on the Twitter account of the main alliance backing Mursi, after the court ruled
  • Marketfield Bets on Sensex Falling as India Small Caps Drop. India’s smallest companies are trailing its biggest corporations by the most since 2008 in the stock market, feeding pessimism about the central bank’s ability to boost economic growth from the weakest pace in a decade. The S&P BSE Small-Cap Index has dropped 30 percent this year as earnings sank to a record low. The gauge of companies with a median market value of $68 million lagged behind the benchmark S&P BSE Sensex (SENSEX) index, where stocks have a median value of $14 billion, by 22 percentage points. The only other times small-cap shares trailed this much were during an economic slowdown in 2004 and the global financial crisis in 2008, when the Sensex fell at least 12 percent in three months.
  • A Fool’s Errand in China to Reinvent Good Government. Forget Client No. 9. If you want to understand the future of world politics, it’s Document No. 9 you need to know. This semisecret directive from the senior members of the Chinese Communist Party tells you how President Xi Jinping plans to manage pro-democracy voices in China: by shutting them down. The sharp repudiation of constitutional government, human rights, civic participation and free speech -- not to mention truly free markets -- guarantees that the ideological struggle between China and the West will continue well into the future.
  • Philippine Stocks Tumble Most in Five Years as Trading Resumes. Philippine stocks tumbled, with the benchmark index posting its biggest intraday retreat since October 2008, as local markets resumed trading after a three-day closure. The peso weakened to a two-month low and bonds dropped. The Philippine Stock Exchange Index (PCOMP) declined as much as 6.9 percent before paring losses to 5.5 percent at 11:03 a.m. local time. The gauge sank to 6,164.18, heading for the lowest level since June 26. Philippine Long Distance Telephone Co. (TEL), the nation’s largest phone company, fell 4.1 percent. SM Investments Corp. (SM), owner of the biggest shopping-mall operator, slid 7.3 percent. The peso weakened 1 percent to 44.12 per dollar, while government bond yields rose to a one-month high. The country’s stock exchange has been closed and trading of currencies and debt was halted this week because of floods in Manila and a public holiday yesterday. The MSCI Southeast Asia Index tumbled 5.5 percent during the period to the lowest level since July 2012, while Indonesia’s rupiah fell 3.7 percent and the Thai baht dropped 1.9 percent.
  • Malaysia Cuts 2013 Growth Forecast as Expansion Misses Estimates. Malaysia cut its forecast for growth this year after second-quarter expansion missed economists’ estimates, adding pressure on policy makers to bolster confidence as the ringgit weakens. The economy may expand 4.5 percent to 5 percent in 2013, from a previous prediction of as much as 6 percent, the central bank said in Kuala Lumpur today.
  • Radioactive Leaks in Japan Prompt Call for Overseas Help. The crippled nuclear plant at Fukushima is losing its two-year battle to contain radioactive water leaks and its owner emphasized for the first time it needs overseas expertise to help contain the disaster. Tokyo Electric Power Co. (9501) is grappling with the worst spill of contaminated water since the March 2011 earthquake and tsunami caused a meltdown at the Fukushima Dai-Ichi plant. The call for help from Zengo Aizawa, a vice president at the utility, follows a leak of 300 metric tons of irradiated water. Japan’s nuclear regulator labeled the incident “serious” and questioned Tepco’s ability to deal with the crisis. Prime Minister Shinzo Abe made similar comments earlier this month. 
  • Asian Stocks Drop as Fed Minutes Signal Tapering Support. Mazda Motor Corp. (7261), a Japanese carmaker that gets 30 percent of its revenue in North America, slumped 2.5 percent. Aboitiz Equity Ventures Inc., which has investments in power and banks, tumbled 7.5 percent in Manila as the nation’s stock market resumed trading after a three-day closure. Brambles Ltd. (BXB), an Australian container maker, slid 4.5 percent after its profit missed estimates. China Shenhua Energy Co., the nation’s top coal miner by market value, rose 1.5 percent in Hong Kong after the manufacturing report. The MSCI Asia Pacific Index dropped 0.8 percent to 129.55 as of 11:32 a.m. in Tokyo, after falling as much as 1.2 percent and briefly wiping out this year’s gains. All 10 industry groups fell on the measure.
  • Gold Rout Seen Bottoming by Analysts as China Buys. The rout in gold that wiped out $56 billion of value this year is spurring consumer demand in China and India, the biggest buyers, and leading JPMorgan Chase & Co. and Bank of America Corp. to say prices are bottoming. Sales of jewelry, coins and bars will reach as much as 1,000 metric tons in India and China in 2013, valued at a combined $87.6 billion, the World Gold Council estimates. Prices will average $1,300 an ounce in the fourth quarter, or 5 percent less than now, the median of 17 analyst estimates compiled by Bloomberg shows. Bank of America is the most bullish, predicting a fourth-quarter average of $1,495, and JPMorgan anticipates rising averages in every quarter through the end of next year. While investors from John Paulson to George Soros sold after the bear market began in April as some investors lost their faith in gold as a store of value, the slump boosted sales in Asia.
  • Rubber Jumps as China’s Manufacturing Improves, Yen Weakens. Rubber rallied as data showed China’s manufacturing expanded, boosting prospects for demand from the world’s largest user, and a weaker Japanese currency raised the appeal of the yen-denominated futures. Rubber for delivery in January on Tokyo Commodity Exchange gained as much as 2.8 percent to 267.8 yen a kilogram ($2,724 a metric ton) and traded at 266.2 yen at 11:18 a.m. The rally pared losses for futures this year to 12 percent.
  • German Trucker Shortage Swells Wage Costs for Companies: Freight. Freight companies are struggling to raise the appeal of commanding a heavy truck along Germany’s highways as an increasing shortage of drivers pushes up the cost for transport in Europe’s biggest economy. The perks of the open road are fading fast as bureaucracy and regulation mount, journey times lengthen and inhabitants of the world’s second-largest export nation prefer to pursue careers outside the solitary confines of a 10-foot lorry cab.
  • Credit Swaps in U.S. Climb as Fed Minutes Support Stimulus Cuts. The cost to protect against losses on corporate bonds rose as minutes of the Federal Reserve’s last meeting showed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves. The Markit CDX North American Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, increased 2.2 basis points to a mid-price of 84.4 basis points as of 6:02 p.m. in New York, according to prices compiled by Bloomberg. “The Fed appeared comfortable with its forecasts and the ability of rising stock market prices to overcome the de facto tightening that followed its early summer QE3 announcements,” Jim Vogel, the head of agency-debt research at FTN Financial in Memphis, Tennessee, said in an e-mail. The index, which typically rises as investor confidence deteriorates and falls as it improves, increased 6.1 basis points last week, the largest advance since the period ended June 21. The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-gradebonds, added 9.5 basis points to 414, Bloomberg prices show.
  • Subprime Squeezed as Auto-Lender Costs Increases. Borrowing costs are rising for subprime auto lenders in the asset-backed bond market, squeezing profit margins and pressuring firms to make even riskier loans. A General Motors Co. unit that makes car loans to people with blemished or limited credit sold top-rated securities backed by the debt to yield 45 basis points more than the benchmark swap rate on Aug. 7, almost double the spread it paid on similar notes in April, according to a person with knowledge of the transactions. American Credit Acceptance Corp., the Spartanburg, South Carolina-based buyer of "deep subprime" loans, paid 225 basis points over benchmarks to sell A rated debt on July 31, up from 165 in March. Subprime lenders lured into the market by low financing costs during the past three years now face being pushed out as rates reverse, according to Moody's Investors Service. Total sales of securities linked to subprime car loans have surged 24.4% to $14.7 billion in 2013 from a year earlier, according to Deutsche Bank AG. Issuance has climbed from $2.4 billion in 2009 and may approach the $20.9 billion sold in 2007, Barclays Plc data show.
  • Potash Rift Seen Enduring After Asia Sales Said to Rile Uralkali. A dispute between the former Soviet Union’s two largest potash producers shows little sign of being resolved quickly as predictions that the commodity’s price will plunge roil the $20 billion market. A pact between Belarus’s Belaruskali and OAO Uralkali (URKA) in Russia helped to buttress prices for eight years in the global market for potash, a vital nutrient for corn and soybeans. That partnership fell apart at the end of July when Uralkali accused the other producer of undermining their sales accord. 
  • HP(HPQ) Profit Forecast Misses Some Estimates on PC Slump. Hewlett-Packard Co. (HPQ) issued a forecast for fiscal fourth-quarter profit that missed some analysts’ estimates, and Chief Executive Officer Meg Whitman rescinded a projection for growth in fiscal 2014 as ebbing demand for personal computers and lower business spending hamper her turnaround efforts. The second-biggest PC maker and largest printer supplier also unveiled a shake-up of its top ranks, naming Chief Operating Officer Bill Veghte as head of its enterprise business, replacing Dave Donatelli. Chief of Communications Henry Gomez was promoted to chief marketing officer, replacing Marty Homlish. Earnings excluding some items will be 98 cents to $1.02 a share for the period which ends in October, the company said in a statement today. Analysts predicted $1.01 on average, according to data compiled by Bloomberg. For the 2013 fiscal year, earnings will be $3.53 to $3.57 a share, compared with the company’s previous forecast of $3.50 to $3.60. In a conference call with analysts, CEO Whitman cited a “weak enterprise spending environment,” with sales challenged in Europe and China. Pointing to difficulties in Hewlett-Packard’s enterprise and PC businesses, she said she now projects “that total company year-over-year revenue growth in fiscal 2014 is unlikely.” Whitman had previously said she expects sales growth in the next fiscal year, which begins in November. Shares fell as much as 6.4 percent to $23.75 in late trading after closing down 1.8 percent at $25.38 in New York.
  • Wells Fargo(WFC) Said to Eliminate 2,300 Mortgage Jobs. Wells Fargo & Co. (WFC), the biggest U.S. home lender, is cutting 2,300 jobs from its mortgage-production unit because higher interest rates are reducing demand for refinancings, according to people with knowledge of the matter. Other smaller cuts had been made in the past few weeks around the country, according to the people, who asked not to be identified because the changes haven’t been publicly disclosed. The cuts would equal about 20 percent of the 11,406 mortgage loan officers employed by the San Francisco-based company at the end of March, according to a presentation.
  • Fed Tells Judge Swipe-Fee Rule Rejection Will Be Appealed. The U.S. Federal Reserve will appeal a judge’s decision that its rules on debit-card transaction fees and processing were illegal, a lawyer for the central bank said. Visa Inc. (V), the world’s biggest payments network, climbed 3 percent to $178.39 in New York, the most in almost a month, as a successful appeal could help the company maintain its market-share lead. Smaller rival MasterCard Inc. (MA) slid 0.5 percent to $619.31.
Wall Street Journal:
  • U.S. Suspects Syria Used Gas. Rebels Say at Least 1,100 Killed by Chemical Weapons; U.N. Asks to Investigate. The U.S. sees "strong indications" that Syria's government used chemical weapons in attacks early Wednesday that opposition groups claimed killed more than 1,100 people—in what would be a significant escalation of poison-gas use in the civil war. Syrian authorities denied using chemical weapons in their renewed offensive on Wednesday, accusing the opposition of fabricating claims or staging gas attacks themselves. "These claims are categorically false and completely baseless and are part of the filthy media war waged by some countries against Syria," a spokesman for Syria's armed forces said. U.S. officials disagreed on Wednesday. "There are strong indications there was a chemical weapons attack—clearly by the government," a senior administration official said. "But we do need to do our due diligence and get all the facts and determine what steps need to be taken."
  • Secret Court Faulted NSA for Collecting Domestic Data. Spy Agency Violated Constitution for Three Years, According to 2011 Ruling. The National Security Agency violated the Constitution for three years by collecting tens of thousands of purely domestic communications without sufficient privacy protection, according to a secret national-security court ruling. In the strongly worded 2011 ruling, released Wednesday by the Obama administration, the court criticized the NSA for misrepresenting its practices to the court. It noted that the illegal collection was the third instance in less than three years in which the government made a "substantial misrepresentation regarding the scope of a major collection program," specifically how the NSA collected Internet communications and phone data. The court ruling includes estimates suggesting the NSA collected as many as 56,000 purely domestic communications a year.
  • SEC Is Set to Propose New Rule on CEO Pay. Plan, Expected to Be Cleared as Early as September, Isn't Likely to Satisfy Critics. The Securities and Exchange Commission will soon thrust CEO compensation back into the spotlight when it proposes a long-delayed rule requiring companies to disclose the pay gap between chief executives and rank-and-file employees. The requirement, a mandate of the 2010 Dodd-Frank financial law, could put added pressure on corporate boards to slow pay increases for chief executives at companies with significant or growing gaps, proponents say.
Fox News:
  • A vicious cycle: U.S. yields and emerging-market currencies. The rise in U.S. yields and resulting pressure on emerging-market currencies has been well documented. But record lows in these currencies could also lead to further yield gains in a “self-reinforcing cycle,” according to Bank of America Merrill Lynch.
  • Build system to control China government debt, now. Among the ills afflicting China’s economy, a few are particularly deadly: the ballooning local government debt is one of them. No one knows for sure how massive it is, or how risky. The nationwide audit that began this month will help to shed some light on these questions, but to stop risks growing past a tipping point, the country must institute a system of debt control. This is the root cure, and it is urgently needed.
Zero Hedge:
Business Insider:
Real Clear Politics: 
  • China bird flu analysis finds more virus threats lurking. A deadly new bird flu virus in China evolved from migratory birds via waterfowl to poultry and into people, and there are other bird flu viruses circulating that could follow the same path, scientists have found. The study - an analysis of the evolutionary history of the H7N9 bird flu that has so far killed 44 people - identified several other H7 flu viruses circulating in birds that the researchers said "may pose threats beyond the current outbreak".
  • U.S. Republicans weigh using debt limit as leverage on Obamacare. U.S. Republican lawmakers, who staunchly oppose President Barack Obama's signature healthcare law, are considering using a fall showdown over the country's borrowing limit as leverage to try to delay the law's implementation. The idea is gaining traction among Republican leaders in the House of Representatives, aides said on Wednesday. An aide to House Majority Leader Eric Cantor said the debt limit is a "good leverage point" to try to force some action on the healthcare law known as "Obamacare."
  • Brazil to cut 2014 growth forecast. The median growth forecast for Brazil's gross domestic product (GDP) next year has fallen to 2.5 percent in this week's Focus survey, from 4 percent in the survey a year earlier. 
Financial Times:
  • SEC scrutinises Goldman’s(GS) trading failure. US regulators and enforcement officials are scrutinising the systems malfunction at Goldman Sachs as part of a broad response to the latest high-profile trading failure to damage investor confidence, say people familiar with the matter. The Securities and Exchange Commission’s involvement comes as leading US exchanges, including those run by NYSE Euronext, worked through the night to determine whether to cancel, adjust or break erroneous trades that could end up costing Goldman tens of millions of dollars.
  • 2% inflation target achievable even with tax hike: BOJ chief. The Bank of Japan will be able to achieve its 2 percent inflation target even if the sales tax is raised as scheduled next April, as the move is unlikely to stall the economy, BOJ Gov. Haruhiko Kuroda said Tuesday. “Basically, a consumption tax hike will not let the economy stall to prevent us from achieving a 2 percent price stability target,” Kuroda said on an NHK program, suggesting the tax hike would have limited impact on the economy.
Singapore Straits Times:
  • Singapore Luxury Home Market Show Signs of Slowdown. Sales of homes priced S$5m and above in first seven months of this yr down to levels last seen in 2008.  Only 183 units worth S$5m and above were sold from January to July this yr, close to 187 moved in first seven months of 2008, citing Urban Redevelopment Authority data. Corresponding period in 2010 saw 444 transactions, 2011 saw 310, the newspaper said.
The Economic Times: 
  • India Cabinet May Clear Super-Rich Tax Increase Today. The government is proposing a 35% tax rate for those earning more than Rs 10 crore in the Direct Taxes Code (DTC) that is likely to be tabled in Parliament during the ongoing session. The Union Cabinet will consider the code on Thursday. The direct taxes bill, once approved by Parliament, will replace the current Income-Tax Act, which dates back to 1961. At present, taxable income in excess of Rs 10 lakh is taxed at 30% while those earning more than Rs 1 crore have to pay a surcharge of 10%. Further, since top earners receive substantial income by way of dividends, the Direct Taxes Code incorporates a 10% tax on dividend income in excess of 1 crore.
China Securities Journal:
  • China Can Allow Local Govt Debt Securitization. China can allow securitization of lending to local government projects to reduce risks, citing reporter Ren Xiao in a front-page commentary. China should also allow securitization of local government financial vehicles' assets, the commentary said.
Evening Recommendations 
  • Rated (VRTX) Outperform, target $105.
  • Rated (REGN) Outperform, target $300. 
  • Rated (TSLA) Hold.
Night Trading
  • Asian equity indices are -2.0% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 166.0 +8.25 basis points.
  • Asia Pacific Sovereign CDS Index 131.75 +9.0 basis points.
  • FTSE-100 futures -.33%.
  • S&P 500 futures -.15%.
  • NASDAQ 100 futures -.05%.
Morning Preview Links

Earnings of Note

  • (HRL)/.45
  • (DLTR)/.57
  • (PDCO)/.48
  • (PLCE)/-.53
  • (SHLD)/-1.07
  • (CYBX)/.46
  • (SSI)/.46
  • (ANF)/.29
  • (TTC)/.59
  • (GME)/.04
  • (ROST)/.93
  • (SCSC)/.60
  • (GPS)/.64
  • (MCRS)/.62
  • (ARUN)/.11
  • (ARO)/-.28
  • (ADSK)/.42
  • (P)/.02
  • (NDSN)/1.04
  • (BKE)/.52 
Economic Releases 
8:30 am EST
  • Initial Jobless Claims are estimated to rise to 330K versus 320K the prior week.
  • Continuing Claims are estimated to fall to 2963K versus 2969K prior.
8:58 am EST
  • Preliminary Markit US PMI for August is estimated at 54.2.
9:00 am EST
  • The House Price Index for June is estimated to rise +.6% versus a +.7% gain in May.
10:00 am EST
  • The Leading Index for July is estimated to rise +.5% versus unch. in June.
11:00 am EST
  • Kansas City Fed Manufacturing Activity for August is estimated at 6.0 versus 6.0 in July.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fisher speaking, Jackson Hole Fed Conference, Eurozone PMI Manufacturing/Services reports, weekly Bloomberg Consumer Comfort Index, Bloomberg Economic Expectations Index for August and the Raymond James Bank Conference could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by financial 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 25% net long heading into the day.

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