Wednesday, July 08, 2015

Wednesday Watch

Posted by Gary .....at 12:26 AM
Evening Headlines 
Bloomberg:  
  • China Freezes Trading in 1,300 Companies, Locking Up 40% of Market Cap. A wave of Chinese companies halted trading in their shares and regulators unveiled new measures to prop up the value of small-cap stocks in the latest attempts to stem a rout that’s wiped more than $3.5 trillion of value. At least 1,301 companies have halted trading on mainland Chinese exchanges, locking up $2.6 trillion of shares, or about 40 percent of the market’s capitalization. The central bank said Wednesday it will provide “ample liquidity” to the stock market, while China Securities Finance Corp. was said to seek more than 500 billion yuan ($80.5 billion), according to people familiar with the matter. The China Financial Futures Exchange raised margin requirements for sell orders on CSI 500 index futures.
  • China’s $3 Trillion Stocks Rout Puts Car Sales in ‘Meat Grinder’. Automakers in China are finding themselves in a “lose-lose situation” after a world-beating stock-market boom that diverted funds away from purchases turned into a bust, further denting demand in the world’s largest car market. An increasing number of car buyers in China are canceling their purchases and risking forfeiture of their down payments after a stock-market rout that has erased about $3.2 trillion in value, according to Cui Dongshu, secretary-general of China’s Passenger Car Association. “The plunging stock market is essentially a meat grinder, shredding money meant for buying cars,” Cui said in a phone interview. The association is scheduled to release monthly sales data Wednesday, with Cui describing the results as the “worst June ever” with all car categories badly hit.
  • Holding Chinese Brokerages’ Bonds Is Risky Business Amid Rout. Investors are demanding ever steeper yield premiums to hold the offshore bonds of some Chinese brokerages as Moody’s Investors Service warns about the risks of relaxing margin financing rules. The extra spread over Treasuries on Haitong Securities Co.’s $670 million of 3.5 percent notes due 2020 soared to a record 227 basis points Monday, the most since they were sold in April, Bloomberg-compiled prices show. The spread on Citic Securities Co.’s $800 million of 2.5 percent debentures due 2018 registered their worst-ever one month performance. China’s securities firms raised more than $32 billion selling bonds in the second quarter, using the proceeds to help fuel a stunning 468 percent rise in margin lending in the 12 months to June 15, when stocks began to nosedive. Equities have lost more than $3.2 trillion since, prompting authorities to relax lending rules, including allowing real estate as an acceptable form of collateral for traders.
  • Greece Must Meet Sunday Deadline to Reform or Face Euro Exit. European leaders set a Sunday deadline for Greece to accept a rescue, saying otherwise they’ll take the unprecedented step of propelling the country out of the euro. At a Brussels summit, Greece’s anti-austerity government was ordered to make new economic reform proposals that could earn it another aid package and head off financial ruin. “We have only a few days left to find a solution,” German Chancellor Angela Merkel told reporters late Tuesday after euro-area leaders met in Brussels. She conceded that she is “not especially optimistic.” Sunday now looms as the climax of a five-year battle to contain Greece’s debts, potentially splintering a currency that was meant to be unbreakable and throwing more than half a century of European economic and political integration into reverse. 
  • EU Commission Has Grexit Scenario Prepared, Juncker Says. (video) Greece’s creditors have prepared a blueprint to remove the indebted nation from the the 19-nation euro, an unprecedented move after failing for five months to agree on an aid bailout. “The commission is prepared for everything,” European Commission President Jean-Claude Juncker said after a meeting of euro-area leaders in Brussels. “We have a Grexit scenario, prepared in detail.”
  • Gundlach Sees Greek Euro Exit Opening ‘Pandora’s Box’. Greece’s likely exit from the euro currency group “opens Pandora’s box” by setting a precedent that makes membership porous, according to Jeffrey Gundlach, co-founder of DoubleLine Capital. Greece will exit the euro currency area in “slow motion,” which should be positive in the short run for the currency since it removes an economic drag, Gundlach said on a wide-ranging webcast on Tuesday from Los Angeles. But that would raise questions about whether other members of the bloc may eventually leave, he said. “There’s never one cockroach.” The five-year-old DoubleLine Core Fixed Income Fund has returned 1.4 percent this year, beating 95 percent of comparable funds, according to data compiled by Bloomberg. Over the past five years, the $4.4 billion fund has beaten 97 percent of peers. The firm’s $46.6 billion Total Return Bond Fund has also returned 1.4 percent this year, beating 77 percent of peers. Over five years, it’s returned 6.8 percent, outpacing 99 percent of rivals.  
  • Bull Herd Is Culled in Europe as JPMorgan Says Fear the Selloff. A crack has formed in what had been a consensus of confidence among European stock strategists. JPMorgan Chase & Co. told clients this week to hold off on fresh purchases of the shares, reducing its suggested allocation to the equivalent of a hold. In so doing, it became the only brokerage of eight surveyed by Bloomberg News that has anything but a buy on the region’s equities. 
  • How a Chaotic Grexit Could Wipe Out $1.4 Trillion in Global M&A. (video) The fallout of a Greek exit from the euro could wipe out as much as $1.4 trillion in future mergers and acquisitions, according to a study by law firm Baker & McKenzie. A disorderly ‘Grexit’ -- where the financial impact spreads unconstrained across global markets -- could stymie about $250 billion of dealmaking next year in Europe, excluding the U.K., according to the study, which is based on financial modeling by Oxford Economics.
  • Westpac, ANZ Tighten Investor Mortgage Lending as Prices Surge. Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd. are further tightening lending to investors in residential real estate amid efforts to cool the housing market. Westpac, the largest lender to landlords, said in a statement Wednesday it will lend a maximum of 80 percent of the value of a home to be rented out, down from 95 percent. ANZ Bank said it cut the loan-to-value ratio to 90 percent from 97 percent, and will introduce an interest rate “floor” to ensure borrowers can repay mortgages if borrowing costs rise. The moves follow similar curbs by National Australia Bank Ltd. last month after pressure from the regulator to limit the growth in lending to investors. Home prices have surged 43 percent in Sydney since May 2012 amid record low interest rates, fueling concern of a property bubble in the nation’s largest city. 
  • China’s Stocks Plunge as State Intervention Fails to Stop Rout. China’s Shanghai Composite Index plunged amid concern a raft of measures to stabilize equities is failing to stop the bear-market rout as traders unwind margin bets at a record pace. The Shanghai Composite tumbled as much as 8.2 percent, the most since 2007, before paring losses to 4.8 percent to trade at 3,549.92 at 9:56 a.m. local time. There were four gainers among the 1,106 stocks that trade on the benchmark gauge, which has slumped 28 percent since the June peak. PetroChina Co., the biggest stock, tumbled 4.9 percent as nine out of 10 industry gauges dropped at least 4 percent in the CSI 300 Index.
  • Asian Stocks Enter Correction Amid China Rout, Greece Crisis. Asian stocks slipped into a correction, with the regional benchmark index falling 10 percent from its April peak, as Chinese shares extended a rout and European leaders gave Greece until Sunday to submit a new set of reforms. Chinese brokerages Huatai Securities Co. and Citic Securities Co. slumped at least 16 percent in Hong Kong, leading losses on the regional benchmark index. Hong Kong Exchanges & Clearing Ltd. dropped 7.8 percent, heading for a record ninth day of decline. Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, sank 3.6 percent as the raw material used to make steel dropped below $50 a metric ton for the first time since April. The MSCI Asia Pacific Index dropped 2.1 percent to 140.59 as of 11:11 a.m. in Tokyo.
  • Iron Ore Sinks Below $50 as Wolfe Sees Risk of Extended Collapse. Iron ore’s bear market deepened, with prices dropping below $50 a metric ton for the first time since April, on concern that low-cost production from Australia and Brazil will expand further while demand stumbles in China. “Supply is now outpacing demand, pointing to renewed price pressure,” said Gordon Johnson, an analyst at Wolfe Research LLC in New York. Iron ore may collapse significantly below the $47-a-ton low that was set earlier this year, he said. Commodities tumbled this week, led by metals, on increased concern that China’s consumption is stalling, and as investors confront the prospect Greece may be ejected from the euro zone. Iron ore’s renewed drop highlights that the same factors of surging supply and weaker demand growth, which dragged prices to the decade-low early April, remain at the forefront. Miners’ shares sank, with Rio Tinto Group at the lowest in two years.
  • China’s Peak Steel Demand Threatens to Spark Trade Hostilities. China’s demand for steel has peaked, if the Japanese experience of the 1970s is anything to go by. That could spur more trade conflicts as the nation ships its excess production overseas. The current decline in Chinese steel output signals the growth period for the commodity has ended in a country where the pace of economic expansion is slowing. Risaburo Nezu, a senior research adviser at RIETI, a think-tank linked to Japan’s trade ministry, expects a prolonged slump, with an absence of growth in demand likely for the next 10 or 20 years. 
  • Aluminum Bear Market Piles Pressure on World’s Biggest Smelters. The world’s biggest aluminum makers will be under even more pressure to make deeper production cuts and stave off a price slump that saw the metal trade near its lowest level in six years on Tuesday. China, which accounts for half of the world’s aluminum output, is on pace to export record amounts of metal products this year, helping to deepen a worldwide glut. Producers outside China, including Alcoa Inc. and United Co. Rusal, had already cut back capacity through last year. Still, 1 million metric tons more, enough to supply Japan for six months, will probably be curtailed within a year, according to Macquarie Group Ltd.
Wall Street Journal:
  • Beijing’s Response to Stock Selloff Reveals Deep Insecurity. All-out push to force up markets comes amid new law to combat ‘dangers’. Far more than simply a market crisis, the turmoil on the Shanghai Stock Exchange is viewed by China’s leadership as a potential security threat to the regime. That helps explain the barrage of measures unleashed by financial authorities to counter a sudden market downturn that threatened to shake public confidence in the.. 
  • China’s Stock Plunge Is Scarier Than Greece. There are four basic signs of a bubble, and the Chinese stock market is on the extreme end of all four. China’s state-sponsored stock-market rally is unraveling, with potentially dangerous consequences. The first major sign that all wasn’t going according to script came on June 15. Chinese had awakened expecting big gains because it was President Xi Jinping’s birthday, but the Shanghai market fell more than 2%. One deeply indebted day trader committed suicide by jumping out a window, his net worth wiped out by the collapse of a single stock that he had borrowed heavily to purchase. The market has since fallen...
Fox News:
  • US Army plans to cut 40,000 troops over next two years. (video) The U.S. Army is planning to cut more than 40,000 troops over the next two years, a senior U.S. defense official confirmed to Fox News Tuesday. General Martin Dempsey announced at a Senate Armed Services Committee Hearing Tuesday that dwindling resources was a major factor in the decision to cut the number of active troops from 490,000 to 450,000.
MarketWatch.com:
CNBC:
  • Why oil could revisit its lows and then some. (video) After another volatile session, oil looks increasingly set to test its lows of the year, and that could mean a temporary decline of near 20 percent. Analysts say crude futures could continue to trade lower for now if the twin pressures on risk markets from Greece and China continue, and Iran succeeds in striking a nuclear deal that would ultimately mean more oil would hit an already oversupplied crude market.
Zero Hedge: 
Business Insider: 
Reuters: 
  • Gartner cuts worldwide device shipment growth forecast for 2015. Research firm Gartner Inc said worldwide shipment of devices such as PCs, tablets and smartphones is expected to grow by 1.5 percent to 2.5 billion units this year, slower than the 2.8 percent it forecast earlier. The cut in growth forecast is mainly due to the slowdown in PC purchases in western Europe, Russia and Japan as a stronger dollar pushed up prices, Gartner said on Tuesday.
Telegraph: 
21st Century Business Herald:
  • China Stock Rout Risks Pledged Shares of Listed Companies. Chinese listed companies face increasing pressure to pledge more shares as collateral if market plunge persists as capitalization of 132 listed companies has halved since they pledged shares for funds, citing statistics from financial data provider Wind Info. Almost one-third China listed companies pledged some of their shares for funds this year as of July 7, the report said.
National Business Daily:
  • More Than 51% of China-Listed Companies Halted From Trading. More than 51% of 2,776 Shanghai- and Shenzhen-listed companies will suspend trading today based on statements as of 11:20 pm yesterday, citing its calculation.
Evening Recommendations 
Maxim:
  • Rated (GES) Buy, target $24.
  • Rated (JVA) Buy, target $7.
Night Trading
  • Asian equity indices are -2.75% to -.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 118.75 +5.75 basis points.
  • Asia Pacific Sovereign CDS Index 61.75 +1.25 basis points.
  • S&P 500 futures -.75%.
  • NASDAQ 100 futures -.79%.

Earnings of Note
Company/Estimate
  • (AA)/.23
  • (WDFC)/.76
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -488,890 barrels versus a +2,386,000 gain the prior week. Gasoline supplies are estimated to fall by -222,220 barrels versus a -1,757,000 barrel decline the prior week. Distillate inventories are estimated to rise by +944,440 barrels versus a +392,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by +.18% versus a +1.0% gain prior.
2:00 pm EST
  • FOMC Minutes from June 16-17 Meeting.
3:00 pm EST
  • Consumer Credit for May is estimated to fall to $18.5B versus $20.541B in April.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Williams speaking, Australia Unemployment report, $21B 10Y T-Note auction, weekly MBA mortgage applications report, Cantor Fitzgerald Healthcare conference and the (UAL) sales performance could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by industrial and technology shares in the region. I expect US stocks to open lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the day.

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