Tuesday, September 22, 2015

Wednesday Watch

Posted by Gary .....at 10:41 PM
Evening Headlines 
Bloomberg: 
  • Chinese Factory Gauge Drops to Lowest Level Since March 2009. A private Chinese manufacturing gauge fell to the lowest in 6 1/2 years, underscoring challenges facing the nation’s factories as the economy’s old growth engines splutter. The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics was at 47.0 for September, missing the median estimate of 47.5 in a Bloomberg survey and below the final reading of 47.3 in the previous month. Readings remained below 50 since March, indicating contraction. Premier Li Keqiang’s expansion target of about 7 percent for this year is being challenged by a slowdown in manufacturing and property investment even as services and consumption hold up better. President Xi Jinping downplayed concern about weakening Chinese growth in a speech in Seattle to mark the start of his U.S. trip. 
  • China Said to Suspect Citic Illegally Profited From Stock Rescue. A Chinese probe found evidence that Citic Securities Co., the nation’s biggest brokerage, engaged in insider trading connected to the government’s rescue of the stock market, people familiar with the matter said. A preliminary investigation concluded that the brokerage used advance knowledge of government-orchestrated stock purchases to execute trades that benefited the firm, said the people, who asked not to be identified because the matter is private. A Citic spokeswoman said the company hasn’t received any formal notification regarding the nature of the investigation. The China State Regulatory Commission didn’t immediately respond to a request for comment. Citic Securities is one of the brokerages that was drafted in to government-led rescue efforts which have included 1.5 trillion yuan ($235 billion) of stock purchases since June, according to a Sept. 7 estimate by Goldman Sachs Group Inc. Emergency measures unleashed to counter the nation’s stock bust have also involved a widening enforcement crackdown, with officials targeting so-called “malicious short-sellers” and vowing to “purify” the market.
  • China Heads to Japan-Like Slowdown as Debt Swells, Chanos Says. China is on a path similar to the one that preceded Japan’s lost decade in the 1990s as the country’s debt level grows twice as fast as its economy, according to Jim Chanos, the hedge fund manager who predicted the 2001 collapse of Enron Corp. “We have an economy addicted to credit,” Chanos, founder of Kynikos Associates LP, said during a panel discussion on China in New York Tuesday. While the country doesn’t appear to be facing an “imminent collapse,” it is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids,” he said. Chinese annual loan growth has slowed to about 15 percent from more than 30 percent in 2009, that’s still double the pace of expansion in gross domestic product. Total household and corporate debt surged to 207 percent of GDP in June, up from 125 percent at the end of 2008 when China embarked on a borrowing binge to stimulate the economy, according to data compiled by Bloomberg. Japan’s total debt swelled to 176 percent of GDP in 1990 from 127 percent in 1980, according to JPMorgan Chase & Co. The burst of the housing and stock market bubble since then led to anemic economic growth in the following years, a period commonly referred to as a lost decade.
  • China's Stock Probes Entangle Regulators, Securities Executives. A former head of the Shanghai and Shenzhen stock exchanges is among the regulators and securities-firm employees publicly named as being under investigation after a summer slump in the nation’s stocks. The probes follow a market rout that wiped $5 trillion from the value of Chinese shares. The government’s response to the market slide, which has involved state purchases of shares and various restrictions on selling equities, has raised questions among investors about its commitment to market reforms. Here is a list of those named by state media, including a journalist for business magazine Caijing. None of them is known to have been charged and Bloomberg News was unable to contact them.  
  • China's Richest Stock Traders Aren't Buying Xi's Bullish Message. Chinese policy makers have a message: the stock market is stabilizing. Their biggest challenge will be persuading the richest investors. As the boom turned to bust, the number of accounts holding shares worth more than 10 million yuan ($1.6 million) almost halved in the past three months, the biggest decline among four categories of investor wealth tracked by the nation’s clearing agency. While accounts with less than 100,000 yuan rose by 3.8 percent in August, those with the biggest funds fell 17 percent -- partly due to a 12 percent drop in the Shanghai Composite Index.
  • China’s Ponzi-Dodging Pensioners Chase High Returns, Free Lunch. Little-known private investment firms have been popping up all over China, luring pensioners’ savings by promising annual returns of more than 10 percent, and sometimes as high 60 percent, to fund cash-thirsty projects unable to get bank loans. Distributing fliers outside supermarkets and drawing on word-of-mouth, the private firms -- part of China’s unregulated network of shadow financing-- typically lure retirees with the offer of free lunch. A recent feast of radish soup, spare ribs, red-cooked pork, fried vegetables and a yogurt cup at a downtown Beijing restaurant drew about 100 mostly elderly people to hear a passionate lecture on the importance of investing. Attendees were treated to a magic show in which a magician chopped off the hand of his assistant in a bloody flourish, a bamboo flute concert, a whirling acrobat, and lucky drawings -- as well as the promise of 12 percent annual returns to lend their money to a real estate project in Chengdu.
  • Volkswagen-Induced Pain in Auto Stocks Seen Deepening by Options. Money manager Michael Woischneck has been inundated with calls from charities, foundations and churches -- clients that prefer investing in socially responsible companies -- urging him to avoid Volkswagen AG. He says he has had little choice but to dump the automaker’s shares. His firm, Lampe Asset Management, is among many surprised by the German company’s widening scandal over faked pollution controls. That caused VW to lose a third of its value, or about 23 billion euros ($25 billion), in just two days. The pessimism has proven contagious for Europe’s auto stocks, further dragging down an industry already hurt this year by a rebound in the euro and jitters about China’s economy. Options traders are preparing for more pain, sending the hedging costs of VW, BMW AG and Renault SA soaring. “This can be a much, much wider scandal,” said Woischneck, who oversees the equivalent of $148 million at Lampe Asset Management in Dusseldorf, Germany. “The concern is that the origin of all this is on the supplier side, and that would affect a lot of the other car companies.”  
  • Volkswagen Emissions Scandal Takes Toll in Corporate Bond Market. Volkswagen AG’s escalating scandal over emissions-test cheating is beginning to ripple across the $10 trillion global corporate bond market. Investors in the U.S. were demanding yields of as much as 4.6 percent to own the German automaker’s dollar-denominated debt on Tuesday. That’s more in line with companies with ratings closest to junk than the A grade that Volkswagen has from Standard & Poor’s. Credit-default swaps traders drove up the cost to protect against losses on debt across the auto industry as they braced for the potential of a widening probe.The rapid selloff in the debt of such a large and creditworthy borrower was starting to remind some investors of the market fallout when BP Plc faced cleanup costs from the 2010 oil spill in the Gulf of Mexico.
  • Offshore Yuan Drops as China PMI Declines to Lowest Since 2009. The yuan dropped 0.27 percent, the most since Sept. 11, to 6.4241 a dollar as of 10:14 a.m. in Hong Kong, according to data compiled by Bloomberg. The spot rate in Shanghai weakened 0.12 percent to 6.3834, China Foreign Exchange Trade System prices show.  
  • Aussie Falls With Kiwi for Third Day on China's Economic Woes. Australia’s dollar dropped 0.6 percent to 70.44 U.S. cents at 9:55 a.m. in Singapore, extending its three-day decline to 2 percent. New Zealand’s currency fell 0.4 percent to 62.70 U.S. cents. The kiwi has tumbled 15 percent and the Aussie has slumped 7.8 percent this year, the worst performers of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar rose 8.8 percent and the yen gained 8.6 percent.
  • Emerging Currencies Fall on Fed Confusion; Commodity Stocks Drop. Emerging-market currencies retreated for a third day and stocks fell as slumping commodity prices and conflicting signals from the Federal Reserve on when it will start raising interest rates curtailed demand for riskier assets.Brazil’s real slumped to the weakest level on record against the dollar as concern mounted that the government won’t be able to avoid further credit rating cuts. A gauge tracking 20 developing-nation currencies fell 0.9 percent to a two-week low.
  • Asian Stocks Extend Global Selloff Before China Factory Report. Asian stocks dropped for a third day, extending a global selloff, as investors awaited a report on China’s manufacturing amid concern the slowdown in the world’s second-largest economy is deepening. The MSCI Asia Pacific Excluding Japan Index fell 0.4 percent to 402 as of 8:01 a.m. in Hong Kong, as commodity producers led declines after raw-material prices tumbled. Futures on the Nikkei 225 Stock Average slumped 2.6 percent in Singapore, with Japan’s equity market shut for a holiday.
  • After Commodity Meltdown, Citi Warns to Brace for More Losses. The worst commodity meltdown since 2008 probably isn’t the end of the pain for bulls, according to Citigroup Inc. Excess supplies and a sluggish world economy mean that it’s “hard to argue that most commodity prices have reached their trough for the year,” analysts led by Ed Morse, the global head of commodities research, said in a report Tuesday. The bank is bearish on crude oil, aluminum, platinum, iron ore, cocoa and wheat in the next three to six months. Prices for raw materials are languishing near a 16-year low as inventories climb just as demand growth slows in China, the world’s biggest consumer of everything from cotton to zinc. Money has been flowing out of funds linked to metals, crops and energy, while investors have punished shares of miners and oil drillers.
Wall Street Journal: 
  • Struggles in China Push Cisco to Strike Deal. U.S. technology giant to unveil partnership with Chinese server maker. U.S. technology giant Cisco Systems Inc. helped build China’s Internet, working so closely with the Chinese government that a spiritual group once accused it of helping the country spy on its own citizens, an accusation Cisco denied.
  • Green Illusions Fell an Auto CEO. Volkswagen bet its U.S. future on curing American drivers of their aversion to diesel. What puzzled a business columnist five years ago remains puzzling today. Martin Winterkorn, the now-embattled Volkswagen chief, grandly pronounced a goal to make VW the world’s biggest car maker by sales. Shouldn’t a business manager care about whether capital is productively deployed to maximize returns, not about generating sales volume for its own sake?
  • The Assault on Drug Innovation. Clinton tanks biotech stocks as she comes out for price controls. The political blaze over drug costs that kicked up a year ago over the Hepatitis C cure Sovaldi has moved on to therapies for more diseases—and beyond white heat too. Now Hillary Clinton and others upset with the price of medical progress are proposing government remedies, including price controls.
Fox News:
  • Clinton breaks silence, announces opposition to Keystone XL pipeline. (video) Hillary Clinton on Tuesday broke her years-long silence over her stance on the Keystone XL pipeline, announcing in Iowa that she opposes the controversial project. The former secretary of state previously had dodged questions about her position on the pipeline, citing her role in reviewing the project at the State Department and saying the ongoing review needs to run its course.
CNBC:
  • Hank Paulson: China economy has 'run out of steam'. (video) China and the United States need to collaborate to expedite reforms and combat slowing growth in the world's second-largest economy, former Treasury Secretary Hank Paulson said Tuesday. "They have an economic model that has run out of steam. They need to place much more reliance on domestic-led growth, domestic consumption," he told CNBC from Seattle, where Chinese President Xi Jinping will meet with American business leaders Tuesday.
Zero Hedge: 
Reuters:
  • Brazil gov't sees deeper economic recession in 2015. The Brazilian government revised its 2015 economic recession estimate to 2.44 percent from 1.49 percent, an official report showed on Tuesday, envisioning a contraction more in line with market expectations.
Financial Times:
  • Harvard endowment warns of market ‘froth’. Harvard is looking for investment managers with expertise as short-sellers, as the world’s biggest university endowment becomes more cautious about the outlook for financial markets. In its latest annual report, which showed investment returns fell to 5.8 per cent in the year to June, the $38bn endowment said its managers had started to increase cash holdings and feared that some markets had become “frothy”.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.75% to -1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 150.75 +3.75 basis points.
  • Asia Pacific Sovereign CDS Index 81.50 +5.0 basis points.
  • S&P 500 futures -.89%.
  • NASDAQ 100 futures -.83%.

Earnings of Note
Company/Estimate
  • (FUL)/.68
  • (SCS)/.33
  • (WOR)/.51
Economic Releases
9:45 am EST
  • Preliminary Markit US Manufacturing PMI for September is estimated to fall to 52.8 versus 53.0 in August.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,162,500 barrels versus a -2,104,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +762,500 barrels versus a +2,840,000 barrel gain the prior week. Distillate inventories are estimated to rise by +912,500 barrels versus a +3,060,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.47% versus a +2.2% gain prior.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, ECB's Draghi speaking, Eurozone Manufacturing PMI report, $35B 5Y T-Note auction, weekly MBA Mortgage Applications report, CSFB Steel/Mining conference, (TOT) investor day and the (STLD) investor day could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology shares in the region. I expect US stocks to open lower and to maintain lossses into the afternoon. The Portfolio is 25% net long heading into the day.

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