Tuesday, June 15, 2010

Wednesday Watch


Evening Headlines

Bloomberg:
  • China Property Bubble to Burst 'Quickly,' Nomura Says. The “bubble” in China’s property market is going to burst very quickly, with prices set to fall as much as 20 percent in the next 12 to 18 months, according to Nomura Holdings Inc. “If you look at housing prices to disposable income in Beijing and Shanghai, they are 13, 14 times,” said Sun, whose team was ranked third in Institutional Investor’s 2010 Asian poll for China research. “There’s no way you can say there’s no bubble.” The China Banking Regulatory Commission warned of growing credit risks in the nation’s real-estate industry and increasing pressures of non-performing loans. Risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans, according to its annual report published on its website yesterday. China’s domestic stock markets have been closed for a three-day holiday since the start of the week. The Shanghai Composite Index has fallen 22 percent this year, the worst performer in Asia. A gauge tracking property stocks on the benchmark measure has declined 28 percent, the most among five industry groups.
  • U.S., South Korea Tell North Korea to Stop Provocative Rhetoric. The U.S. and South Korea told North Korea to stop provocative behavior after the communist nation said it will respond militarily to any accusation by the United Nations of complicity in the sinking of a South Korean warship. “If the Security Council releases any document against us, condemning us or questioning us, I myself can do nothing, but follow-up measures will be carried out by our military forces,” North Korea’s Ambassador to the UN, Sin Son Ho, told reporters yesterday in New York. Sin refused to rule out the use of his nation’s nuclear weapons, saying they are a “deterrent because we are always threatened.” North Korea’s rhetoric is “not desirable,” Kim Young Sun, a spokesman for South Korea’s Foreign Ministry, said today in Seoul. Kim Jong Il’s government should act responsibly, U.S. State Department spokesman Philip J. Crowley said in Washington yesterday.
  • Mexico Army Fights Gang in Tourist Town, Killing as Many as 15. Mexican soldiers confronted an armed group today in the city of Taxco, killing as many as 15 people, the state attorney general said. “They’re verifying between 14 and 15 people killed in this clash,” Guerrero state Attorney General Albertico Guinto said, according to an audio recording of his remarks e-mailed by his office. He said the soldiers were carrying out a search operation in the town, which is popular with tourists for its historic role in the silver trade.
  • Australia Resource Tax Will Be 40%, Ferguson Says. Australia’s resource tax rate will be 40 percent and won’t be set at different levels for various commodities, Resources Minister Martin Ferguson said as companies look for a compromise on how the levy will be applied. “We’re not talking about different tax rates,” Ferguson told Australian Broadcasting Corp. radio today. There will be “generous transitional arrangements” for existing projects and “there will be a headline rate of 40 percent.” Prime Minister Kevin Rudd has seen public support drop since announcing his proposed 40 percent tax on the “super profits” of resource projects, a levy mining companies say will stall investment in an industry that in April accounted for 57 percent of the value of goods exported.
  • Commercial Property to Stay 40% From Peak, Pimco Says. U.S. commercial property values are rebounding slowly and may remain as much as 40 percent below their 2007 peak levels, Pacific Investment Management Co. said. More than $500 billion of real estate will hit the market as lenders dispose of assets or restructure debt on properties where valuations have dropped below loan levels, keeping “general” prices down for three to five years, Newport Beach, California-based Pimco, which runs the world’s biggest bond fund, said on its website. “Capital is clearly returning to commercial real estate, helping to stem the value decline in the sector,” Pimco said in a report based on research in 10 cities. “Optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations.” High unemployment, potential re-regulation and an increased savings rate are among factors that will “lengthen the deleveraging process and suppress a recovery,” Pimco said in the report dated June 2010 and led by John Murray, commercial real estate portfolio manager.
Wall Street Journal:
  • Obama Vows Spill Fix. President Barack Obama used his first Oval Office address Tuesday to outline a plan for an oil spill "assaulting our shores and our citizens" that looked beyond containing the gusher to securing full restitution from BP PLC, refashioning federal supervision of the oil industry and ending the nation's dependence on fossil fuels. Mr. Obama named Michael R. Bromwich, a Washington lawyer touted as a government agency turnaround specialist, to lead the reorganization of the scandal-plagued Minerals Management Service, whose lax oversight of offshore drilling is blamed in part for the blowout of the BP-owned well. The president promised to restore the Gulf not just to the condition it was in when the Deepwater Horizon oil rig exploded April 20 but to a state that reverses decades of decline. He appointed Navy Secretary Ray Mabus, a former Mississippi governor, to develop a long-term plan for Gulf Coast restoration. And Mr. Obama emphasized his demand that BP establish a restitution fund with "whatever resources are required," controlled by an independent administrator, to handle claims from Gulf communities fairly and quickly. He accused the company of "recklessness" ahead of a planned meeting Wednesday with BP's chairman and its chief executive officer. Republicans accused him of exploiting the crisis to promote an unwanted energy policy that, in prior proposals from the president, would cap the emission of greenhouse gases and force polluters to buy and trade emissions credits. "The White House may view this oil spill as an opportunity to push its agenda in Washington, but Americans are more concerned about what it plans to do to solve the crisis at hand,'' said Senate Minority Leader Mitch McConnell (R, Ky.). Rep. Darrell Issa (R, Calif.) faulted the president for glancing over a major issue affecting the Gulf: Protecting the jobs and workers at risk from his six-month moratorium on deep-water drilling. "The politics of this crisis should not result in the permanent loss of tens of thousands of American jobs,'' Mr. Issa said. Mr. Obama spoke even as the sense of crisis in the Gulf escalated. The government again upgraded its estimate of the amount of oil flowing from the well Tuesday, to as much as 60,000 barrels a day, 12 times the rate thought a month ago. But the president insisted the gusher was coming under control. BP would be capturing 90% of the flow "in the coming days and weeks," he said.
  • BP(BP) Protests Threaten Independent Dealers. Protests and boycotts of the BP brand generated by the Gulf spill aren't likely to have a big immediate impact on BP PLC, but could threaten the thousands of entrepreneurs who have staked their livelihoods on the company's name. Nearly all the 10,000 service stations around the U.S. flying the BP flag are owned by independent dealers that are obligated under long-term contracts to sell BP-branded fuel. Some worry that mounting anger over the spill's environmental and economic toll could turn the once-highly coveted brand into a liability. BP stations in Florida immediately saw consumers turning away after the leak began in late April. Total sales at BP stations there declined 8%-10% in May compared with last year, while competitors benefited from additional traffic, said Jim Smith, president of the Florida Petroleum Marketers and Convenience Stores Association. The magnitude of the sales declines "means that we are going to have a lot of small business owners going out of business," he said.
  • New Spin on Derivatives Debate. Moving a bad piece of cheese around different drawers in the fridge won't make it taste any better. Lawmakers working on the financial-overhaul bill should remember that as they finalize parts of the legislation that aim to make banks' derivatives businesses safer. Right now, U.S. banks, mostly a few giants, have $276 trillion in over-the-counter derivatives, instruments that don't trade on exchanges. Most of these derivatives are within commercial-bank subsidiaries that enjoy federal deposit insurance. Thus, the banks effectively enjoy a government subsidy that likely distorts prices and allows them to hold too little capital against the derivatives. An amendment sponsored by Sen. Blanche Lincoln (D., Ark.), which was opposed by banks but made it into the Senate bill nonetheless, aimed to force banks to spin off most derivatives trading into new affiliates separate from insured bank subsidiaries. But that might not get rid of the subsidy problem, because the top derivatives banks are still so big that the government would almost certainly rescue them—and their derivatives affiliates—if they collapsed. Nicole Gelinas, of the Manhattan Institute, counters that there is a better way to reduce over-the-counter derivatives risk. That is to force nearly all of them onto exchanges. Banks would then effectively have to hold more cash against their trades. Of course, provisions to increase exchange trading are in the legislation. But, in practice, their efficacy may rely on how tough regulators want to be. And that is why Sen. Lincoln's affiliate idea is worth retaining. If it creates a distinct structure that discloses capital and other key data, the market may be able to police it.
  • High Default Rate Seen for Modified Mortgages. Fitch Ratings Ltd. forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months. Among those with loans that aren't backed by any federal agency, the redefault rate within a year is likely to be 65% to 75% under the Obama administration's Home Affordable Modification Program, or HAMP, according to a report to be released Wednesday by Fitch, a New York-based credit-rating firm. Almost all of those who got loan modifications have already defaulted once.
Bloomberg Businessweek:
MarketWatch:
  • Foreign Investors Selling Off Asia Stocks: Report. Some major Asian stock markets saw a sudden swing to net selling by foreign investors in May for the first time in more than a year, according to a report Wednesday. Foreign investors sold a net $20 billion of shares in the combined markets of Japan, South Korea, India, Indonesia, the Philippines, Thailand and Taiwan, Japan's Nikkei business daily reported, citing a study by Dai-ichi Life Research Institute.
  • Federal Reserve Caps Credit-Card Penalty Fees at $25. Consumers, particularly those who are consistently late in paying their credit-card bills, now can breathe a sigh of relief: The Federal Reserve said Tuesday it is limiting penalty fees to no more than $25 in most cases as well as banning so-called "inactivity" fees.
NY Times:
  • Stimulus Bond Program Has Unforeseen Costs. They are supposed to help states and cities that are short of cash build roads, schools and bridges. But Build America Bonds, part of President Obama’s economic stimulus plan, are also building something else: controversy. States and cities have embraced these taxable bonds to borrow money at what they assume are favorable interest rates. The federal government pays 35 percent of the interest costs on the bonds, a huge potential saving. But questions about this multibillion-dollar program are piling up. For one, Wall Street banks are charging larger commissions for selling Build America Bonds than they do for normal municipal bonds, increasing the costs to the states and cities. For another, the new bonds may be priced too cheaply, enabling quick-footed investors to turn a fast profit as the prices climb, but raising interest costs for taxpayers.
Zero Hedge:
  • Too Big to Fails Remain Immune From Reform, There Is "No Way to Break Them Up" When Need Arises. When (not if) the need arises to dismantle the TBTFs, full of noncashflow producing loans, the next time around we have a Flashiest Crash, we will have no way to do so, despite the widely propagandized Obama FinReg reform. These are the words of Obama's right shoulder man Paul Volcker, who on William Isaac's program earlier noted that proposed legislation is "not going to prevent the top five banks from being saved." In that sense, the primary goal of Obama's attempt to overhaul financial regulations: the prevention of taxpayer bailouts when banks implode, is a miserable failure, yet it will not stop countless hours of self-congratulatory, teleprompterized appearances by the president, the Congressman from Fannie Mae and the Senator from Countrywide. In other news, the bankers win again, and nothing changes. Next up: how to get bank leverage to 100x all over again, without alerting the general public that next (if not this) year's bonuses will be once again fully funded by the US middle class.
  • Barney Frank Once Again Sides With Bernanke, Announces Proposed Fed Audit Will Be Materially Curbed. This way the American public will never know whether someone like Goldman Sachs (in addition to Jerome Kerviel) has had any influence in determining monetary policy.
Absolute Return + Alpha:
Atlanta Journal Constitution:
  • Oil Spill Worse for Obama Than Katrina for Bush? In Louisiana, at least, it may be true. This poll from left-leaning Public Policy Polling may prove nothing more than the notion that the present crisis is always the biggest crisis. But the result is nonetheless stunning: Our new Louisiana poll has a lot of data points to show how unhappy voters in the state are with Barack Obama’s handling of the oil spill but one perhaps sums it up better than anything else — a majority of voters there think George W. Bush did a better job with Katrina than Obama’s done dealing with the spill. 50% of voters in the state, even including 31% of Democrats, give Bush higher marks on that question compared to 35% who pick Obama. Overall only 32% of Louisianans approve of how Obama has handled the spill to 62% who disapprove. 34% of those polled say they approved of how Bush dealt with Katrina to 58% who disapproved.
The Hill:
  • Centrist House Dems Oppose Lincoln Derivatives Measure. Centrist House Democrats are pressing lawmakers to remove a controversial Wall Street overhaul provision requiring banks to wall off derivatives trading. The New Democrat Coalition, a group of 69 "centrist" House Democrats, is preparing a letter that will urge lawmakers to drop the provision, championed by Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.). Members are still collecting signatures for the letter.
Politico:
  • GOP Health Care Repeal Vote Fails. A Republican effort to repeal the individual mandate in the Democrats’ health care overhaul failed Tuesday afternoon on a largely partisan vote. Rep. Dave Camp of Michigan, the top Republican on the Ways and Means Committee, called for the repeal under a “motion to recommit” — a parliamentary tool often used by the minority party to change bills on the House floor. Never mind that the bill Camp is using for this maneuver is a small business tax bill — Republicans wanted to get Democrats on the record once again saying they back a law that requires uninsured Americans to purchase health insurance. The procedural motion never really had a shot at passing, but that wasn't the Republicans' point. The vote was 187-230, with 21 Democrats voting to roll back the individual mandate.
Reuters:
  • Despite Oil Woes, Louisiana Wants Rig Ban Lifted. Anger at BP Plc (BP) is intense in southern Louisiana as the Gulf of Mexico oil spill keeps fishermen from making their living, but many feel a six-month ban on all deep water oil drilling is going too far. The governor, local politicians and many fishermen, shrimpers and oystermen say the Obama administration's moratorium will do more harm than good in communities where the Mississippi River meets the Gulf, and across the state. "It's not only hurting us, it's hurting people who work on those jobs," shrimper Anthony Bourgeois, who has often found extra work in the oil patch, said in Venice, Louisiana. "This puts us out of work and it's going to put them out of work. You can't blame all oil companies for what one did." Caller after caller to radio talk shows blast the ban. The Louisiana state government, fearing a big economic loss, set up an online petition that now has more than 86,000 signatures.
  • BofA(BAC) to Limit Duration of Trades with BP(BP). Bank of America Merrill Lynch has ordered its traders not to enter into oil trades with BP Plc (BP) that extend beyond June 2011, a market source familiar with the directive told Reuters. The directive didn't state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico for which it could eventually face billions of dollars in economic liabilities.
  • Questions on Afghan Strategy Touch Nerve in Pentagon.
  • Ratings Agencies Dodge Bullet in Wall Street Reform Bill. Credit-rating agencies like Moody's and Standard & Poor's dodged a bullet on Tuesday as lawmakers decided to strip out a provision in the Wall Street reform bill that would have upended their business model.
Financial Times:
  • Spanish Banks Break ECB Loan Record. Spanish banks are borrowing record amounts from the European Central Bank as the country’s financial institutions struggle to gain funding from the international capital markets. Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank. This is the highest amount since the launch of the eurozone in 1999 and a disproportionately large share of the emergency funds provided by the euro’s monetary guardian, according to analysis by Royal Bank of Scotland and Evolution. Spanish banks account for 11 per cent of the eurozone banking system. The rise in borrowing from €74.6bn in April, or 14.4 per cent of the net liquidity pumped by the ECB into the eurozone financial system, provides further evidence of the acute tensions in the Spanish banking system. “If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS. Some investors believe the difficulties increase the chances that Spain will have to use emergency loans from the newly created €440bn stability fund.
  • Subprime Consumers Hit at Goldman(GS). Goldman Sachs is facing a wave of complaints from consumers over the business practices of its mortgage servicing unit, a subsidiary that collects payments on hundreds of thousands of loans worth tens of billions of dollars. Goldman bought Litton Loan Servicing – a Houston, Texas, specialist in collecting money from high-risk borrowers – in December 2007, a year after the bank decided to reduce its exposure to the US housing market. The deal gave Goldman a new way to earn fees from subprime borrowers and provided it with a street-level view of conditions in the US housing market as the financial crisis deepened.It also put the Wall Street bank in the unusual position of facing hundreds of complaints from mainstream consumers, who allege that Litton unfairly charged them money. “Litton saw a great opportunity to make a lot of money by collecting servicing fees on troubled loans,” said Dan Parsons, president of the Houston chapter of the Better Business Bureau, a non-profit group that promotes responsible business practices. “But when Litton takes over a loan, the borrower tends to be worse off.” Consumer Affairs, a website that tracks consumer problems, said it had received 390 complaints against Litton in the past year, a 60 per cent rise over the prior 12 months, and more than triple the number logged against some similar-sized competitors. Many complaints against Litton come from consumers who say they entered into “trial” mortgage modification programmes that reduced their payments, only to find out later that they had been denied a permanent modification and owed more money than they would have if they had not entered the programme.
  • Bank Levy Seen as Threat to City Jobs Recovery. A potential levy on banks coupled with eurozone debt threatens to hold back the recovery in the City’s jobs market, recruiters and bankers have warned. Demand for staff in London’s financial services sector has been one of the bright spots in the labour market in recent months, underlined by figures on Wednesday from Morgan McKinley, a City recruitment specialist, showing that new job opportunities rose 82 per cent last month compared with a year ago. Andrew Evans, the managing director of Morgan McKinley’s financial services division, said: “The recruitment market is very much affected by confidence. Potential increases in taxes, levies and potential economic issues – which I assume we are going to see continue in Europe for some time yet – are going to damp confidence, which could therefore affect the recruitment market.” A quarter of 422 bankers surveyed by eFinancialCareers.com, a jobs website, said they would be forced to seek work overseas or change sector if direct taxes on banks reduced the size of the profit pool. Almost half said any higher taxes on bonuses would make them look elsewhere.
Telegraph:
  • Spain Plays High-Stakes Poker Game with Germany as Borrowing Costs Surge. Spain has upped the ante in a high-stakes poker game with Germany, pushing for the release of EU stress test results for major banks in a move that risks precipitiating a dramatic escalation of Europe's financial crisis. "We're not afraid of transparency," said the Spanish Banking Association (AEB), saying the full truth would put an end to rumours battering Spain's instutitions. El Pais reported that the government backs the initiative, putting it on a collision course with Germany which insists on secrecy. Josef Ackermann, head of Deutsche Bank, warned last week that it would be "very dangerous" to publish the results of each bank, fearing that it would trigger flight from weak lenders and set off a chain reaction. The Spanish authorities have little to lose by publishing the data given the near paralysis in the country's debt markets. Funding is frozen for much of the private sector. Spain was pummeled yet again on Tuesday as credit default swaps (CDS) measuring bond risk on Spanish debt jumped to 245 basis points, approaching an all-time high. An auction of Spanish debt yesterday underlined how fast the situation is deteriorating. Yields on one-year debt reached 2.45pc compared to 0.9pc as recently as April, suggesting that the markets do not view the EU's €750bn rescue shield as credible. Francisco Gonzalez, chairman of BBVA, stunned investors earlier this week by admitting that "the majority of the Spanish companies and financial groups are shut out of the international capital markets". He said the country's external debt had reached €1.5 trillion or 147pc of GDP, much of it on short-term maturities. "This debt has become our most overwhelming problem, since €600bn falls due this year," he said. Analysts say the call for release of the stress test results is a veiled attack on Germany, retaliation for German media reports – fed by sources in Berlin – claiming that Spain is about to tap the EU's bail-out fund. Spain's two heavyweights, Santander and BBVA, are well capitalised, though there are concerns that Spain's accounting rules mask the full horror of bad debts in the property sector. The problem lies with savings banks or cajas that are not part of the EU test. These are being kept afloat by the European Central Bank, with loans equal to 20pc of their balance sheets. By contrast, some German banks may look very ugly. An internal memo last year by the regulator BaFin feared that write-offs might reach €800bn. German banks have accumulated a double set of loses from both US subprime and the Club Med debt crisis. They have the lowest risk-adjusted capital ratios in the world after Japan and have not exploited the global rally to rebuild their base.
Evening Recommendations
  • None of note
Night Trading
  • Asian indices are +.75% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 133.0 -5.0 basis points.
  • S&P 500 futures -.18%.
  • NASDAQ 100 futures -.17%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (IHS)/.73
  • (FDX)/1.32
Economic Releases
8:30 am EST
  • The Producer Price Index for May is estimated to fall -.5% versus a -.1% decline in April.
  • The PPI Ex Food & Energy for May is estimated to rise +.1% versus a +.2% gain in April.
  • Housing Starts for May are estimated to fall to 648K versus 672K in April.
  • Building Permits for May are estimated to rise to 625K versus 606K in April.
9:15 am EST
  • Industrial Production for May is estimated to rise +.9% versus a +.8% gain in April.
  • Capacity Utilization for May is estimated to rise to 74.5% versus 73.7% in April.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,000,000 barrels versus a -1,829,000 barrel decline the prior week. Gasoline supplies are expected unch. versus a -8K barrel decline the prior week. Distillate inventories are estimated to rise by +1,000,000 barrels versus a +1,836,000 barrel gain the prior week. Finally, Refinery Utilization is expected unch. versus a +1.6% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Plosser speaking, weekly MBA mortgage applications report, Bloomberg Global Confidence Index, Think Equity Healthcare Conference, BofA Merrill Transport Conference, William Blair Growth Conference, Goldman Sachs Healthcare Conference, (MT) investor event, (ERTS) analyst meeting, (TD) investor day and the (IPI) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by commodity and automaker shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

Stocks Sharply Higher into Final Hour on Options Expiration, Short-Covering, Less Energy Sector Pessimism, Technical Buying


Broad Market Tone:

  • Advance/Decline Line: Substantially Higher
  • Sector Performance: Every Sector Rising
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 25.99 -9.13%
  • ISE Sentiment Index 109.0 +32.93%
  • Total Put/Call .83 -23.15%
  • NYSE Arms .28 -80.42%
Credit Investor Angst:
  • North American Investment Grade CDS Index 122.06 bps +1.17%
  • European Financial Sector CDS Index 153.60 bps +1.68%
  • Western Europe Sovereign Debt CDS Index 139.0 bps +.36%
  • Emerging Market CDS Index 272.40 bps -1.74%
  • 2-Year Swap Spread 32.0 -2 bps
  • TED Spread 47.0 -2 bps
Economic Gauges:
  • 3-Month T-Bill Yield .07% +2 bps
  • Yield Curve 254.0 +1 bp
  • China Import Iron Ore Spot $143.10/Metric Tonne unch.
  • Citi US Economic Surprise Index -12.10 +1.5 points
  • 10-Year TIPS Spread 2.02% +2 bps
Overseas Futures:
  • Nikkei Futures: Indicating +178 open in Japan
  • DAX Futures: Indicating +25 open in Germany
Portfolio:
  • Higher: On gains in my Technology, Retail, Medical and Biotech long positions
  • Disclosed Trades: None
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades substantially higher, near session highs, despite quite a bit of negative news. On the positive side, Airline, Networking, Semi, Oil Service, Alt Energy and Coal stocks are especially strong, rising 3.0%+. Cyclical shares are outperforming again. Tech trades very well. Copper is rising another +.9% today. Weekly retail sales rose +3.1% this week versus a +3.6% gain the prior week, but up from a +2.4% gain the first week of May. On the negative side, Retail, Hospital, HMO, Medial, I-Banking, Computer Service and Telecom shares are underperforming. The Greece sovereign cds is rising +10.6%% to 858.63 bps today. It has only been higher on 4 other days since the crisis began. Moreover, the Spain sovereign cds is rising +10.2% to 246.72 bps and the California municipal cds is rising +3.2% to 295 bps, which is the highest its been since February. Lumber is dropping another -1.2% today to another new 52-week low. Lumber has plunged -37.5% since April 21st. The much-larger-than-expected decline in the NAHB Index today also bodes poorly for a continutation of the US housing recovery. Most credit default swaps are not confirming the recent move higher in global equities, which is also a large red flag. The S&P 500 is rising just above its 200-day moving average today on below average volume. So far, this is not a convincing breakout. As well, I suspect much of today's move is related to options expiration on Friday and the ongoing short-covering bounce in the euro. I expect US stocks to trade modestly lower into the close from current levels on rising sovereign debt angst, more shorting and profit-taking.

Bear Radar


Style Underperformer:

  • Large-Cap Value (+1.46%)
Sector Underperformers:
  • Hospitals (+.34%), Retail (+.69%) and HMOs (+.76%)
Stocks Falling on Unusual Volume:
  • LZB, BBY, GME, DLLR, ECLP, VVUS, MDRX, AMLN, UNFI, LNCR, NFLX and IX
Stocks With Unusual Put Option Activity:
  • 1) GME 2) BBY 3) GOLD 4) RL 5) STD
Stocks With Most Negative News Mentions:
  • 1) BP 2) PCX 3) AXP 4) COF 5) EBAY

Bull Radar


Style Outperformer:

  • Large-Cap Growth (+1.44%)
Sector Outperformers:
  • Airlines (+3.50%), Oil Service (+3.23%) and Semis (+3.20%)
Stocks Rising on Unusual Volume:
  • TER, FSLR, VQ, PERY, NWS, RINO, FINL, GMCR, JRCC, FSLR, CAGC, KFY, CIX, AXR and CYT
Stocks With Unusual Call Option Activity:
  • 1) ALL 2) AONE 3) ARUN 4) GME 5) ANF
Stocks With Most Positive News Mentions:
  • 1) AAPL 2) CASY 3) BA 4) ITW 5) FDS

Tuesday Watch


Evening Headlines

Bloomberg:
  • Australian Dollar Falls, Snaps Five-Day Gain on RBA Comments. The Australian dollar fell, snapping a five-day gain, as the central bank said Europe’s debt crisis would “inevitably weigh” on global growth prospects, fueling speculation it will hold rates unchanged in the months ahead.
  • Caterpillar(CAT) 'Concerned' About Australian Mining Tax. Caterpillar Inc., the world’s largest maker of construction equipment, said Australia’s proposed 40 percent tax on mining profits may hurt the company’s sales in the country. “Along with our dealers and customers in the region, we are concerned about the potential impact the proposed change in tax policy will have on the manufacturing of mining equipment and our sales in Australia,” Caterpillar spokeswoman Kate Kenny said in an e-mailed response to questions from Bloomberg News.
  • South Korea Seeks 'Appropriate' UN Action Against North Korea. South Korea called on the United Nations Security Council to take “appropriate action” against North Korea for torpedoing the Cheonan warship, hours after the government replaced its top military commander. The Security Council’s response should be “commensurate with the gravity of the provocation,” South Korea’s Ambassador Park In Kook said in New York yesterday as officials presented evidence of North Korean involvement in the sinking. “We are just victims,” Pak Tok Hun, North Korea’s deputy ambassador to the UN told reporters before meeting privately with the Security Council, reiterating the country wasn’t responsible for the incident.
Wall Street Journal:
  • Obama's Political Oil Fund. In its Gulf spill panic, the White House runs roughshod over the rule of law. The BP oil spill is already a calamity for the Gulf Coast ecosystem and economy, but now that Washington is looking to deflect all political blame it could also became a disaster for the rule of law. Exhibit C, or perhaps it's now D, is the new White House demand that BP pay into an escrow account controlled by government to pay for the economic costs of the spill. Exhibit A was the public announcement by Attorney General Eric Holder that his Department had opened a criminal probe of the spill, a fact usually kept under wraps to protect the innocent. Then came the President's suggestion that BP suspend its dividend, which is crucial to the retirement of thousands of shareholders. BP may decide it is prudent to suspend its dividend while it gets a better handle on its ultimate liability. But the White House has no legal basis to compel such a decision. Meanwhile, Democrats in Congress are preparing to lift their own $75 million liability cap and apply that retroactively to BP, another move of dubious legality. No wonder Britain's Prime Minister and other officials are alarmed about the fate of one of their country's foremost corporations. This is the kind of treatment that Americans would protest if it were applied to U.S. companies by Venezuela or Russia.
  • (BP) Builds 'Responders Village' for Cleanup Crews. BP PLC is erecting a small village to house workers laboring to clean up the environmental disaster in the Gulf of Mexico. Oil-spill responders have just started moving in to the camp-like collection of trailers, tents and portable toilets about eight miles from Venice. It will house up to 1,500 of the workers battling the spill in this southeastern corner of Louisiana.
  • Labor Board Explores Electronic Voting. The National Labor Relations Board is exploring electronic-voting methods for unionization elections, which employer advocates fear could be used to circumvent the current secret-ballot process and favor unions.
  • Welfare Reform Reduced Drug Use. When the U.S. government overhauled welfare programs in the 1990s the primary goal was to promote work, but a new study suggests reform brought another unexpected benefit: reduced drug use.
  • RIM(RIMM) Tests A Tablet and New BlackBerry to Rival iPhone. Research In Motion Ltd. is readying a slate of new devices and software as it looks to keep its BlackBerry smartphone from losing more ground to touch-screen devices like Apple Inc.'s(AAPL) iPhone and iPad.
  • UAW Fund: $45 Billion for Investing. The United Auto Workers union is gathering in Detroit this week to elect a union president. But a new center of the labor power is emerging 45 miles to the west. Here, a newly independent fund born out of the remaking of the Detroit auto business three years ago is busy figuring out where to place its roughly $45 billion in assets. That doesn't include ownership stakes in two of the three U.S. auto makers.
  • FDA to Propose Tougher Rules for Outsourcing Drug Manufacturing. The Food and Drug Administration said Monday it will propose stronger regulations for pharmaceutical companies that outsource manufacturing, putting more responsibility on the companies to ensure the purity and safety of products made by contractors.
MarketWatch:
  • Australian Mining-Tax Changes Reportedly Imminent. Australian Prime Minister Kevin Rudd may be set to announce changes to his government's controversial mining-tax scheme, though the move likely will fall short of what some large mining firms want, according to a report Tuesday.
NY Times:
  • Fed Approves Trading of Box-Office Futures. Federal regulators on Monday approved a plan by Media Derivatives Inc. to begin trading futures contracts based on box-office revenue, though the film industry has continued to lobby Congress to ban such film-related trading. After delays to consider objections from movie studios and others, the Commodity Futures Trading Commission approved a request to trade futures and option contracts tied to the opening weekend box office revenue of the movie “Takers,” a crime-thriller set for release in the United States on Aug. 20 by Sony Pictures Entertainment’s Screen Gems unit. The Motion Picture Association of America, which represents Sony and the other major studios, has vehemently opposed such contracts, arguing that they will be easily manipulated and may hurt the performance of films, as market players begin looking for ways to affect a movie’s opening.
Business Insider:
Zero Hedge:
Chicago Sun-Times:
  • Accept Grim Truth - Illinois is Broke. We're Americans, we don't do austerity. Oh, we like conservation -- we embrace the idea of limiting ourselves, voluntarily, of being lean and mean and not wasting quite so much of our bounty, if we so choose. But the idea of difficult economic conditions being imposed upon us, against our will, the notion of limits being reached and exceeded, confounds us. What, the cupboard's bare? Really? Nah, c'mon! Bare? We've had years to get used to it, to adjust to Illinois being $13 billion in debt, our credit rating slipping, our bills unpaid. We clutch at any excuse for optimism. These hard times are just a passing dip, a bad patch. Look -- unemployment in Illinois has fallen from 11.5 to 11.3 percent -- happy days are here again! In 2006 it hit 3.9 percent. How completely we don't get our current predicament is demonstrated whenever key programs are being cut. What do the people directly affected do? They protest, they demonstrate, they get angry, as if we're still flush and the problem is merely one of allocating our plenty. They seem convinced that if only people understood -- if only the czar knew! -- then funding would immediately be restored. Everything's important, everything's untouchable. We can't cut and we can't raise taxes and we can't earn more -- so what can we do? The idea that the money isn't there, that broke is the new normal, that a program's being vital and important isn't enough to save it anymore, has yet to sink in. Need isn't the deciding factor, money -- or, rather, lack of money -- is the deciding factor. Get used to it.
Rasmussen Reports:
  • Generic Congressional Ballot: Republicans 46%, Democrats 36%. Republican candidates now hold a 10-point lead over Democrats on the Generic Congressional Ballot for the week ending Sunday, June 13. That ties the GOP's largest ever lead, first reached in April, since it first edged ahead of the Democrats a year ago.
Politico:
  • Derivatives Language Picks Up Steam. Derivatives language in the Wall Street reform bill — once widely expected to become a casualty of the formal conference process — picked up significant momentum Monday, securing the endorsement of two regional Federal Reserve Bank presidents. The Fed presidents in Dallas and Kansas City sent letters of support Monday to Sen. Blanche Lincoln (D-Ark.), the architect of the controversial derivatives language, on the eve of the conference committee re-opening its negotiations Tuesday. The two officials argued that the derivatives “swaps desks” should be spun off to other entities, because of the danger they pose to banks’ balance sheets, which are backed by what they called a federal government “safety net” that could put taxpayer funds at risk. “Such activities should be placed in a separate entity that does not have access to government backstops,” they wrote.
Reuters:
  • Spain Sees Credit Squeeze, Denies EU Rescue Bid. Spain admitted on Monday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
Financial Times:
  • China's Banking Watchdog Speaks Out. As Chinese banks flooded the economy with new loans last year in response to a government order to boost flagging growth, the lone voice of caution seemed to be emanating from the China Banking Regulatory Commission. Liu Mingkang, CBRC chairman, repeatedly warned of the risks of indiscriminate lending and the commission introduced a range of policies to stem the deluge and try to avoid lending to borrowers that would eventually default. In its annual report for 2009, due to be released on Tuesday, the CBRC provides a summary of its attempts to rein in the excess as well as a glimpse of the likely aftermath of last year’s credit binge. Total outstanding renminbi-denominated loans increased by Rmb9,590bn ($1,400bn), or nearly 32 per cent last year from a year earlier, which means nearly one quarter of all outstanding loans in China at the end of 2009 were extended in the previous 12 months. Thanks to the sheer volume of lending and the resulting lack of scrutiny on where the loans were going or how they would be repaid “the possibility of the rebound of credit risks or losses remains high”, according to the CBRC annual report. The regulator is most concerned with loans to the overheated real estate sector as well as the proliferation of credit to special purpose vehicles set up by local governments specifically to borrow from the state-controlled banks. The CBRC estimates outstanding loans to the 8,221 funding vehicles set up by local governments surged 70 per cent last year to Rmb7,380bn. These loans now account for about 20 per cent of all outstanding bank credit. In its report, the CBRC criticises some banks for “inadequate risk controls” and “lax loan review procedures” in their dealings with local governments. The regulator also warns of the risks involved in property lending in China. “As uncertainties in the real estate sector ratchet up, the risks associated with home mortgages are building and the risk of chain effect might appear in real estate development loans as well,” it says.
TimesOnline:
  • China Primes House Tax to Halt Runaway Prices. China is considering a wealth tax on homeowners as it grasps at new weapons to halt a frantic rise in property prices that many fear poses the biggest threat to the Chinese economy. The Mayor of Chongqing, the world’s biggest metropolis, wants to tax the properties of its richest homeowners in order to stop the spread inland of a coastal property bubble that is pushing up prices in hotspots such as Shenzhen by 20 per cent a year. Huang Qifan believes that a levy on the value of luxury homes, a huge investment in low-income housing and a cut in land sales to high-end developers are needed to ensure that China’s poor are not locked out of the housing market. He said: “We are considering a levy of 1 per cent. For those people who can afford to buy luxury, they will pay extra.” China’s State Council is examining the tax proposals from Chongqing and Shanghai. The latter is expected to be the guinea pig in the latest policy initiative from the Government, which is fearful that a real estate bust will halt the advance of the Chinese economic juggernaut. The Government’s dilemma is how to prick the property bubble without causing economic collapse or alienating the newly powerful Chinese middle-class of homeowners and investors. According to Jonathan Fenby, a director of Trusted Sources, an emerging markets consultancy, real estate is one of the few assets still trusted by the Chinese middle class. “The question is where people put their money. They have gone off equities and the banks offer negative real interest rates.”
Telegraph:
  • Oil Spill: BP(BP) Shares Fall as Obama Says Spill Like 9/11. The slide came after US news website Politico released the transcript of a damaging interview with President Obama, describing BP's spill in his harshest language yet. "In the same way that our view of our vulnerabilities and our foreign policy was shaped profoundly by 9/11…I think this disaster is going to shape how we think about the environment and energy for many years to come," he said. President Obama went on to say, ahead of a two-day tour of the three affected Gulf states, that it is important the US "draw[s] the right lessons from this disaster". The incendiary comments came as BP's board met to discuss how to address the growing storm of public opinion against the company.
  • Investors Are Betting on a Black Monday-Style Collapse, BoE Warns. Investors are placing bets on a Black Monday-style crash in the British stock market at the fastest rate since the collapse of Lehman Brothers bank in 2008, the Bank of England has warned. In a survey of markets, the Bank warned that widespread fear over the possible collapse of a sovereign debtor, including Greece and Portugal, had sparked a mass of bets on a 20 per cent fall in the FTSE 100. The warning coincides with calculations from the Bank for International Settlements (BIS) showing that Britain has major exposure to the Irish and Spanish banking systems, which many fear could be at risk in the next round of the financial crisis.
The Australian:
  • Europe's Debt is 'A Repeat' of the Global Financial Crisis. THE powerful Bank for International Settlements has judged that the European sovereign debt crisis is shaping up as a repeat of the US subprime mortgage debt meltdown. The Swiss-based institution, which acts as the official banker to the world's central banks, said wild swings in markets over the past three months had been caused by a global loss of investor confidence. "The swift reversal in market confidence evokes painful memories of (the northern) autumn 2008, when the collapse of Lehman Brothers brought money and capital markets to a virtual standstill," the bank said in its quarterly review of world financial markets, released yesterday. "In both cases, market sentiment deteriorated rapidly . . . with problems in one region spreading globally through the network of interbank funding markets and counterparty credit exposures."
Evening Recommendations
Citigroup:
  • Upgraded (FINL) to Buy, target $20.
RBC Capital:
  • Rated (SFSF) Outperform, target $27.
Night Trading
  • Asian indices are unch. to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 138.0 -1.5 basis points.
  • S&P 500 futures +.27%.
  • NASDAQ 100 futures +.30%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (FDS)/.77
  • (BBY)/.50
Economic Releases
8:30 am EST
  • The Import Price Index for May is estimated to fall -1.2% versus a +.9% gain in April.
  • The Empire Manufacturing Index for May is estimated to rise to 20.0 versus a reading of 19.11 in April.
9:00 am EST
  • Net Long-term TIC Flows for April is estimated to fall to $70.0B versus $140.5B in March.
10:00 am EST
  • The NAHB Housing Market Index for June is estimated to fall to 21 versus a reading of 22 in May.
Upcoming Splits
  • (LNCR) 3-for-2
Other Potential Market Movers
  • The Fed's Bullard speaking, weekly retail sales reports, ABC Consumer Confidence reading, BofA Merrill Lynch Transports Conference, William Blair Growth Stock Conference, Wells Fargo Industrial Conference, Goldman Sachs Healthcare Conference, (MGM) shareholders meeting, (SIG) investor day and the (SRX) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by shipping and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Monday, June 14, 2010

Stocks Reversing Morning Gains into Final Hour on Rising Sovereign Debt Angst, Increasing Energy Sector Pessimism, Technical Selling, More Shorting


Broad Market Tone:

  • Advance/Decline Line: Higher
  • Sector Performance: Most Rising
  • Volume: Below Average
  • Market Leading Stocks: Outperforming
Equity Investor Angst:
  • VIX 27.89 -3.13%
  • ISE Sentiment Index 81.0 -13.83%
  • Total Put/Call 1.07 +.94%
  • NYSE Arms 1.09 -13.91%
Credit Investor Angst:
  • North American Investment Grade CDS Index 120.65 bps -4.36%
  • European Financial Sector CDS Index 153.64 bps -.85%
  • Western Europe Sovereign Debt CDS Index 138.50 bps +8.91%
  • Emerging Market CDS Index 274.83 bps -3.86%
  • 2-Year Swap Spread 38.0 -1 bp
  • TED Spread 49.0 +2 bps
Economic Gauges:
  • 3-Month T-Bill Yield .05% -2 bps
  • Yield Curve 253.0 +4 bps
  • China Import Iron Ore Spot $143.10/Metric Tonne unch.
  • Citi US Economic Surprise Index -13.60 +.6 point
  • 10-Year TIPS Spread 2.0% +3 bps
Overseas Futures:
  • Nikkei Futures: Indicating +41 open in Japan
  • DAX Futures: Indicating -35 open in Germany
Portfolio:
  • Higher: On gains in my Technology, Retail and Biotech long positions
  • Disclosed Trades: Added (IWM)/(QQQQ) hedges and added to my (EEM) short
  • Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite a mid-day swoon after the S&P 500 failed again at its 200-day moving average. On the positive side, Gaming, Construction, Hospital, Disk Drive, Oil Tanker, Coal and Alt Energy stocks are especially strong, rising 1.0%+. Cyclical and small-cap shares are outperforming again. Copper is rising another +2.82% today. Oil is just slightly higher today despite the rise in the euro, rise in global stocks, less economic fear out of Europe and supply concerns. On the negative side, Education, I-Banking, Gold and Oil Service shares are under mild pressure, falling .50%+. The TED spread continues to grind to new 52-week highs, which remains a big negative. As well, the yield on 3-Month Treasuries continues to slide back towards zero. The Greece sovereign cds is rising +3.8% to 792.61 bps today. Despite the recent rise in the euro and stocks, the European Investment Grade CDS Index is just -17 bps off its high of three days ago, which is also a red flag. Moreover, the Asia Ex-Japan High-Yield CDS Index has soared +27.9% to 591.66 bps over the last week. The S&P 500's 200-day moving average has provided tough resistance again. I will wait and see if the average can penetrate this level convincingly before getting more aggressive on the long side again. I expect US stocks to trade modestly lower into the close from current levels on technical selling, tax hike worries, energy sector pessimism, profit-taking, more shorting and rising sovereign debt angst.