China Risks 'Sacrificing' Growth as Energy Curbs Slow Factory Production. China’s growth may have weakened in July as the government shuttered energy- intensive factories, highlighting how environmental goals risk damping industrial outputgrowth just as export orders soften. China is lagging behind a target for reducing the amount of energy used relative to gross domestic product, with only months to run in Premier Wen Jiabao’s five-year plan. Policy makers’ determination to meet the goal may be tested by the need for “sacrificing” growth in an economy that is already cooling, according to UBS AG economist Wang Tao. A harsher campaign of closures of inefficient factories would add to weakness in export orders, illustrated by a third monthly decline in a July index released by the logistics federation. A cooling property market, easing infrastructure investment and credit curbs are also restraining the expansion of the fastest-growing major economy. The energy measures add to the threat of excessive “tightening” by officials, while weakness in external demand poses the biggest near-term risk to growth, according to Ken Peng, an economist for Citigroup Inc. China’s energy used per unit of GDP rose 0.1 in the first six months from a year earlier, making it harder to meet the 2006-10 goal of a 20 percent cut. In the first four years, the reduction was 15.6 percent, according to UBS. “If the government has true resolve, then investors, especially overseas investors, may have not fully comprehended the implications of such policies on China’s heavy industry and demand for commodities,” Beijing-based economist Wang said in a note last month.
U.S. Economy Improving, More Stimulus Isn't the Answer, Rubin, O'Neill Say. The U.S. economy will improve slowly and another round of fiscal stimulus probably wouldn’t be effective, former Treasury secretaries Paul O’Neill and Robert Rubin said. Rubin, who served under Democratic President Bill Clinton, said the U.S. is “going to have slow and bumpy growth,” during a taped interview on CNN’s “Fareed Zakaria GPS” aired today. A “major second stimulus” might create more uncertainty and undermine confidence, he said.
Hedge Funds Raise Bets on Rising Oil Price to 13-Week High: Energy Markets. Hedge funds last week boosted their holdings of crude oil futures and options to the highest level in 13 weeks in a bet that Tropical Storm Bonnie would delay imports to states along the Gulf of Mexico, reducing supplies. Oil jumped 6.5 percent in the week ended Aug. 3 as the funds, along with other large speculators, boosted their long positions in New York Mercantile Exchange contracts by 24 percent to 135,833, the most since May 4, a Commodity Futures Trading Commission report Aug. 6 showed. Hedge funds increased net-long positions, or bets that crude oil will rise, for the fourth straight week, the longest streak since March the CFTC’s weekly Commitments of Traders report showed. “The bullish news is they’re buying it and that’s good for prices,” said Tim Evans, an energy analyst at City Futures Perspective in New York. “The bearish news is that it’s becoming more vulnerable with larger long positions.”
Berkshire Profit Falls as Buffett's Derivative Bets Suffer. Berkshire Profit Falls as Buffett's Derivative Bets Suffer. Warren Buffett’s Berkshire Hathaway Inc. said second-quarter profit declined 40 percent as derivative bets on equity indexes by the billionaire chairman slid amid the retreat of global stocks. Buffett, whose career of stock picking helped him amass the world’s third-largest personal fortune, has accumulated losses for Berkshire on equity derivatives since the 2008 financial crisis. The contracts, which mature starting in 2018, lose value when equity indexes decline. “On the derivatives, we had a problem there in the second quarter,” Bill Bergman, an analyst with Morningstar Inc., said in an interview. “That’s clearly reflected in the bottom line.”
Goldman Sachs(GS) Estimates Derivatives May Provide Up to 35% of Its Revenue. Goldman Sachs Group Inc., which makes more money from trading than any other bank, estimates that 25 percent to 35 percent of its revenue comes from derivatives, a spokesman said. The New York-based firm, whose executives have said that they didn’t know how much of their money came from derivatives, provided the information in response to a request from the Financial Crisis Inquiry Commission, spokesman Lucas van Praag said. Based on the firm’s 2009 revenue of $45.2 billion, the estimate means derivatives may have provided $11.3 billion to $15.8 billion of revenue last year. Goldman Sachs held a gross amount of $49.1 trillion of derivatives contracts as of March 31, according to a June report from the Office of the Comptroller of the Currency. The OCC lists Goldman Sachs among the five banks that together account for 97 percent of the derivatives held by U.S. banks.
Wheat Speculators Slow Bets on Gain After Best Month Since 1973. Wheat speculators slowed their bets on higher prices after the biggest monthly gain in Chicago Board of Trade futures in 37 years, a sign the rally may be peaking, according to Grain Service Corp. Speculators including hedge funds raised their net-long positions in futures and options by 5.3 percent in the week ended Aug. 3, the smallest increase since they turned bullish last month, U.S. Commodity Futures Trading Commission data on Aug. 6 show.
Crash of 2015 Won't Wait for Regulators to Buckle Wall Street Safety Belts. The financial system experiences a crisis “every five to seven years,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the Financial Crisis Inquiry Commission in January. By that measure, the next crash could come by 2015 -- years before new banking reforms are in place. Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world’s banks until 2018 to comply with limits on how much they can borrow. Parts of the Volcker rule, a provision of the new Dodd-Frank Act that would force firms to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a dozen years. Banks’ appetite for using borrowed money, known as leverage, for investing in complex, illiquid securities contributed to the worst credit crisis since the Great Depression. The pace at which curbs on leverage are likely to be imposed on the industry contrasts with the speed at which banks including and UBS AGMorgan Stanley are hiring to ramp up trading activities. “Based on our experience of government’s ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another 8 or 10 years, and that’s a little scary,” said Roy Smith, finance professor at New York University’s Stern School of Business and a former banker at Goldman Sachs Group Inc.
North Korea May Have Seized South Korean Fishing Boat Off Peninsula's East. A South Korean fishing boat may have been detained by North Korea off the peninsula’s east coast after the communist country threatened “physical retaliation” against the South’s joint military drills with the U.S. The 41-ton Daeseung has not been in contact since its last communication through satellite phone at 2:35 p.m. local time today that it was being taken away by a North Korean patrol ship, an official at the Korea Coast Guard said by telephone, confirming a Yonhap News report.
Iran Sanctions Make China, Russia Winners While Reliance Loses. Sanctions punishing Iran for its nuclear program are deepening the country’s ties with China and handing Russia opportunities to sell more gasoline while hurting suppliers in Europe and India. Iranian Oil Minister Masoud Mir-Kazemi and Chinese officials pledged for their countries to cooperate more closely in the energy industry during talks in Beijing on Aug. 6, Iran’s government-run Press TV reported. Russia’s state-controlled OAO Rosneft and OAO Gazprom Neft may step up fuel shipments to the Islamic republic this month, the Iran Commission of the Moscow Chamber of Commerce and Industry said in July.
Dubai Brokerages Shutter as Stock Trading Tumbles to 4-Year Low. Stock brokers in the United Arab Emirates are struggling to make ends meet as trading volumes tumble to the lowest in four years, forcing some to close. The number of brokerages in the country may drop to as low as 55 from 81, according to Shuaa Securities LLC, the brokerage unit of the U.A.E.’s biggest investment bank.
HP's(HPQ) Ex-CEO Hurd Said to Settle With Sexual-Harassment Accuser. Hewlett-Packard Co. Chief Executive Officer Mark Hurd reached a settlement last week with a woman who accused him of sexual harassment, releasing HP from responsibility, two people familiar with the matter said. Hewlett-Packard was informed by Hurd’s attorneys that he had settled with the woman, who worked as a contractor for HP between 2007 and 2009, said one of the people, who declined to be identified because the settlement hasn’t been made public. HP didn’t make any payments, one of the people said. Hurd, who had been Hewlett-Packard’s CEO since 2005, resigned Aug. 6 after a company investigation found he violated its standards of business conduct by submitting inaccurate expense reports and concealing his personal relationship with the woman, who has not been identified. HP found that Hurd didn’t violate its harassment policy. The expenses, which ranged between $1,000 and $20,000, were for meals and travel, and Hurd intends to pay back the amount, according to one person familiar with the matter.
Wall Street Journal:
Saudi RIM(RIMM) Pact Lifts Hope of Ending U.A.E Impasse. Saudi Arabia's telecom watchdog and local phone operators reached a preliminary agreement with BlackBerry maker Research in Motion Ltd. over the weekend to use local data servers, said an official at a Saudi-based telecom operator involved in the talks.
Woman in Hurd Case Regrets Dismissal. The woman at the center of the ethics scandal that cost Mark Hurd the top job at Hewlett-Packard Co. identified herself Sunday as Jodie Fisher, a 50-year-old sometime actress whose film credits include "Intimate Obsession" and "Body of Influence 2."
Brands Are Friending Social Gaming. Honda Motors Co. and McDonald's Corp.(MCD) are making a push into social gaming to promote their brands, as Madison Avenue begins to take notice of the latest Web craze that is drawing growing numbers of people to games on social networks.
China Orders Factory Closures. China has ordered 2,087 companies in 18 industries that are highly pollutive and energy intensive, including steel, coal, cement and glass, to shut obsolete capacity as part of Beijing's economic restructuring efforts, the Ministry of Industry and Information Technology said Sunday. China's government has made it clear that overcapacity must be cut, and its weekend warning suggests it is tackling the issue with more urgency. The listed companies must shut obsolete capacity by the end of September or face financial and administrative penalties, such as halts in new project approvals and lending curbs, the ministry said on its website. Most of the companies in the list are small- and medium-sized, and they aren't state-owned, according to the minister.
Regulators Plan First Steps on Credit Rating. U.S. financial regulators this week will take their first steps to replace private credit ratings in their review of bank capital levels, a big step for regulators eager to ensure they are able to accurately assess firms' financial condition. The Federal Deposit Insurance Corp. on Tuesday will lay out a number of options to the use of credit ratings in capital evaluations, part of a joint effort with the Federal Reserve and other federal banking agencies. Among the options being discussed is a greater use of credit spreads, having supervisors develop their own risk metrics and a reliance on existing internal models, according to people familiar with the situation.Agency officials aren't expected to endorse a particular approach and instead plan to encourage input from banks, academics and other regulators.
U.S. to Sell F-15s to Saudis. The proposed $30 billion, 10-year arms package, which would be one of the biggest single deals of its kind, has been a source of behind-the-scenes tension during months of negotiations. Israeli officials have repeatedly conveyed their concerns in private that the U.S. risks undermining its military advantage by equipping regional rivals with top-flight technologies.
Doctors Get Dose of Technology From Insurers. Health-insurance companies including Humana Inc. and Aetna Inc. are stepping into the race to equip doctors with high-tech patient records.
China 'Fear' Gauge Plunges to Lowest Since 2006 on Wen Policy. Chinese stocks volatility fell to the lowest level in almost four years, signaling investors’ “comfort” with the outlook for slowing economic growth, according to AlphaShares Inc. The AlphaShares Chinese Volatility Index, a gauge of investor fear of Chinese stocks, fell to 20.17 on Aug. 5, the lowest since Dec. 15, 2006. The index tracks the implied volatility of options on the Hang Seng Index, the benchmark for Hong Kong stocks, and the FTSE/Xinhua China 25 Index, or FXI, which tracks the nation’s 25 largest companies by market value.
Marketwatch.com:
Chinese Banks Reportedly Face Wave of Bad Loans. China's banks could see as much as 20% of their loans from state-controlled firms go bad, a report said Sunday, even as the nation's banking regulator said non-performing loans were on the decline. Recent stress tests conducted by the China Banking Regulatory Commission (CBRC) showed 20% of all outstanding loans to state-owned companies were "in trouble" as of the end of June, the Japanese business newspaper Nikkei reported, citing an unidentified CBRC official. The report put the total amount of current loans to state-controlled enterprises at 7.7 trillion yuan ($1.14 trillion), meaning 1.54 trillion yuan are in the "problem" category. As a result, the CBRC will order banks to increase their loan-loss provisions, it said.
Wall Street Rewards to Trigger Surge in Informants. New US whistleblowing incentives within the Dodd-Frank financial reform act – that could net informants multimillion dollar pay-outs – are likely to generate a surge in allegations against US-listed companies and Wall Street banks, lawyers say.
Sectarian Clashes Surge in a City in Pakistan's Heartland. This industrial city, famous for its textile exports, has lately become renowned as the center of a new wave of sectarian violence that has gripped Pakistan as militancy and extremism have taken firm root here in central Punjab Province.
Housing Policy's Third Rail. WHILE Congress toiled on the financial overhaul last spring, precious little was said about Fannie Mae and Freddie Mac, the mortgage finance companies that collapsed spectacularly two years ago. Indeed, these wards of the state got just two mentions in the 1,500-page law known as Dodd-Frank: first, when it ordered the Treasury to produce a study on ending the taxpayer-owned status of the companies and, second, in a “sense of the Congress” passage stating that efforts to improve the nation’s mortgage credit system “would be incomplete without enactment of meaningful structural reforms” of Fannie and Freddie. No kidding. With midterm elections near, though, there will be talk aplenty about dealing with the companies precisely because Dodd-Frank didn’t address them. Unfortunately, if past is prologue, this talk is likely to be more political than practical.
NY Post:
Rangel Fund in Furor. Aids Chaotic Nonprofit. With the help of Rep. Charles Rangel, a politically powerful uptown nonprofit is getting a $2.6 million taxpayer-funded grant despite serious concerns about the organization’s finances. The Upper Manhattan Empowerment Zone, a Rangel-sponsored group that distributes tax money to improve the local community, green-lighted the grant to Alianza Dominicana. The money was OK’d even after one of the zone’s own finance executives refused to sign off on the cash — and questioned the nonprofit’s checkered balance sheet, The Post has learned.
CNNMoney:
Health Reform: What You're Not Getting. If you gloss over your benefits materials at open enrollment this year, you may be setting yourself up for a nasty surprise at the doctor's office. Many self insured companies will be exempted from some of health reform's key benefit improvements.
Business Insider:
Japan's Debt Is So High, It Doesn't Even Fit on the Charts. Let this be a reminder that the ongoing popularity of the yen and JGB (Japanese Government Bonds) should throw a big fat wrench into any notion that any simplistic ideas about the size of a country's debt, and the strength of their national financial instruments.
Bell Admits More Hefty City Salaries. Several other administrators get six-figure paychecks, and two were given extra payments. The city of Bell, already under fire for paying unusually high salaries to three top administrators, acknowledged Friday that two more officials were earning over $400,000. The city's director of administrative services, Lourdes Garcia, was earning $422,707, and the director of general services, Eric Eggena, earned $421,402, officials said. Those amounts include salary, deferred compensation and some benefits, which city officials did not fully detail. In addition, Bell's director of community services, Annette Peretz, earned $273,542, a deputy city engineer earned $247,573, the business development coordinator earned $295,627, a police captain earned $238,075 and a police lieutenant earned $229,992.
Whistleblower: Fannie Mae Bungled HAMP Anti-Foreclosure Program. Fannie Mae executives bungled their stewardship of the federal government’s massive foreclosure-prevention campaign, creating a bureaucratic muddle characterized by “mismanagement and gross waste of public funds,” according to a whistleblower lawsuit by a former Fannie Mae executive and consultant. Caroline Herron, a former Fannie vice president who returned to the mortgage giant in 2009 as a high-level consultant, claims that the homeowner-relief effort was marred by delays, missteps and executives preoccupied with their institution’s short-term financial interests. “It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs – even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs,” she claims in the lawsuit.
SiliconValley.com:
Chip Industry in Midst of Boom. The chip industry is in the midst of a record-setting boom, an upbeat sign about the health of the technology industry as it struggles to rebound from the Great Recession. Global sales of the microprocessors that are the lifeblood of Silicon Valley this year are expected to be the biggest in the industry's history, two research firms recently reported, with total sales expected to top $300 billion.
White House Official: 'Potential' for Climate Change in Lame-Duck. Carol Browner, the White House's top energy and environmental adviser, refused on Sunday to shut the door on passing climate change legislation this year — even though Senate Democratic leaders have conceded they lack the votes and have punted on the volatile issue. Browner said on NBC's "Meet the Press" that President Barack Obama is still committed to pushing the bill through the Senate, and that there was "potential" for the bill to come up in a post-election, lame-duck session of Congress. Browner's remarks will almost certainly give ammunition to Republicans who say Democrats are plotting to do mischief in a lame-duck session — even though top congressional Democrats have thrown cold water on an overly ambitious lame-duck agenda. Rep. Mike Pence (R-Ind.) later said on the same program that it's "outrageous" for Democrats to consider passing the bill after the elections.
USA Today:
Tracking Big Corporate Donors. Find out how much money some of the nation's largest companies have given to nonprofit groups over the past three years, and what charities they support. Click on each column to reconfigure the chart.
Chavez Rejects US Ambassador-Designate to Venezuela. President Hugo Chavez on Sunday rejected Larry Palmer as the US ambassador-designate to Venezuela, and urged US President Barack Obama to "look for another candidate." "How can you think I'd accept this gentleman coming here? You'd best withdraw him, Obama. Don't insist, I'm asking you," said Chavez in his weekly "Alo Presidente" radio and television show. Palmer "can't come here as ambassador," said Chavez. "He disqualified himself by breaking all the rules of diplomacy. He messed with all of us. He can't come here." "The best thing the United States government can do is to look for another candidate," for ambassador to Venezuela, he added.
Handelsblatt:
Germany's Ifo research institute expects the economy to "cool down" in the third quarter, citing Ifo economist Kai Carstensen.
Xinhua:
Chinese central bank adviser Xia Bin said the nation should introduce a property transaction tax based on the number of homes sold and the frequency of sales. The government's policies for credit, local government financing vehicles and limits on production capacity and energy consumption affected economic growth in the first half, Xia said.
The People's Daily:
The introduction of additional stimulus measures in China would cause overcapacity, asset bubbles and drive speculation and price surges in the property market, citing Ba Shusong, deputy head of the financial institute of the State Council's Development Research Center. Additional stimulus measures may cause China's economy to easily overheat, citing Jia Kang, head of the Ministry of Finance's research institute. China shouldn't introduce new stimulus measures and also shouldn't introduce new tightening measures, citing Fan Jianping, head of the economic forecast department at the State Information Center.
Securities Daily:
Chinese home prices will not realistically stay at their current high levels after an expected surge in the housing supply later this year, citing China Vanke Co. Chairman Wang Shi. The government won't stop politices aimed at curbing the property market to stimulate domestic consumption, Wang said.
Weekend Recommendations Barron's:
Made positive comments on (V), (MA), (SYY), (WLL), (BWP), (TGT), (HPQ) and (NFX).
Citigroup:
Reiterated Buy on (FISV), target $60.
Reiterated Buy on (HPQ), target $65.
Reiterated Buy on (CSCO), target $31.
Reiterated Buy on (EOG), target $120
Night Trading
Asian indices are -.25% to +.50% on average.
Asia Ex-Japan Investment Grade CDS Index 118.0 unch.
Asia Pacific Sovereign CDS Index 113.50 -1.0 basis point.
The JPMorgan Auto Conference, Needham Cleantech Conference and the (CBSH) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.
BOTTOM LINE: I expect US stocks to finish the week modestly higher on short-covering, less financial sector pessimism, mostly positive earnings reports and technical buying. My intermediate-term trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.
North American Investment Grade CDS Index 103.85 bps +2.04%
European Financial Sector CDS Index 101.33 bps +2.30%
Western Europe Sovereign Debt CDS Index 120.0 bps +3.26%
Emerging Market CDS Index 211.36 bps +.47%
2-Year Swap Spread 20.0 +2 bps
TED Spread 27.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .14% unch.
Yield Curve 231.0 -6 bps
China Import Iron Ore Spot $144.50/Metric Tonne +.63%
Citi US Economic Surprise Index -32.90 -1.3 points
10-Year TIPS Spread 1.78% -5 bps
Overseas Futures:
Nikkei Futures: Indicating -112 open in Japan
DAX Futures: Indicating +40 open in Germany
Portfolio:
Slightly Lower: On losses in my Retail and Technology long positions
Disclosed Trades: None
Market Exposure: 100% Net Long
BOTTOM LINE: Today's overall market action is just mildly bearish as the S&P 500 is cutting losses substantially into the afternoon, despite more weak economic data and recent stock gains. On the positive side, Airline, Restaurant, HMO, Biotech, Wireless, Gold, Ag and Coal stocks are higher on the day. Copper is flat despite today's headwinds. On the negative side, Education, Hospital, Computer Service, Disk Drive, Computer Hardware and Road&Rail shares are under pressure, falling 1.5%+. Small-caps are underperforming. (XLF) has also underperformed throughout the day. The US Muni CDS Index is rising +3.37% to 208.44 bps. Today's July jobs report wasn't that far from expectations, however the downward revisions to June were meaningful. The euro will likely make another meaningful top over the coming weeks. Unless worries over China's economy increase, I still expect US stocks to work higher near-term on slowing, but not negative, US economic growth and surging profits. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, technical buying, mostly positive earnings reports and bargain-hunting.
