North American Investment Grade CDS Index 110.52 bps +1.86%
European Financial Sector CDS Index 134.11 bps +2.74%
Western Europe Sovereign Debt CDS Index 158.66 bps +1.71%
Emerging Market CDS Index 225.10 bps -.19%
2-Year Swap Spread 16.0 -2 bps
TED Spread 15.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .14% +1 bp
Yield Curve 203.0 -6 bps
China Import Iron Ore Spot $139.50/Metric Tonne unch.
Citi US Economic Surprise Index -11.70 -4.6 points.
10-Year TIPS Spread 1.82% +2 bps
Overseas Futures:
Nikkei Futures: Indicating -5 open in Japan
DAX Futures: Indicating -8 open in Germany
Portfolio:
Slightly Lower: On losses in my Tech and Ag long positions
Disclosed Trades: None
Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite recent sharp equity gains, sovereign debt worries and more weak economic data. On the positive side, Retail, Semi, Gold and Steel shares are especially strong, rising 1.0%+. Growth stocks are outperforming value shares again. On the negative side, REIT, Wireless, Ag and Coal shares are under pressure, falling more than .75%. Small-caps are underperforming. (XLF) is also a bit heavy. Weekly retail sales rose +2.6% this week, which is the slowest pace since the week of May 4. Lumber is down another -2.97% today. The Euro Financial Sector CDS Index is up again today and is very near a technical breakout, which is a major negative. The Portugal sovereign cds is rising +4.10% to 435.0 bps and is close to a new record high. The Ireland sovereign cds is continuing its recent parabolic move higher, rising another +1.30% to a record of 485.10 bps and the Spain sovereign cds is gaining +2.29% to 234.29 bps. Furthermore, key credit default swap indices continue to move higher, even as equities trend higher, which is also a large negative. I still believe equity investors will continue to ignore these worrisome moves until they start to negatively impact the euro currency. Oil continues to trade poorly given recent equity and euro strength. The 10-year yield is down another -6 bps to 2.46% and is close to its 52-week low at 2.41%. The Shanghai Composite closed slightly below its 50-day moving average again last night and continues to trade poorly. The knee-jerk selling in (AAPL) shares on false rumors could be another red flag for the broad market. Investors continue to ignore most negative news items, which could be related to end-of-the-quarter positioning, but remains a large market positive for now. I expect US stocks to trade mixed-to-lower into the close from current levels on rising sovereign debt angst, profit-taking, more shorting, China concerns and increasing financial sector pessimism.
Ireland Swaps Surge to Record on Anglo Irish Bailout Cost Wager. The cost of insuring against default on Ireland’s government debt surged to a record as Standard & Poor’s said the price of bailing out nationalized lender Anglo Irish Bank Corp. could exceed $47 billion. Credit-default swaps tied to Irish bonds jumped as much as 33 basis points to 521.5 after more than doubling in the past two months, and were at 493 basis points as of 4 p.m. in London, according to data provider CMA. Contracts on Anglo Irish rose 4 basis points from yesterday’s record high closing price to 940, implying a 56 percent probability of default within five years. Investors are speculating the ballooning cost of rescuing Dublin-based Anglo Irish will force the nation’s government to choose between fully repaying senior bondholders and tackling the region’s biggest budget deficit. “It’s a key test for the market,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London. “The cost of the Anglo Irish bailout is too high for Ireland to afford without jeopardizing its fiscal position.” The speculation about Ireland weighed on sentiment in the region, driving up credit-default swaps on other governments and banks. The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 5 basis points to 165, according to CMA. Credit-default swaps on Portugal increased 19 basis points to 449.5, approaching the record-high closing price of 461, while Greece climbed 2.5 basis points to 818.5 and Italy was up 5.5 basis points at 202, CMA prices show. Spain added 8 basis points to 235.5. Irish two-year government notes slumped, sending yields to the highest level since Bloomberg began collating the data in 2003. The yield on Ireland’s two-year government note rose as much as 52 basis points to 4.76 percent, Bloomberg generic data show. Credit-default swaps on financial-company debt rose, with the Markit iTraxx Financial Index of 25 banks and insurers rising 3 basis points to 149 and an index of their riskier subordinated debt climbing 1 basis point to 218, according to JPMorgan Chase & Co. Gauges of corporate risk also jumped. The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated European companies climbed 6.5 basis points to 523.4, according to Markit Group Ltd.
U.S. Consumer Confidence Fell More Than Forecast. Mounting gloom over the outlook for jobs and wages caused American consumers to lose confidence in September, indicating spending will take time to recover. The Conference Board’s sentiment declined to 48.5 this month, lower than the indexmedian forecast of economists surveyed by Bloomberg News and the weakest level since February, according to figures from the New York-based private research group today. Household purchases, which account for about 70 percent of the world’s largest economy, may be constrained by a jobless rate this is projected to average more than 9 percent through 2011. Consumers “certainly are worried about jobs,” said David Sloan, a senior economist at 4Cast Inc. in New York. They “are facing considerable headwinds.” The Conference Board’s measures of present conditions and expectations for the next six months both dropped, today’s report showed. Fewer respondents thought more jobs would become available and the share of those who expected incomes to rise fell to the lowest since February.
China Rare Earth Says Japan Exports Halted on Lack of Government Permits. China Rare Earth Holdings Ltd., which exports 30 percent of its products to Japan, said shipments to the nation were halted from last week after a local branch of the Chinese trade ministry stopped issuing licenses. “We couldn’t get export licenses to Japan,” John Jiang, a sales manager in charge of exports at China Rare Earth, said by phone from Yixing, Jiangsu province. “They cited system failure.”
Dollar Is 'One Step Nearer' to Crisis on Burgeoning Debt Burden, Yu Says. The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank. Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today. “Such a huge amount of debt is terrible,” Yu said. “The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.”
Fewer U.S. CEOs Project Gains in Sales, Employment. Chief executive officers in the U.S. turned less optimistic in the third quarter as fewer projected sales and hiring will improve, a survey showed. The Business Roundtable’s economic outlook index fell to 86 in the July-to-September period, the first decrease since the beginning of 2009 when the gauge dropped to a record-low of minus 5, the Washington-based group said today.
Wall Street Journal:
More Americans Expect Recovery Will Take Years. The American public has arrived at the same dismal conclusion as many economists: We’re in for a long and painful economic recovery. A new survey by AlixPartners LLP, a business-advisory firm, showed a growing share of Americans think it will take years for the economy to recover to “normal times.” Some 46% said it will be 2013 or later before that happens. A smaller 36% predicted a recovery sometime before 2013.
Banks Face the Killing Yields. The financial-services industry is built for speed. But while superlow interest rates are meant to be high-octane fuel for the economy, they are gumming up financial engines. The problem for many banks, insurers and fund managers is that their cost of borrowing can't fall below zero. Yet returns from a number of businesses or products continue to decline with already near-record low bond yields. That compresses margins and threatens to make some business lines uneconomic.
Nine Dragons Paper Shares Slip as Analysts Diverge on Prospects. Nine Dragons Paper Holdings Ltd. slipped in Hong Kong trading Tuesday, a day after the company released results that led analysts to different conclusions about the outlook for the shares of China’s largest containerboard manufacturer.
Union Rejects Concessions at GM Plant in Indianapolis. A months-long battle to save a General Motors Co. stamping plant here that pitted rank-and-file UAW members against top union officials over whether autoworkers should accept pay cuts to keep jobs ended bitterly today. Addison, Ill.-based JD Norman Industries said it is dropping its effort to buy the factory after an announcement late Monday that United Auto Workers members had voted 457-96 against accepting the concessions. That means the 80-year-old plant will close next year, and the city and county will lose one of their biggest tax revenue generators. At least one state politician has charged that the vote also means more layoffs at other area auto suppliers.
Insider Likely to Replace Rahm Emanuel. President Barack Obama hasn’t yet picked a permanent replacement for chief of staff Rahm Emanuel — but he’s leaning toward someone already inside the Obama bubble rather than an outsider who would shake up the West Wing, people close to him say.
Foreign Firms: Quit Bashing Us. On the campaign trail, President Barack Obama elicits cheers when he rails against tax loopholes that he says benefit foreign companies that have operations in this country. It’s a sound bite that seems eminently fair to average voters, particularly those suffering through today’s tough economic times. But representatives of some of those firms are coming to Washington on Tuesday for a series of quiet meetings at the White House and on Capitol Hill to offer a counterargument — that the combination of tough presidential rhetoric and draconian administration policy could drive their firms away and, with them, thousands of jobs that the economy desperately needs if there is going to be a real recovery.
AP:
FBI Investigates Prominent Labor Leader Andy Stern. The FBI and the U.S. Labor Department are investigating prominent labor leader Andy Stern in their probe of corruption at the Service Employees International Union, according to two people who have been interviewed by federal agents.
Reuters:
Position Limits Keep Market Diverse - CFTC's Gensler. Position limits would guard against excessive concentration in the energy futures market, the chief U.S. futures regulator said in a speech to natural gas officials on Tuesday. Chairman Gary Gensler of the Commodity Futures Trading Commission said the financial crisis last fall showed the risk posed by "large concentrated actors on the financial stage". "I believe we should consider setting position limits to guard against excessive concentration in the energy futures market," said Gensler at a luncheon held by the Natural Gas Roundtable, a nonprofit organization. The CFTC is weighing whether to set position limits -- a maximum market share -- for oil and other energy products.
Telegraph:
OECD Calls For More Austerity in Portugal. Portugal must brace for fresh austerity to bring the budget deficit under control and stem capital flight, despite signs that political consensus is unravelling.
Handelsblatt:
Carl Heinz Daube, the head of Germany's Federal Finance Agency, said a restructuring of Greek debt could have "devastating consequences" for the German covered bond market. In a worst case scenario, interest and redemption payments of Pfandbriefe wouldn't be completely secured, Daube said. So-called haircuts on Greek debt would also have consequences for life insurers holding the bonds and may create new problems for other peripheral euro-region economies, he said.
Xinhua:
China's government will subsidize as much as 70% of the cost of essential equipment for trial solar-power projects, citing a government statement.
China yesterday started a crackdown against pornography, pirated products and "illegal publications" in preparation for the National Day holiday break that starts Oct. 1.
Berlusconi Yields Climb Amid Threat of Early Italian Election: Euro Credit. Investors are driving up Italy’s borrowing costs as Prime Minister Silvio Berlusconi struggles to retain enough support to prevent early elections in Europe’s most-indebted nation. The extra yield that investors demand to hold 10-year Italian debt rather than German bunds exceeded 163 basis points yesterday to hover at the highest level in a month. The premium is rising as the government prepares to sell as much as 9.5 billion euros ($12.8 billion) of bonds today and tomorrow.
Yuan Legislation in U.S. Congress My Prompt Retaliation, Businesses Say. U.S. legislation pressing China to raise the value of its currency may boomerang by prompting retaliation against American businesses operating there, representatives of those companies said. “This step would make it harder for us to export to China, not easier,” Timothy Stratford, a partner in Beijing at Covington & Burling LLP and a former U.S. trade official, said at a briefing today in Washington. The House of Representatives is set to consider legislation this week that would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency.
October is likely to be "peculiarly dangerous" for Chinese stocks, already Asia's biggest loser in 2010, as the supply of new shares soars in the month that's historically been the worst for the nation's equities, according to China International Capital Corp. The median return in October for China's benchmark during the period has been negative 4.5%, with declines 67% of the time, according to Hao Hong, a global strategist at CICC. This October "will also see a substantial amount of restricted stock starting to become tradable," Hong said. Shares worth $112 billion will become eligible for trading on the Shanghai market next month, he said.
U.S. Gasoline Supplies Increase in Survey as Demand Falls: Energy Markets. U.S. gasoline inventories probably rose to the highest level in six months as demand slipped with the end of the summer driving season and economic growth slowed, a Bloomberg News survey showed. An increase in first-time claims for jobless benefits in mid-September points to reduced gasoline demand and lower pump prices. Consumption dropped 1.9 percent in the week ended Sept. 17, the smallest level since February. Regular gasoline, averaged nationwide, declined for a tenth straight day to $2.694 a gallon on Sept. 26, the AAA said on its website. “We’ve seen a recent major decline in gasoline demand,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut. “Normally demand drops at this time of year along with refinery utilization rates. We’ve yet to see refiners cut back.” Gasoline output has outpaced demand during the past three weeks, according to the department. Refineries produced 9.02 million barrels a day of gasoline compared with demand of 8.85 million. Supplies of the fuel in the week ended Sept. 17 were 15 percent higher than the five-year average for the period, the department said. U.S. fuel demand will drop 9 percent to average 18.93 million barrels a day this year, from a record 20.8 million in 2005, the Energy Department said on Sept. 8.
California May Seek $5 Billion From Wall Street, Lockyer Says. California is lining up a short- term loan of more than $5 billion from a group of Wall Street banks to tide the state over with enough cash after a record- long budget impasse, Treasurer Bill Lockyer said. The state may borrow the money from Bank of America Merrill Lynch, JPMorgan Chase & Co., Goldman Sachs Group Inc. and RBC Capital Markets once a budget is enacted and would repay the funds with an estimated $10 billion of notes it will sell in October or November, Lockyer said today in New York.
Mexican Mayor Becomes 11th City Chief Killed in 2010 as Drug Deaths Surge. An interim mayor of the Mexican town of Tancitaro in Michoacan state became the country’s 11th city chief killed this year, and may have been stoned to death. State officials were conducting an autopsy to confirm the cause of death after Gustavo Sanchez’s corpse was found on a road in the Michoacan city of Uruapan, said an official at the state attorney general’s office who can’t be identified because of the agency’s policies. He said there were signs the victim may have been killed with rocks.
Commodity Volatility May Gain Amid Recovery Concerns, SocGen's Godin Says. Commodity prices, which have surged to the highest level since January, may see greater volatility as investors react to threats to the global economic recovery, according to Societe Generale SA. “We’re not completely out of the crisis,” Olivier Godin, the bank’s head of commodities derivatives in Asia, said in an interview from Hong Kong. “There might be some bumps along the way, and that’s going to affect our markets.”
Kim Jong Il's Son Appointed General Before North Korea Meeting. Kim Jong Il’s youngest son was named a general, signaling the start of a possible power transfer in North Korea to a man said to be in his late 20s who has never previously been mentioned in public.
Wall Street Journal:
J.P. Morgan(JPM) Targets FDIC Funds for WaMu Claims. J.P. Morgan Chase & Co. is putting federal regulators on notice that it may go after the very funds it used to buy Washington Mutual Inc.'s banking assets—and then some. In a series of previously undisclosed letters sent to the Federal Deposit Insurance Corp., the nation's second-largest bank by assets warned it could seek billions in legal protection from the FDIC receivership that liquidated the Seattle-based thrift two years ago, people familiar with the situation said.
Fed Weighs Different Approach If It Revives Bond Purchases. Federal Reserve officials are considering new tactics if they resume purchases of long-term U.S. Treasury securities to bolster a disappointingly slow recovery. Rather than announcing massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds. The Fed hasn't yet decided to step up its bond purchases, let alone agree on an approach.
Local Taxes Sway Races. A recent rise in state and local taxes is roiling voters in an already tumultuous year, complicating the debate over whether to extend Bush-era tax cuts and upending some campaigns. As Washington is consumed with the debate over whether to extend Bush-era tax cuts beyond the end of the year, voters in many parts of the country are focused on state tax increases already hitting them.
ObamaCare's Hotel California. The state moves to impose price controls you can never leave. California, the novelist Wallace Stegner famously wrote, is like the rest of America, only more so—meaning that wherever the country is headed, the Golden State is probably there already. So the state's ObamaCare advance planning deserves closer scrutiny, given that it mirrors the regulatory and ideological model that the White House favors for everyone else.
GE(GE) Just Made Its Last Conventional Light Bulb in the US - Another 200 Employees Out of Work. Speaking of the de-industrialization of America, Tim Carney was on hand for the production of GE's last-ever incandescent lightbulb in the United States. The shutdown of a plant in Winchester, VA will result in the layoffs of 200 workers. It's yet another example of a company shifting manufacturing jobs overseas, but there's a twist, because GE is supporting the environmental regulations that are driving incandescent lightbulbs to the deadpool.
Where Are All the Prosecutions From the Crisis? At a hearing before the Senate Judiciary Committee last week, Senator Ted Kaufman of Delaware summed up the frustration on Capitol Hill with the lack of any identifiable villains for the financial troubles of the last two years. “We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” Mr. Kaufman said. “Why is that?”
Jabil(JBL) Q4 Revenue Lags Street, Sees Q1 Revenue Below Market. Technology distributor Jabil Circuit Inc's (JBL) quarterly revenue missed Wall Street expectations, and the company forecast first-quarter 2011 sales below estimates, sending its shares down 2 percent in extended trade.
Progress Energy(PGN) Trading Halt Sparks Questions. Shares of Progress Energy Inc were halted briefly on Monday on the New York Stock Exchange after trading triggered a circuit breaker, although more than 100 trades took place after the stock had moved enough to trigger a halt. Nearly 60 erroneous trades have been canceled, according to a Nasdaq representative.
U.S. Set to Propose New Auto Fuel, Emissions Rules. The Obama administration this week will propose new fuel efficiency and emissions requirements for cars and light trucks for model years 2017 and beyond.
U.S. Bank Regulators Delay 'Too Big Fail' Reform. U.S. banking regulators on Monday put off proposing how the government would use its new authority to dismantle large, collapsing financial companies, saying they need more time for industry and other regulators to weigh in.
Paychex Q1 Profit Beats Street View. Payroll processor Paychex Inc (PAYX) reported a quarterly profit above market view, helped by an increase in revenue from its human resources services segment.
Financial Times:
Mexico Hedges Against Fall in Oil Prices. Mexico is hedging its oil exports for 2011 at about $65 to $70 a barrel as it takes a cautious view on the global economic recovery, citing bankers, traders and brokers. Based on current market rates, Mexico is paying a premium between $5 and $6 a barrel for the put options, placing the program's cost at about $1 billion, citing bankers.
Telegraph:
Americans! Don't Copy Europe! The policies his administration is pursuing amount to comprehensive Europeanisation: European carbon taxes, European foreign policy, European healthcare, European daycare, European disarmament, European industrial intervention and, inevitably, European unemployment rates.
Shanghai Securities News:
Relevant Chinese government departments may jointly sign off on trials for a property tax. The trials may be announced publicly soon.
Evening Recommendations Citigroup:
Downgraded (HSP) to Sell, target $52.
Night Trading
Asian equity indices are -.50% to +.25% on average.
Asia Ex-Japan Investment Grade CDS Index 127.0 +1.0 basis point.
Asia Pacific Sovereign CDS Index 113.0 -2.5 basis points.
Consumer Confidence for September is estimated to fall to 52.1 versus a reading of 53.5 in August.
Upcoming Splits
None of note
Other Potential Market Movers
The S&P/CaseShiller Home Price Index, weekly retail sales reports, Richmond Fed Manufacturing Index for September, ABC Consumer Confidence reading, Fed's Warsh speaking, Fed's Lockhart speaking, $35 Billion 5-Year Treasury Notes Auction, (BAM) Investor Day, BofA Merrill Power/Gas Conference, JMP Securities Healthcare Conference, DA Davidson Construction Conference and the (HPQ) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and automaker 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.
North American Investment Grade CDS Index 108.50 bps -1.03%
European Financial Sector CDS Index 130.78 bps +1.57%
Western Europe Sovereign Debt CDS Index 156.0 bps +.38%
Emerging Market CDS Index 222.46 bps -3.57%
2-Year Swap Spread 18.0 -1 bp
TED Spread 16.0 +2 bps
Economic Gauges:
3-Month T-Bill Yield .13% -2 bps
Yield Curve 209.0 -7 bps
China Import Iron Ore Spot $139.50/Metric Tonne unch.
Citi US Economic Surprise Index -7.10 +1.6 points.
10-Year TIPS Spread 1.78% -6 bps
Overseas Futures:
Nikkei Futures: Indicating -33 open in Japan
DAX Futures: Indicating +29 open in Germany
Portfolio:
Slightly Higher: On gains in my Tech, Ag and Retail long positions
Disclosed Trades: None
Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades just slightly lower despite recent sharp equity gains, rising real estate sector pessimism, sovereign debt worries and more weak economic data. On the positive side, Airline, Gaming, Telecom, Networking, Steel and Oil Tanker shares are especially strong, rising 1.0%+. Select large-cap growth stock leaders continue to trade much better than the broad market. The S&P GSCI Ag Spot Index is rising another +.67%. On the negative side, Education, REIT, Biotech and Disk Drive shares are under pressure, falling more than 1.0%. (IYR) has been a bit heavy throughout the day again. Lumber is falling -1.41%. The Euro Financial Sector CDS Index is up again today and is very near a technical breakout, which is a major negative. The Portugal sovereign cds is rising +3.10% to 414.14 bps and is close to a new record high. The Ireland sovereign cds is continuing its recent parabolic move higher, rising another +2.01% to a record of 475.87 bps and the Greece sovereign cds is gaining +2.16% to 836.92 bps. Furthermore, key credit default swap indices continue to move higher, even as equities trend higher, which is also a large negative. I suspect equity investors will continue to ignore these moves until they start to negatively impact the euro currency. Oil continues to trade poorly given recent equity and euro strength. The 10-year yield is down another -9 bps to 2.51% and is close to its 52-week low at 2.41%. The Shanghai Composite closed slightly above its 50-day moving average last night, but remains a global laggard. Consumer confidence for September, which is released tomorrow, should exceed estimates. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, technical buying, growth stock optimism and buyout speculation.
