North American Investment Grade CDS Index 84.04 -.54%
European Financial Sector CDS Index 159.0 bps -2.69%
Western Europe Sovereign Debt CDS Index 193.17 bps -2.97%
Emerging Market CDS Index 197.75 -1.75%
2-Year Swap Spread 22.0 -1 bp
TED Spread 16.0 unch.
Economic Gauges:
3-Month T-Bill Yield .14% unch.
Yield Curve 275.0 +2 bps
China Import Iron Ore Spot $178.30/Metric Tonne +1.02%
Citi US Economic Surprise Index +44.0 +3.8 points
10-Year TIPS Spread 2.34% -1 bp
Overseas Futures:
Nikkei Futures: Indicating +126 open in Japan
DAX Futures: Indicating +25 open in Germany
Portfolio:
Higher: On gains in my Medical, Ag, Tech, Biotech and Retail long positions
Disclosed Trades: None
Market Exposure: 100% Net Long
BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades near session highs, despite recent equity gains, China inflation fears, US muni worries and some disappointing economic data. On the positive side, Education, Gaming, Restaurant, Homebuilding, Construction, HMO, Bank, Networking, Semi, Computer, Internet, Oil Service and Energy shares are especially strong, rising more than 1.0%. The MS Tech Index has traded well throughout the day and (XLF) is strongly outperforming again. Copper is rising +1.28%. The 10-year yield is stable at 3.32%. The Citi US Economic Surprise Index is now at the highest level since Feb. 18th of last year. The Italy sovereign cds is falling -2.83% to 206.35 bps, the Greece sovereign cds is falling -4.21% to 939.75 bps, the Spain sovereign cds is falling -2.68% to 299.33 bps, the Portugal sovereign cds is declining -3.08% to 480.93 bps and the Belgium sovereign cds is falling -2.04% to 205.30 bps. The Western Europe Sovereign CDS Index is now -26 bps off its record high set on January 11. Gold continues to deteriorate technically, falling another -1.01%. On the negative side, Food, Oil Tanker, Alt Energy and Coal shares are under pressure, falling more than .5%. The Japan sovereign cds is rising +2.79% to 83.65 bps and the US Muni CDS Index is rising +5.14% to 226.22 bps. The Euro Financial Sector CDS Index is still trending higher. The broad market continues to trade well overall. Semi equipment stocks(TER, CYMI, NANO, NVLS, SANM, BRKS, KLAC, AMAT, VSEA, RTEC, UCTT) are exploding higher today on volume. As well, the semi ETF(SMH) is seeing huge call volume. The move higher in this group looks like it has legs as it has caught many analysts by surprise. I expect US stocks to trade modestly higher into the close from current levels on declining eurozone debt angst, tech sector optimism, less financial sector pessimism, buyout speculation, earnings optimism and short-covering.
U.S. Economy: Retail Sales, Production Gains Point to Pickup in Growth. Retail sales and industrial production both rose in December, indicating that the U.S. economic recovery is picking up as the new year begins. Purchases climbed 0.6 percent, capping the biggest annual increase in more than a decade, Commerce Department figures showed today in Washington. Output at factories, mines and utilities increased 0.8 percent, the most in five months, according to data from the Federal Reserve. Americans this year are forecast to boost the spending that accounts for 70 percent of the economy as tax cuts put more money in their pockets, increasing demand for Ford Motor Co. cars and Apple Inc. iPads. At the same time, an unexpected drop in consumer confidence indicates that rising gasoline prices and unemployment stuck above 9 percent pose a risk for sales. “The expansion should no longer be described as fragile,” said Dean Maki, chief U.S. economist at Barclays Capital in New York, who today raised his forecast for fourth-quarter growth to 3.5 percent from 3 percent. The pickup in sales “is an important signal that consumers are more comfortable spending than they have been.”The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for this month dropped to 72.7, the lowest since November, from 74.5 in December. Economists surveyed by Bloomberg News projected a gain to 75.5, according to the median forecast. Americans anticipated stagnant incomes this year along with rising inflation, a product of the highest gasoline prices at the pump since October 2008. The cost of living climbed 0.5 percent in December, led by higher fuel and food prices, figures from the Labor Department also showed today. Eight of 13 major retail categories showed increases last month, led by a 2.6 percent jump at non-store retailers, which include Internet vendors. The increase was the biggest in more than two years. Demand at auto dealers climbed 1.1 percent. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 68.2, the highest since June 2010.
Lacker Says Economic Outlook Merits Re-Evaluation of Asset Buying by Fed. Federal Reserve Bank of Richmond President Jeffrey Lacker said the economy will probably grow this year between 3.5 percent and 4 percent, prompting a re- evaluation of the Fed’s plan to buy $600 billion in bonds. “While the outlook may not have improved enough yet to warrant adjusting our purchase plans in the near-term, I anticipate earnest re-evaluation as economic developments unfold in the months ahead,” Lacker said today in prepared remarks of a speech in Richmond, Virginia. “I believe we have emerged from that soft patch and have begun a phase of the recovery in which growth can be sustained at an above-trend rate,” Lacker said in a speech to members of the Richmond Chapter of the Risk Management Association. Lacker said he expects the economy to improve further because of a firming labor market and reduced household debt. “Given these stronger fundamentals, it’s not a stretch to project robust growth in consumer spending this year,” Lacker said. Economic forecasters have been raising economic forecasts in recent weeks to 4 percent growth for this year, Lacker said, and “if I had to write down a forecast today, it would be pretty close to that -- somewhere between 3.5 and 4 percent.”
Greece's Long-Term Debt Ratings Are Cut to Junk by Fitch; Outlook Negative. Greece lost its last investment grade rating as Fitch Ratings downgraded the country’s debt one notch to BB+, or junk. The cut was foreshadowed by a warning last month and puts the rating at the same level as at Moody’s Investors Service and Standard & Poor’s. The Fitch grade has a negative outlook, indicating that the credit evaluator is more likely to cut it than to raise it or keep it unchanged. The country’s "heavy public debt burden renders fiscal solvency highly vulnerable to adverse shocks," Fitch analysts led by London-based Chris Pryce said in a report today.
Commodity Options Traders Make Record Bearish Bets After U.S. ETF Advances. Commodity options traders have increased bearish bets to a record against an exchange-traded fund tracking energy and metals prices after a rally to a two- year high. The open interest for puts to sell the iShares S&P GSCI Commodity-Indexed Trust doubled this week to a record 18,797 outstanding contracts, lifting the ratio of puts per call to a three-year high of 3.28-to-1. “Investors see the potential for downside,” said Paul Justice, director of ETF research at Morningstar Inc. in Chicago. “You’re going to see less investor interest in commodities as the economy continues to recover and people feel more comfortable getting back into stocks.”
AIG(AIG) Repays Fed, Swaps Treasury Investment for Common Stock. American International Group Inc. repaid the last $21 billion it owed on a Federal Reserve credit line and swapped the Treasury Department’s preferred stake for common stock as the U.S. unwinds its investment in the company. Treasury now owns 1.66 billion shares of New York-based AIG, or about 92 percent of the company, and will sell the securities to repay an investment of about $49 billion through the end of last year, the regulator said in a statement today.
Gold Falls as Confidence in Europe Recovery Cuts Investor Demand for Haven. Gold fell to the lowest price in a week on speculation that European Union leaders will stabilize the region’s economy, eroding the appeal of the metal as a haven. The euro was headed for the biggest weekly gain against the dollar in almost two years. German Chancellor Angela Merkel said this week she would do “whatever is needed to support the euro.” European Central Bank President Jean-Claude Trichet said yesterday he may increase interest rates if needed to control inflation. “The marketplace believes the worst is over regarding the crisis of the euro zone,” said Daniel Briesemann, a Frankfurt- based analyst with Commerzbank AG. “Trichet regained some confidence in the ECB’s interest-rate policy, which led to a lower need to be trading gold as a safe haven.” Gold futures for February delivery fell $22.40, or 1.6 percent, to $1,364.60 an ounce at 10:24 a.m. on the Comex in New York.
India's Inflation Accelerates to 8.43%, Adding Pressure for Higher Rates. India’s inflation accelerated as food costs increased, adding pressure on the central bank to extend last year’s fastest round of monetary tightening in Asia. The benchmark wholesale-price index rose 8.43 percent in December from a year earlier after a 7.48 percent gain in November, according to a commerce ministry statement in New Delhi today.
JPMorgan(JPM) Net Rises 47% on Lower Credit Costs, Tops Estimates. JPMorgan Chase & Co., the second- biggest U.S. bank by assets, posted a record $4.83 billion profit, buoyed by $2 billion in reserves added back to earnings as credit quality and the U.S. economy improved. Fourth-quarter net income, which rose 47 percent, was $1.12 a share, compared with $3.28 billion, or 74 cents, in the same period of 2009, the New York-based company said today in a statement. The results compared with an average per-share estimate for adjusted earnings of $1 projected by 25 analysts surveyed by Bloomberg. The shares rose as much as 2.9 percent to a nine-month high.
Wall Street Journal:
Venture Industry Seeks More Flexibility In SEC Registration Rules. The National Venture Capital Association, which represents more than 400 venture firms, wants some wiggle room in complying with the venture capital exemption to registration requirements imposed on private equity and hedge funds by the Dodd-Frank overhaul of financial markets. In a comment letter submitted Thursday to the Securities and Exchange Commission, the NVCA asks that venture firms be allowed to use up to 15% of a fund’s committed capital to pursue activities outside the agency’s proposed definition of venture capital while still qualifying for the registration exemption.
Non-Core Euro-Zone Default Insurance Costs Fall Further. The cost of insuring debt issued by non-core euro-zone sovereigns using credit default swaps fell in early trading Friday, as sentiment towards financially weaker countries continued to improve following successful bond auctions by Portugal, Spain, and Italy this week. Portugal's five-year CDS showed the biggest fall, dropping 15 basis points to 470/490 basis points, according to one trader. Portuguese sovereign CDS were trading around 550 basis points at the beginning of the week. Spain's five-year sovereign CDS were 9 basis points lower at 297/304, Italy was seven basis points lower at 205/215, Ireland dropped four basis points to 610/630, and Belgium fell four basis points to 203/213. The SovX Western Europe index, which lets investors buy or sell credit protection on 15 sovereigns, is indicated at 196 basis points, from 200 basis points at close and 222 basis points on Jan. 10.
Giffords Continues to Progress, but Breathing Tube Remains. Critically wounded U.S. Rep. Gabrielle Giffords is "continuing to make all the right moves in all the right directions" as she attempts to recover from last weekend's shooting, her doctor said Friday.
CNBC:
China Has $1.5 Trillion 'Hidden' Debt: Lawmaker. Billions of dollars of debt racked up by local Chinese governments during their investment sprees are likely to sour as the projects they finance near completion, Yin Zhongqing, a prominent Chinese lawmaker, said this week. In an interview with Reuters Insider, Yin said local governments had incurred at least 10 trillion yuan ($1.5 trillion) of "hidden" debt, which they have concealed by creating thousands of investment vehicles that serve as borrowers. Yin said it is not yet clear which loans will sour because they do not have to be repaid until the projects are completed. "The large amount of debt that local governments took on since the end of 2008 to battle the impact of the global financial crisis will become a heavy burden for our development going forward," said Yin, who is a member of the finance and economic affairs committee in China's parliament. He highlighted the high risk of default in the low-level county governments, which Yin said have little financial resources. "Seventy percent of the loans from these investment and financing platforms in 2009 and 2010 were generated at the county level, where governments don't have much assets, and some cannot even afford to pay their staff," he said. "Debts accumulated from these platforms, even with government financial guarantees, simply cannot be paid back. In other words, when they borrowed the money, local governments did not plan to pay it back." Local Chinese governments are barred by law from borrowing directly. To pay for their ambitious growth plans for cities, they set up investment vehicles that take out bank loans backed by assets - typically land - or implicit government guarantees. They do not show up in official central government debt accounts. But Yin said these debts will ultimately have to be written off by Chinese banks and Beijing. "In 2009 and 2010, we encouraged them (local governments) to increase debt and run deficits to stimulate investment. Local governments' debt problems will come to light in 2011," Yin said. Yin warned against complacency, however, and said China's debt ratio was much higher than what official data suggests.
Intel's(INTC) Spending Plan Boosts Chip-Equipment Stocks. Novellus(NVLS), Applied Materials(AMAT) gain on chip giant's projection. Intel Corp.’s heftier-than-expected budget for building up its manufacturing muscle triggered a sharp rise in shares of chip-equipment makers on Friday. Intel (INTC) on Thursday announced that it expected capital spending for 2011 to total $9 billion, plus or minus $300 million, as it ramps up its manufacturing capabilities. That’s substantially higher than the roughly $5.2 billion the company spent last year. The announcement prompted a sharp jump in shares of major chip-equipment companies, led by Novellus Systems Inc. (NVLS), shares of which soared 10%, and Applied Materials Inc.(AMAT), which was up 5.4%. KLA-Tencor Corp. (KLAC)also gained 5.7%, while Lam Research Corp.(LRCX) added 3.1% and Form Factor (FORM)traded up more than 6%. “We have to admit we were blindsided by this large number, and expect equipment stocks to trade up,” Citigroup analyst Timothy Arcuri said in a note. Last month, Gartner reported that semiconductor-capital-equipment spending was on track to reach $38.4 billion in 2010, up 131% from the previous year. But Gartner also projected spending in 2011 to be “essentially flat,” totaling $38 billion, or down 1% from last year.
Among Hedge Funds, Worry Over New California Lobbyist Law. Starting this month, anyone who solicits money for private investment managers from the two largest public pension plans in California must register as a lobbyist and can no longer be paid incentive fees for successful commitments. The two pensions are the California Public Employees Retirement System, or Calpers, which manages more than $200 billion in retiree money, and the California State Teachers Retirement System, which manages more than $140 billion.
Institutional Investor:
OTC Risk Indicators Continue Easing. Growth in the notional amount of outstanding over-the-counter derivatives has been slowing, and the troublesome category of credit default swaps has been shrinking, for about the last three years, according to tracking surveys by the International Swaps and Derivatives Association. Now from derivatives infrastructure servicer TriOptima come further indications that notional exposures are coming down, reducing the aggregate risks in OTC markets that have been of particular concern to financial regulators around the world.
Washington Post:
GM(GM) and Chrysler, Owned by the Government, Lobby the Government. General Motors and Chrysler, the bailed-out automakers still partially owned by the government, have joined an industry coalition that this week lobbied against proposed federal rules on fuel efficiency. The attempt to push back against regulations pursued by environmental groups follows the automakers' efforts last year in which they opposed measures in an auto safety bill, which had been supported by the Obama administration. The notion of federally owned companies lobbying the government - at times on the opposite side of the architects of their bailout - has drawn repeated criticisms from environmental organizations, safety advocates and watchdog groups. They say the government should have used its influence to block the companies from interfering with legislation that could improve the public welfare, such as environmental controls and safety enhancements.
mocoNews.net:
MasterCard(MA) Hires Orange Exec to Run Its Mobile Business. With news that RIM(RIMM) might be joining the still-small ranks of handsets makers putting NFC chips into its devices, there is increasing belief that we could be reaching some kind of critical mass for mobile payments using contactless techology. Today MasterCard made a key hire from the mobile industry to ensure its role in it all. MasterCard has hired Mung-Ki Woo as its head of mobile, a newly-created role in the company. Woo is at France Telecom’s mobile operation Orange, where he has been the VP in charge of mobile payments technologies.
TechCrunch:
Amazon's(AMZN) Diapers.com and Soap.com Bring E-Commerce to Facebook Pages. E-commerce on Facebook has steadily been ramping up as both small retailers and big brands set up online store fronts on the social networks. With access to Facebook’s nearly 600 million members, it makes sense for retailers to bring e-commerce and the shopping experience to the social network. Today, Quidsi, which Amazon acquired for $540 million last Fall, is launching an shopping experience on Facebook for Soap.com and Diapers.com.
Wells Fargo(WFC) Settles Suit Over Pick-A-Payment Loans. 10 states reach agreements to modify mortgage loans; Carolinas not among them. Homeowners to get relief. Working to clean up problem mortgages inherited in its 2008 Wachovia purchase, Wells Fargo & Co. in recent weeks has reached a settlement in a class-action lawsuit and signed loan modification agreements with 10 states, with more likely to come. The architects of the agreements say they guarantee relief for consumers, including billions of dollars in potential principal reduction on risky mortgages sold by Wachovia and predecessor Golden West Financial. Wells, which didn't make the loans, pays more than $100 million to borrowers and states in return for more certainty about its legal costs.
Real Clear Markets:
Extreme Budget Illogic At the CBO. Hold onto your budget scorecards. With the House of Representatives likely to vote next week on H.R. 2, Repealing the Job-Killing Health Care Law Act, the Congressional Budget Office has announced that eliminating this 2010 Democratic entitlement program for 32 million uninsured people will cause the deficit to increase by $230 billion over the next decade. With such logic, we could cut the deficit by passing a new entitlement program. Indeed, we could solve the whole budget problem by passing new entitlement programs every day of the year.
Police Turn to Drones for Domestic Surveillance. Police agencies around the USA soon could have a new tool in their crime-fighting arsenal: unmanned aircraft inspired by the success of such drones on the battlefields of Iraq and Afghanistan. Local governments have been pressing the Federal Aviation Administration for wider use of unmanned aerial vehicles, or UAVs — a demand driven largely by returning veterans who observed the crafts' effectiveness in war, according to experts at New Mexico State University and Auburn University. Police could use the smaller planes to find lost children, hunt illegal marijuana crops and ease traffic jams in evacuations of cities before hurricanes or other natural disasters.
Reuters:
BP(BP) in Share Swap with Russia's Rosneft - Sky News. Oil major BP Plc, recovering from its Gulf of Mexico oil spill, is to announce an exchange of shares with Russian state-controlled oil company Rosneft on Friday, Sky television news said. BP invited reporters to a press conference, to be addressed by Chief Executive Bob Dudley and scheduled for 2100 GMT on Friday, at its headquarters in London a few hours before the event. Sky news said BP would announce the tie-up with Rosneft at the press conference.
U.S. to End "Virtual" Fence On Mexican Border. President Barack Obama's administration plans to pull the plug on the troubled "virtual fence" project that was meant to better guard stretches of the U.S. border with Mexico, a senior lawmaker said on Friday. The project, being run by Boeing Co, has cost about $1 billion so far and was meant to pull together video cameras, radar, sensors and other technologies to detect smugglers trying to cross the porous border. "The SBInet program has been a grave and expensive disappointment since its inception," Representative Bennie Thompson, the senior Democrat on the House of Representatives Homeland Security Committee, said in a statement which noted that the Department of Homeland Security was ending the project.
Spain's government may recapitalize savings banks with at least 30 billion euros, citing people familiar with the situation. In an "extreme" case the amount could rise to 80 billion euros.
Kronenzeitung:
European Central Bank Governing Council member Ewald Nowotny doesn't see a breakup of the euro area, citing an interview. "There is no breakup of the euro zone, but a difficult adjustment phase for some countries," Nowotny said.
American Stocks Become Sweet Spot as Emerging Markets Tighten. Price pressures are pushing emerging-market central banks from Russia to China to raise interest rates this year, tarnishing the appeal of their stocks and increasing investor interest in the U.S. Tighter monetary policy means officials in developing nations will break further with Federal Reserve Chairman Ben S. Bernanke. He has pledged to keep rates near zero for an extended period and continue stimulus plans to power a recovery now gathering momentum. The shift is causing Goldman Sachs Group Inc. -- which coined the term BRIC to highlight the power of Brazil, Russia, India and China -- to dilute its support for stocks of emerging countries, saying it no longer expects them to outperform the Standard & Poor’s 500 Index. JPMorgan Chase & Co. also has reversed a bias toward these equities. Developing “markets are on the frontline of the inflation fight,” said Eric Fine, a portfolio manager in New York who helps Van Eck Associates Corp. oversee $3 billion in emerging- market assets. “This is the year when the trade-off between inflation and growth becomes even harder.” The combination of accelerating growth in economies such as the U.S. with little pressure for tighter policy may be creating a “sweet spot” for their asset markets, Dominic Wilson, head of Goldman Sachs global-markets research in New York, wrote in a Jan. 5 report to clients. The firm’s strategists estimate the S&P 500 will end 2011 at 1,500, up from 1,283.76 at 4 p.m. in New York yesterday. They aren’t alone in their confidence.
Euro Drops After IMF Official Says Europe 'Skepticism' Persists. The euro fell for the first time in five days versus the dollar after an International Monetary Fund official said Europe has yet to allay investor “skepticism” about the sustainability of the region’s debt. The currency dropped versus 15 of its 16 major counterparts as the IMF’s Deputy Managing Director Naoyuki Shinohara said European nations need to “tackle structural issues” such as boosting growth. The yen rose for the first time in four days against the euro on speculation Japan’s exporters took advantage of the biggest drop in six weeks to buy their currency. “The steps that the European Union officials can announce in terms of increasing the fund’s size that they have to help the peripheral countries can still take a few weeks to happen,” said Mansoor Mohi-uddin, Singapore-based head of global currency strategy at UBS AG, in a Bloomberg Television interview. “I’d rather still be a seller of the euro on the rallies.”
EU Bailout Rates May Need to Drop for Aid to Work: Euro Credit. Europe should reduce the interest rate on emergency aid to Ireland by 50 percent when revamping the financial backstop meant to stem the euro-area debt crisis, say economists, including David Mackie at JPMorgan Chase & Co. Ireland faces an average charge of about 5.8 percent for an 85 billion-euro ($113 billion) rescue package offered in November by a group led by the European Union. The cost threatens to increase the debt load for an economy that the International Monetary Fund projects will grow less than 1 percent this year and below 2 percent in 2012. “Europe should be able to cut the borrowing rates by around half, or 250 basis points,” Mackie, JPMorgan’s head of western European economic research, said by telephone yesterday from London. “If you want to exit the crisis without government debt restructuring, the current rates will not do it. The borrowing rate is critical given that economic growth will be moderate for some time due to the magnitude of the fiscal tightening that is needed.”
Spain's U.K. Ambassador Tells Sky News Markets Convinced by Measures. Spain’s ambassador to the U.K., Carles Casajuana, told Sky News in an interview that international bond markets are “quite convinced” that measures being taken by the Spanish government to reduce the country’s deficit are “going to take effect.” Responding to questions on whether the European Union should evolve into a single European state, Casajuana said with the Lisbon treaty and political union already in place, “we are moving towards that.” While the U.K. isn’t part of the euro area and thus isn’t expected to participate in bailouts of euro countries in difficulties, “it’s in the U.K.’s interest that the euro is stable,” Casajuana said, and “we would like to see solidarity amongst member states.” “It would be much better for everybody if the U.K. was part of the eurozone,” he said.
Brazil to Offer $1 Billion of Reverse Currency Swaps to Stem Real Advance. Brazil’s central bank will offer tomorrow reverse currency swaps, the equivalent to buying dollars in the futures market, as President Dilma Rousseff’s administration steps up efforts to curb a currency rally. The bank will offer 20,000 contracts worth $1 billion between 9 a.m. and 9:30 a.m. New York time, according to a statement on its website. Results of the auction will be published at 9:45 a.m. The real, which has surged 38 percent against the U.S. dollar in the past two years, gained 0.1 percent today to 1.6726 per U.S. dollar.
Texas Short Seller Fights China Fraud in $20 Billion U.S. Shares. On an April afternoon in 2009, in his home office near Austin, Texas, John Bird was hunched over his computer trying to figure out if a Chinese company some 6,500 miles away was anything close to what it claimed to be. A silver-haired short seller, Bird, 62, projects an air of relaxed amusement. His philosophy is reflected in a sticker from “The Big Lebowski” over his door: “The Dude Abides...” Some things he takes very seriously, including what he calls the “sanctity of math.” On that afternoon it was being defiled in his eyes by the claims of China Sky One Medical Inc., a maker of slimming patches and hemorrhoid ointments. Sky One, according to its annual report, was selling out its inventory and resupplying almost every seven days. That, Bird says he knew from experience in business, was impossible. Sky One, Bird would find, wasn’t the only stock recently arrived from China to defy financial speed limits, Bloomberg Businessweek reports in its Jan. 17 issue. It’s one of about 370 Chinese companies -- with a combined market value of at least $20 billion -- that have obtained U.S. listings since 2004 without the rigors of initial public offerings. Some of them have reported numbers making Bird suspect what he calls “flat-ass” fraud. The Securities and Exchange Commission hasn’t until recently paid much public attention to what Bird describes as a pattern, at a time when investors are still recovering from the Bernie Madoff Ponzi scheme.
Permal Asset Bets on U.S. Stock, Macro Hedge Funds on Asia Inflation Risks. Permal Asset Management Inc., a Legg Mason Inc. unit that invests clients’ money in hedge funds, plans to increase allocations to U.S. equity and global macro funds as emerging countries struggle to cap a rise in inflation. “In emerging markets, the macro economic conditions are now negative,” Isaac Souede, New York-based chairman and chief executive officer of Permal, said in an interview. “The American equity market should do better than the emerging market equities until these countries manage to engineer soft landings.” The Standard & Poor’s 500-stock index of U.S. stocks rose 13 percent in 2010, compared with declines in emerging markets such as China and Brazil. Capital inflows, a driving force of the recovery in emerging countries, now pose risks to global growth as they can trigger abrupt currency fluctuations that may do “lasting damage” to some nations, the World Bank said yesterday. The Washington-based bank expressed concerns about the possibility of asset bubbles in the East Asia and Pacific regions, whose largest economies include China, Indonesia, Thailand and Malaysia. Permal will invest more in macro funds to protect its portfolios from price fluctuations in emerging markets, amid concerns central banks in Asia will raise rates to curb inflation, Souede, 59, said in Singapore.
'Desperate Housewives' Hold Out for Pay Raise at ABC. Walt Disney Co.’s ABC, running last this season in the viewers marketers target, is unable to renew its most-popular drama “Desperate Housewives” because of pay demands by three stars, people familiar with the situation said. Felicity Huffman, Marcia Cross and Eva Longoria are seeking a raise, said three people with knowledge of the demands. Teri Hatcher has signed a new contract, said one of the people, who sought anonymity because the talks with ABC aren’t public. In August, TVGuide.com put their pay at $400,000 each per episode.
Galle Global Hedge Fund Closing After a Year as Withdrawals Shrink Assets. Galle Global Macro Partners LLC, the hedge fund founded by Sri “Wije” Wijegoonaratna, a former Fortress Investment Group LLC executive, is shutting down about a year after it started. The firm, based in New York, plans to return most money to investors next month, Wijegoonaratna said in a letter to clients today.
Gates Says China Military-Civilian Disconnect Cause for Concern. U.S. Secretary of Defense Robert Gates said that the apparent lack of communication between China’s civilian and military leadership is “something of a worry” for the United States. Gates, speaking in Japan following a three-day trip to China, said Chinese President Hu Jintao and the civilian leadership seemed to be unaware that the military was carrying out a test flight on Jan. 11 of a new jet fighter that may have stealth capabilities. “This is an area where, over the last several years, we have seen some signs of, I guess I would call it a disconnect, between the military and the civilian leadership,” Gates said, adding that while such lapses occasionally occur in the U.S. too, “this is something of a worry.”
China Loose Policy to Shape Global Capital Flows, Fortress's Levinson Says. A failure by Chinese officials to anchor inflation expectations by tightening monetary policy may hasten a reversal of capital flows out of emerging markets into developed economies, said Adam Levinson, co-chief investment officer of global macro funds at Fortress Investment Group LLC. China’s policy stance is too loose and officials should be more aggressive in curbing inflation now to avoid more “draconian” measures later, Levinson said in Singapore.
China Failing to Enforce Sanctions on Iran's Nuclear Program, Expert Says. China remains “a major gap” in enforcing global sanctions on Iran, with lax oversight enabling front companies to purchase sensitive materials that can advance Iran’s pursuit of a nuclear weapons capability, a leading expert on Iran’s nuclear program said. “China does not implement and enforce its trade controls or its sanctions laws adequately,” David Albright, a nuclear physicist who inspected Iran’s nuclear facilities for the United Nations’ atomic energy agency in the 1990s, said yesterday at the Woodrow Wilson International Center for Scholars, a Washington research institute. “Over and over, Iran goes there to buy things,” including high-strength maraging steel, specialty vacuum pumps, Kevlar and carbon fiber used for machinery that produces enriched uranium, said Albright, president of the Institute for Science and International Security in Washington. The comments come just ahead of Chinese President Hu Jintao’s state visit to Washington next week.
Wall Street Journal:
Giffords's Condition Still Improving. Rep. Gabrielle Giffords, recovering from a gunshot wound to the head, is opening both eyes, moving her arms and legs, and undergoing intense physical therapy, her doctors said Thursday. Doctors at the University Medical Center in Tucson said the congresswoman was rubbing her eyes and yawning, and that her eyes could also track people's movements—a sign that she could see.
Economists More Upbeat About Pace of Recovery. Economists surveyed by The Wall Street Journal are increasingly optimistic about the pace of the recovery, predicting the U.S. will grow at better than a 3.2% annual rate in each quarter this year. "The U.S. economy appears to have successfully navigated the adjustment from a recovery driven primarily from economic stimulus and inventory rebuilding to one driven by private domestic demand and rising exports," said economists at Wells Fargo & Co. "Three percent growth looks pretty good, particularly with housing stuck in low gear." Economists have steadily grown more upbeat about growth in recent months and boosted their estimates for the fourth quarter of 2010 in this survey. On average, respondents now estimate the U.S. grew 3.3% at a seasonally adjusted annual rate in the fourth quarter—up from an estimate last month of 2.6% growth. The economy grew 2.6% in the third quarter.
SEC Probes Banks, Buyout Shops Over Dealings With Sovereign Funds. The Securities and Exchange Commission is investigating whether banks and private-equity firms violated bribery laws in their dealings with sovereign-wealth funds, according to people familiar with the matter. The SEC has sent letters of inquiry to Citigroup Inc.(C) as well as private-equity firm Blackstone Group LP(BX), the people said. The letters are said to have been sent to as many as 10 firms in the past week, one person said. Though the letters didn't contain specific allegations of bribery, they requested that firms retain documents and asked about the firms' dealings with sovereign-wealth funds, the people said. The wave of investments by sovereign-wealth funds in U.S. financial companies over the past several years included stakes in Citigroup, Merrill Lynch & Co. before its acquisition by Bank of America Corp., and Morgan Stanley. For example, China Investment Corp., which manages more than $300 billion, invested in both Morgan Stanley and Blackstone.
Others Got Early 'Poke' on Facebook Deals. Of all the things Goldman Sachs Group Inc. can crow about in the unusual deal to help wealthy clients invest in Facebook Inc., it wasn't the first securities firm to open a back door into the closely held social-networking site. In September, small Atlanta brokerage firm J.P. Turner & Co. started pitching a $25 million fund that was set up to buy and hold Facebook shares until the Palo Alto, Calif., company goes public or is acquired. Felix Investments LLC in late 2009 launched two funds to snap up Facebook shares. The names of the deals: Facie Libre I and Facie Libre II, a rough Latin morphing of "face" and "book." The deals and their creators are now in the spotlight as regulators scrutinize how Wall Street is scurrying to satisfy demand for shares in closely held Internet companies such as Facebook, Twitter Inc. and LinkedIn Corp. The Securities and Exchange Commission wants to know if the offerings and a patchwork of secondary exchanges are helping companies evade the agency's 500-shareholder limit for private firms. SEC officials also are worried about the valuation of shares that change hands in such deals. "There is a level of murkiness," said Jay Ritter, a finance professor at the University of Florida and an authority on initial public offerings.
New Hit to Strapped Sates. Borrowing Costs Up as Bond Flops; Refinancing Crunch Nears. With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil. The market has fallen every day this week, and investors have been net sellers of their holdings in municipal-bond mutual funds for nine straight weeks, according to fund tracker Lipper FMI.
Pack Mentality Grips Hedge Funds. Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices. The pack behavior undermines the image of hedge-fund chiefs as savvy money managers who sniff out investment opportunities that others don't see—thereby justifying the hefty fees they charge clients. It also suggests that hedge funds are having a harder time coming up with money-making ideas in rocky markets. During the bull market, hedge funds regularly generated strong returns as broad stock-market indexes marched higher. But since the start of 2009, the average performance of hedge funds has trailed the return of the Standard & Poor's 500 Index in six out of eight quarters, according to Hedge Fund Research Inc.
EPA Blasted as It Revokes Mine's Permit. The Environmental Protection Agency, in an unusual move, revoked a key permit for one of the largest proposed mountaintop-removal coal-mining projects in Appalachia, drawing cheers from environmentalists and protests from business groups worried their projects could be next. The decision to revoke the permit for Arch Coal Inc.'s(ACI) Spruce Mine No. 1 in West Virginia's rural Logan County marks the first time the EPA has withdrawn a water permit for a mining project that had previously been issued. It's also only the second time in the 39-year history of the federal Clean Water Act that the agency has canceled a water permit for a project of any kind after it was issued, according to the agency.
Real Pain From Illinois Tax Hike Looms in 2012. The federal government might be giving taxpayers a break with a temporary 2-percentage-point decrease in Social Security payroll taxes. But thanks to the biggest state budget shortfall in the nation, residents of Illinois will also be hit with a 2-percentage-point increase in state income taxes, as the Wall Street Journal reported. Hiking the state’s income tax from 3% to 5% (that’s a flat rate for all individuals) amounts to a stunning 67% increase in the income tax rate.
Banks Entering 'Golden Age' With 20% Profit Growth: Bove. The banking industry is entering another "golden age," with so much cash on hand that earnings will grow 20 percent annually over the next few years, well-known banking analyst Dick Bove told CNBC.
Intel(INTC) Results Surpass Street Forecasts; Shares Edge Up. Intel revenue and margin forecasts beat expectations on healthy technology spending, defying worries about the chipmaker's minor role in the booming smartphone and tablet market. Shares in the world's largest chipmaker gained 2.7 percent after its forecast for first-quarter revenue and gross margin surpassed expectations, driven by hopes for strong sales of its cutting-edge Sandy Bridge microprocessors.
Coinstar(CSTR) Shares Whacked on Disappointing Outlook. Shares of Coinstar were walloped in after-hours trading after the company released disappointing preliminary earnings. Shares fell more than 30 percent in late trading Thursday. The Thursday close price was $56.95.
Groupon IPO Said to Value the Company at $15 Billion. Groupon, the social buying site that spurned a $6 billion offer from Google, is pushing ahead with plans for its initial public offering, a debut that could value the company at $15 billion or more.
Optimistic, Biden Seeks 'Free' Iraq. Vice President Biden said Thursday that a democratic and prosperous Iraq is "the single most significant strategic thing that can happen to the United States" in the Middle East. Biden, speaking at the start of a meeting with Iraqi President Jalal Talabani, said it is the United States' "one overwhelming desire." "The single best thing that can happen to the United States, literally, is for you to be a free, prosperous democracy in the middle of this part of the world," said Biden. "It's the single most significant strategic thing that can happen to the United States in this region."
Rasmussen Reports:
26% Say U.S. Heading in Right Direction. Twenty-six percent (26%) of Likely U.S. Voters say the country is heading in the right direction, according to a new Rasmussen Reports national telephone survey taken the week ending Sunday, January 9. That's down a point from last week and back to levels found in early December. Confidence that the country is moving in the right direction is down to 48% among Democrats from 59% the week before Election Day. Among all voters, confidence in the nation's current course hovered around the 30% mark for roughly a year but began falling at the end of November. Sixty-eight percent (68%) of voters say the country now is heading down the wrong track, up three points from last week.
Just 29% Believe Health Care Repeal Will Increase Deficit. Some supporters of the national health care law say its repeal will drive up the federal budget deficit, but most voters believe repeal will either reduce or have no impact on government spending and the deficit. A new Rasmussen Reports national telephone survey finds that 39% believe repeal will reduce government spending, and another 21% say repeal will have no impact. Just 28% of Likely U.S. Voters believe repeal of the health care law will increase federal spending.
Reuters:
Al Qaeda Group Said to Eye Thermoses to Attack U.S. An alert by U.S. authorities last month about carrying insulated drink containers on planes stemmed from intelligence that al Qaeda in the Arabian Peninsula operatives may try to hide explosives in them, a senior U.S. official said on Thursday.
Financial Times:
Goldman(GS) Reveals Fresh Crisis Losses. Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.
Telegraph:
Europe Fears Motives of Chinese Super-Creditor. The EU authorities fear that China's purpose in buying eurozone debt may be double-edged, intended to push up the euro exchange rate against the yuan and gain advantage for exports. Herman Van Rompuy, Europe's president, said during a visit to Downing Street that the Chinese may have "political" thoughts in the back of their minds for coming to Europe's help, and gave a strong hint that they are also engaging in currency manipulation. "When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate," he said. China was the secret buyer in a private placement of €1.1bn of Portuguese debt last week, according to the Wall Street Journal. Finance minister Fernando Teixeira dos Santos said China "may well have been" a key buyer in this week's debt auction. China was not the only force at work. Traders say the European Central Bank (ECB) acted aggressively behind the scenes, calling some 20 dealers to buy Portuguese debt in the secondary market. This created what amounted to a "short-squeeze" in Portuguese bonds just before auction, causing spreads to tighten dramatically and inflicting damage on market makers acting in good faith. City sources say this has caused some bitterness. A WikiLeaks cable from the US embassy in Beijing last January cites the EU's mission chief, Alexander McLachlan, saying Spain had tried to curry favour with Chinese leaders, "seeking advantage at other EU states' expense". He said China was fully aware of Madrid's game but was exploiting intra-EU divisions to gain leverage. China's second goal is to secure market economy status from the EU. This would make it much harder for the EU to impose anti-dumping measures against Chinese imports. As it happens, the EU has just lifted its punitive tariff on Chinese shoes. Mr Grant said Beijing will not risk much cash to woo Europe. "They are very hard-nosed. They may splash some money around for goodwill but they are not going to waste the hundreds of billions that may be needed. Nothing short of meaningful action by Europe's leaders can genuinely stabilise the eurozone," he said. "It is debatable whether China would actually be willing to become buyer of last resort of the debt of a country close to default," said Julian Jessop from Capital Economics. "Chinese officials are acutely aware of past losses and will not want to be seen to risk their peoples' capital on a lost cause. Their actions frequently fall short of expectations raised by their words."
EU President Seeks 'More Economic Convergence'. Britain must submit to “surveillance” of its budget to promote a co-ordinated European Union economic policy, the EU president has said. Herman van Rompuy, the president of the European Council, said there must be “more convergence” between the economies of all EU members and not just those using the euro. Even as Mr van Rompuy spoke in London, David Cameron was insisting that Britain’s position outside the euro meant it was not obliged to take part in any “harmonisation” of economic policies.
Nikkan Kogyo:
Kubota Corp., an Osaka-based farm-equipment maker, will spend about $60 million to build a tractor plant in the U.S. state of Georgia by 2012. The factory will produce about 20,000 tractors a year.
China Securities Journal:
China won't rule out introducing new price control measures if inflationary pressures in the first quarter are too great, citing Zhou Wangjun, deputy director of the pricing department a the National Development and Reform Commission. Inflation remains "relatively large" so far in the first quarter, compared with last year, Zhou said.
Evening Recommendations Citigroup:
Rated (NM) Buy, target $6.50.
Rated (KNX) Buy, target $23.
Rated (WERN) Buy, target $27.
Rated (ABFS) Sell, target $24.
Rated (CSX) Buy, target $80.
Rated (NSC) Buy, target $76.
Rated (UNP) Buy, target $112.
Reiterated Buy on (TGT), target $72.
Night Trading
Asian equity indices are -.75% to +.50% on average.
Asia Ex-Japan Investment Grade CDS Index 108.50 +1.5 basis points.
Asia Pacific Sovereign CDS Index 109.50 +1.25 basis points.
The Consumer Price Index for December is estimated to rise +.4% versus a +.1% gain in November.
Advance Retail Sales for December are estimated to rise +.8% versus a +.8% gain in November.
Retail Sales Ex Auto & Gas for December are estimated to rise +.3% versus a +.8% gain in November.
9:15 am EST
Industrial Production for December is estimated to rise +.5% versus a +.4% gain in November.
Capacity Utilization for December is estimated to rise to 75.6% versus 75.2% in November.
9:55 am EST
Preliminary Univ. of Mich. Consumer Confidence for January is estimated to rise to 75.5 versus 74.5 in December.
10:00 am EST
Business Inventories for November are estimated to rise +.7% versus a +.7% gain in October.
Upcoming Splits
(PATR) 3-for-1
(ADVS) 2-for-1
Other Potential Market Movers
The Fed's Lacker speaking and the Fed's Rosengren speaking could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and real estate shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.
North American Investment Grade CDS Index 84.50 +1.19%
European Financial Sector CDS Index 163.16 bps +1.46%
Western Europe Sovereign Debt CDS Index 199.08 bps -5.54%
Emerging Market CDS Index 201.38 +.20%
2-Year Swap Spread 23.0 unch.
TED Spread 16.0 unch.
Economic Gauges:
3-Month T-Bill Yield .14% unch.
Yield Curve 273.0 -3 bps
China Import Iron Ore Spot $176.50/Metric Tonne +.63%
Citi US Economic Surprise Index +40.20 +3.8 points
10-Year TIPS Spread 2.35% -4 bps
Overseas Futures:
Nikkei Futures: Indicating +11 open in Japan
DAX Futures: Indicating -20 open in Germany
Portfolio:
Slightly Higher: On gains in my Medical, Ag and Retail long positions
Disclosed Trades: None
Market Exposure: 100% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower, despite declining eurozone debt fears and gains in overseas equities. On the positive side, Road & Rail, Education, Hospital, Ag, HMO and I-Banking shares are especially strong, rising more than .5%. The Transports are higher on the day and (IYR) is also outperforming. Lumber is rising +1.02%. The 10-year yield is falling -6 bps to 3.3%. The Citi US Economic Surprise Index is now at the highest level since April 12th of last year. The Italy sovereign cds is falling -6.56% to 213.06 bps, the Spain sovereign cds is falling -7.75% to 306.65 bps, the Portugal sovereign cds is declining -2.9% to 498.21 bps and the Belgium sovereign cds is falling -9.54% to 208.55 bps. Moreover, the European Investment Grade CDS Index is dropping -2.46% to 87.46 bps, which is also a huge positive. The AAII % Bulls fell to 52.34 this week, while the % Bears rose to 23.44, which is a mild positive. On the negative side, Gaming, Drug, Construction, Bank, Computer, Steel and Alt Energy shares are under pressure, falling more than .75%. (XLF) has underperformed throughout the day. The UBS-Bloomberg Ag Spot Index is hitting another record high today, rising +.52%. The China sovereign cds is rising +3.63% to 77.27 bps and the US sovereign cds is climbing +4.81% to 43.44 bps. The Euro Financial Sector CDS Index is still trending higher. The Western Europe Sovereign CDS Index is still just modestly below its record high set on Monday. Today's comments from ratings firms on US sovereign debt, as munis suffer another sell-off, are likely weighing on equities. The broad market continues to trade well overall. Given the decline in the eurozone cds and stabilization in the euro currency, today's pullback looks like healthy profit-taking to me. I expect US stocks to trade modestly higher into the close from current levels on declining eurozone debt angst, short-covering and a bounce in the euro.
