Bernanke's Next Round of Asset Purchases Risks Jimmy Carter-Like Inflation. For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory. Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms.
Pimco's El-Erian Says Fed Easing to Spur Faster Inflation. Federal Reserve Treasury purchases will lead to faster global inflation while failing to revive U.S. economic growth, said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co. Quantitative easing, the strategy of buying bonds to keep borrowing costs low that is under consideration at the central bank, won’t be enough to curb U.S. unemployment, El-Erian said at a reception in New York sponsored by the Financial Women’s Association. The Fed will buy more bonds because it is terrified of deflation, an extended decline in consumer prices, he said. “QE on its own means we’ll have the same issues in six to nine months time with the rest of the world being inflated,” El-Erian said. “It will have some benefits but not as much as we’d like. It will have costs and unintended consequences.” Fresh purchases will drive up commodity prices as much of the money injected into the U.S. economy leaks out to other currencies, El-Erian said. He also has said governments and central banks haven’t detected the “ongoing paradigm shift” in their economies that will require remedies beyond stimulus programs. Among the fault lines he spots are strained balanced sheets, persistently high unemployment and a misunderstanding of financial markets. “We have a structural unemployment issue,” El-Erian said in New York. “It is worrisome because it erodes the skillset of a society. The numbers are terrifying. The longer you are unemployed, the more difficult it is to get a job.”
Fed-Induced Junk Rally Makes Riskiest Debt Most Expensive: Credit Markets. The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued. The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.2 percentage points, or 3.3 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average. Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels. Goldman Sachs Group Inc. advised its clients to avoid adding CCC rated debt in a report published Oct. 22 because of slower economic growth.
Citigroup's(C) Pandit Says Basel Accords Could Make Credit Crunches Worse.Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse. While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said. “By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S. Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout.
Buffett-Backed BYD's Profit Plunges More Than 99% as Sales Drop. BYD Co., the Chinese carmaker backed by Warren Buffett, fell the most in more than five months in Hong Kong trading after third-quarter profit dropped 99 percent amid faltering sales. The shares declined as much as 7.7 percent to HK$52.50, the biggest drop since May 17, and traded at HK$53.55 as of 10:18 a.m. after BYD posted net income of 11.34 million yuan ($1.7 million) for the three months ended Sept. 30. It was the fourth- biggest decline among 982 stocks in the MSCI Asia Pacific Index. “Profit was pretty disappointing and well below our estimations,” said Galant Ng, an analyst at Taifook Securities Group Co. in Hong Kong. BYD suffered from declining car sales and higher costs, Ng said in an interview today. The company, the fastest growing automaker in China last year, cut its 2010 vehicle sales target 25 percent in August as it struggled to maintain momentum amid higher taxes on small cars. Vehicle sales at BYD, 10 percent owned by Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., slumped 25 percent in September to 33,085 vehicles. BYD’s deliveries dropped 19 percent in August. “Most local brands suffered from the government policy tax revision,” Ricon Xia, a Hong Kong-based senior analyst at Mitsubishi UFJ Asset Management, said before the earnings. BYD’s fourth quarter also “won’t be very strong,” he said.
JPMorgan(JPM), Bank of America(BAC) Subpoenaed Over Foreclosures in Texas by Abbott. Texas Attorney General Greg Abbott sent subpoenas to JPMorgan Chase & Co., Bank of America Corp. and seven other banks or loan servicers seeking information about foreclosure practices, a spokesman said. “The state is subpoenaing information and documents,” Jerry Strickland, the spokesman, said in an interview. He didn’t elaborate. The state also subpoenaed Ally Financial Inc., CitiMortgage Inc. and Wells Fargo & Co.
Ford's(F) Drive to Ditch 'Junk'. For the past 12 months, Ford Motor Co. has been on a campaign to lift its credit rating out of "junk" territory and get back to investment grade. Judging by the way bond investors view the company, it's just about there.
Pimco's El-Erian: Expects Greece Will Default In 3 Years. Mohamed El-Erian, chief executive and co-chief investment officer of bond giant Pimco, said he bets Greece will default on its debt in three years. Greece is likely to default, and it will be to the country's and the European Union's benefits, said El-Erian, speaking at the Buttonwood Gathering in New York. Without an orderly restructuring, he said, Greece's economy could spiral into a lost decade of high unemployment and low growth as seen in Asia and Latin America in the past. That is because the fiscal plan imposed by the International Monetary Fund and EU for Greece's bailout to adjust its debt to GDP ratio will require enormous growth sacrifices, and yet see the country's debt rise further into the future. "Europe has shown its ability to make changes that people thought were not very likely," said El-Erian. He said it is in the region's interest for Greece to default "because the alternative doesn't promise growth and employment generation."
Buffett Flags a Successor. Fund Manager Named Leading Candidate as Next Investment Chief at Berkshire.
Big Insurance, Big Medicine. ObamaCare is already driving a wave of health-care consolidation - and higher costs. ObamaCare's once and future harms have been well chronicled, but the major effects so far are less obvious and arguably more important: A wave of consolidation is washing over the health markets, and the result is going to be higher costs. The turn toward consolidation among insurance companies is not new, and neither is it among doctors, hospitals and other providers. Yet the health bill has accelerated these trends, as all sides race to anticipate and manage political risk and regulatory uncertainty. This dynamic is leading to much larger hospital systems and physician groups, and fewer insurers dominated by a handful of national conglomerates. ObamaCare was sold using the language of choice and competition, but it is actually reducing both.
CNBC:
Foreclosure Sales Were 'Accurate', Moratorium Stands: BofA. Bank of America issued a statement Monday crying out against so-called "factual errors" regarding its foreclosure affidavit review process, as an industry-wide foreclosure scandalcontinues to plague several of the nation's largest lenders.
India Warned Over Capital Inflow Risks. Economists are warning that New Delhi may be underestimating the risks of excessive capital inflows, as huge foreign portfolio investment into India has helped push both the stock market and the rupee to pre-crisis levels.
Berkshire Hathaway(BRK/A) Tells SEC: Accounting Rules Don't Apply To Us, And We Don't Have to Take Writedowns. Is Berkshire Hathaway asking the SEC for special treatment? The regulator questioned Buffett's firm in May over a glaring absence in write-downs concerning losses worth $1.86 billion on Kraft and US Bancorp, Reuters reported today. Berkshire denies any accounting malpractice despite the fact that the losses endured for at least 12 months and were clearly not temporary under SEC guidelines.
NY Times:
Connecticut Fund Manager Sued for Fraud Over Fees. A Connecticut hedge fund manager was accused by state and federal regulators on Monday of inflating the value of its holdings, which allowed it to fraudulently collect millions of dollars of undeserved fees.
New York Daily News:
Are Bert and Ernie Gay? Official 'Sesame Street' Twitter Account Sparks Rumors With Ambiguous Post. It was the tweet heard round "Sesame Street." "Ever notice how similar my hair is to Mr. T's?" lovable sweater-clad Bert wrote on the official "Sesame Street" Twitter account in June. "The only difference is mine is a little more 'mo,' a little less 'hawk.'" Taking the "mo" to mean "homosexual," the tweet had gay bloggers, activists, and parents buzzing that the show was letting them in on a big secret with an under-the-radar wink. The Los Angeles Times took the post as the latest evidence in a history of clues the show has dropped over the years that Bert and Ernie are more than just friends, reviving the (nearly) age-old question: are Bert and Ernie gay?
Mess in Rhode Island for Obama. President Barack Obama’s decision not to endorse the Democratic gubernatorial candidate here turned a routine campaign stop Monday into a political headache, complete with the candidate telling Obama to "shove it."
Reuters:
Comcast(CMCSA) Launches New Web Video Service, Stepping Up Fight. Comcast Corp. (CMCSA), the largest U.S. cable operator, on Monday rolled out a service that allows its subscribers to watch an array of television shows and movies on a personal computer or laptop.
Euro Close to Overvalued; Growth Risk- IMF Official. The euro is close to being overvalued and further gains could impede growth rates in the single currency area, Bas Bakker, an economist at the International Monetary Fund, told a news conference on Monday. "(The) euro is at a level which we call close to overvaluation. A stronger euro means slower growth (in the euro zone). Should there be further appreciation, the effect will be larger but it is difficult to comment on day-to-day exchange-rate changes," Bakker said.
Chavez Nationalizes Venezuela Arm of U.S. Bottle Co. Venezuelan President Hugo Chavez ordered the takeover of the local unit of U.S. glass bottle firm Owens-Illinois (OI) on Monday, part of a drive to nationalize large swathes of the food processing and distribution business. Since an election last month that left the socialist leader's party with a reduced majority in parliament, he has nationalized a large fertilizer factory, a motor lubricants firm and a huge swathe of land belonging to a wealthy British family. "Expropriate it ... a company of North American capital that has been here for years exploiting the workers, destroying the environment," he said of Owens-Illinois on a late night TV appearance a few hours after returning from a tour of friendly nations such as Russia and Iran.
Fed's Hoenig Says More Easing Could Be Dangerous. A U.S. Federal Reserve official who has persistently dissented against the central bank's easy money policies said on Monday that further monetary easing would be a hazardous bet. "There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in a speech, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero. Hoenig said further asset buying -- which other officials have said will likely resume in November -- would be "a very dangerous gamble."
TI(TXN) Sees PC, TV Weakness for Few Quarters.Texas Instruments Inc (TXN) warned its fourth-quarter revenue will be hurt by slowing demand for chips for computers and televisions, sending its shares lower even though its results beat Wall Street forecasts. The maker of chips used in products from cars to cellphones said strong demand from industrial customers was offset by weak chip sales for consumer products.
Digital River Q3 Tops Wall Street. E-commerce services provider Digital River Inc (DRIV) reported better-than-expected quarterly results, helped by extension of services with Microsoft (MSFT) and new contract from video-game publisher Electronic Arts (ERTS), and forecast fourth-quarter revenue above market estimates.
German Boom Creates ECB Policy Nightmare as South Lags. Blistering growth in Germany is aggravating the growing gap between the eurozone's North and South and may force the European Central Bank to tighten monetary policy long before the high-debt states are ready, Standard & Poor's has warned.
Barack Obama's Poor Economic Policies Are Playing into China's Hands. No one here wants to turn America back into the Wild West but the current paralysis of US governance is the single biggest mistake America is making and the single biggest competitive advantage being enjoyed by China. Beggar-thy-neighbour trade wars based on currency devaluationis only a very short-term tonic for America and is no substitute for longer-term sustainable job creation. It is jobs that will create the wealth to allow households to pay off their mortgages and afford the fees needed to pay for higher education that will equip the next generation to compete. Quantitative easing (a way of printing money) will support the price of financial assets in the short term in the hope of inspiring confidence and a positive wealth effect. But a return to the credit-induced consumerism and illusions of wealth that characterised the last boom are no answers to America's current economic problems. And that goes for the UK too.
21st Century Business Herald:
The Chinese city of Chongqing may impose a property tax on second homes and large first homes, citing a government official.
Shanghai Securities News:
China should resist pressure from the U.S. and Europe to let its currency appreciate, Wang Yong, a central bank researcher wrote. The Asian nation should not increase holdings of U.S. or European government bonds as long as pressure remains, Wang wrote.
Evening Recommendations Citigroup:
Reiterated Buy on (NSH), raised target to $39.50.
RBC Capital:
Rated (ESRX) Outperform, target $57.
Rated (MHS) Outperform, target $68.
Night Trading
Asian equity indices are -.25% to +.50% on average.
Asia Ex-Japan Investment Grade CDS Index 101.0 -4.0 basis points.
Asia Pacific Sovereign CDS Index 95.0 -2.75 basis points.
Consumer Confidence for October is estimated to rise to 49.9 versus a reading of 48.5 in September.
The House Price Index for August is estimated to fall -.2% versus a -.5% decline in July.
Richmond Fed Manufacturing Index for October is estimated to rise to 1.0 versus a reading of -2 in September.
Upcoming Splits
None of note
Other Potential Market Movers
The Fed's Dudley speaking, S&P/CaseShiller Home Price Index, weekly retail sales reports, $35 Billion 2-Year Treasury Notes Auction and the weekly ABC Consumer Confidence report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and real estate shares in the region. I expect US stocks to open modestly lower 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 93.33 bps -3.54%
European Financial Sector CDS Index 93.67 bps -2.63%
Western Europe Sovereign Debt CDS Index 138.92 bps unch.
Emerging Market CDS Index 202.23 bps -3.11%
2-Year Swap Spread 17.0 unch.
TED Spread 17.0 unch.
Economic Gauges:
3-Month T-Bill Yield .11% -1 bp
Yield Curve 220.0 -1 bp
China Import Iron Ore Spot $149.40/Metric Tonne -1.58%
Citi US Economic Surprise Index -3.90 +.8 point
10-Year TIPS Spread 2.17% +4 bps
Overseas Futures:
Nikkei Futures: Indicating +30 open in Japan
DAX Futures: Indicating +13 open in Germany
Portfolio:
Higher: On gains in my Tech, Ag, Medical, 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 higher despite recent sharp gains, mixed economic data and further bank weakness. On the positive side, Networking, Coal, Gold, Semi, Gaming, Ag, Alt Energy and Airline shares are especially strong, rising 1.5%+. Small-cap and cyclical shares are outperforming. "Growth" shares are also outperforming "value" shares again. Copper is rising +1.78% and the S&P GSCI Ag Spot Index is rising +1.43%. The Eurozone Investment Grade CDS Index is dropping -3.78% to 79.11 bps and the California Municipal CDS is falling -7.61% to 257 bps. The ongoing trend lower in key credit default swap indices remains a large positive. On the negative side, Hospital, Bank, Disk Drive, Oil Tanker and Utility shares are down on the day. (XLF) has been a bit heavy throughout the day. The Emerging Markets Sovereign CDS Index is rising +1.92% to 186.98 bps. I continue to see select stocks exploding higher on volume despite overall lackluster market volume. Despite high correlations in the markets this year, it has been a very good year for true stockpickers. I suspect this trend will become more pronounced over the intermediate/long-term. I expect US stocks to trade mixed-to-higher into the close from current levels on tax policy/election optimism, diminishing sovereign debt angst, less economic fear, short-covering, buyout speculation, investment manager performance angst and earnings optimism.
Credit Swaps Fall to the Lowest Level Since May on G-20's Currency Pledge. The cost of protecting bonds from default in the U.S. fell to the lowest since May as stocks climbed following a Group of 20 pledge to avoid devaluations to stem the U.S. dollar’s decline. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, slid 2 basis points to a mid- price of 94.3 basis points as of 8:28 a.m. in New York, according to index administrator Markit Group Ltd. The index, which typically falls as investor confidence improves and rises as it deteriorates, fell for the fourth straight trading day.
Cotton Jumps 4.2% to Record as China Cold Spell Threatens Crops. Cotton soared to a record, rising the maximum allowed by ICE Futures U.S. in New York, as a cold front threatened to damage the crop in China, the world’s biggest user of the fiber. A cold spell that started yesterday will last until tomorrow and may hurt fields, the China Meteorological Center said. Prices climbed 9 percent last week, the third straight weekly gain, as storms dropped damaging hail in Texas, the biggest cotton-growing state in the U.S., the world’s largest exporter. The U.S. Department of Agriculture forecasts a 4.3 percent drop in global stockpiles in the year ending July 31.
Supertankers Face Two-Year Losing Streak as Frontline Shuns Oil. Supertanker owners are facing the longest stretch of unprofitable rates in 17 years as the supply of new vessels increases nine times faster than demand for oil. Shipping companies are making $3,826 a day for a single voyage, 88 percent below the $30,900 Frontline Ltd., the biggest operator, says it needs to break even. Morgan Stanley estimates the tanker fleet will expand almost 13 percent next year and the International Energy Agency says oil use will grow 1.4 percent. Ships ordered before rates plunged from $177,036 in July 2008 are swelling the fleet of about 526 supertankers. Owners have responded by cutting average speeds 9 percent since March and anchoring 24 percent more vessels since January, ship- tracking data compiled by Bloomberg show.
Lockheed Martin(LMT) Announces Approval of Plan for $3 Billion Share Buyback.Lockheed Martin Corp., the world’s largest defense company, said its board approved a share buyback program of as much as $3 billion to return money to investors. “We remain committed to returning at least 50 percent of annual free cash to stockholders through dividends and share repurchases,” Chairman and Chief Executive Officer Robert Stevens said in a statement. The company boosted its quarterly dividend by 19 percent to 75 cents last month.
U.S. Existing Home Sales Rose 10% to 4.53 Million Rate. Sales of U.S. existing homes rose in September by the most on record, a sign cheaper borrowing costs are helping stabilize an industry that’s battling the headwinds of foreclosures and joblessness. Purchases increased 10 percent to a 4.53 million annual rate from 4.12 million in August, the National Association of Realtors said today in Washington. Economists forecast sales would rise to a 4.3 million pace, according to the median projection in a Bloomberg News survey. The median pricefell 2.4 percent from a year earlier. Compared with a year earlier, existing home sales were down 19 percent before adjusting for seasonal patterns. Sales last month rose in all four regions, today’s report showed, led by a 14.5 percent jump in the Midwest. The median price decreased 2.4 percent to $171,700 last month from September 2009. The number of previously owned homes on the market fell 1.9 percent to 4.04 million. At the current sales pace, it would take 10.7 months to sell those houses, compared with 12 months in August. Month’s supply would need to drop to eight to nine months in order to stabilize home prices, according to the NAR. Distressed sales, which include foreclosures and short-sales in which the bank agrees to take less than the full amount of the mortgage, accounted for 35 percent of total sales.
CNBC:
FDIC Head Sounds Alarm on Foreclosure Litigation. Litigation arising from the problems surrounding mortgage foreclosure paperwork could be "very damaging" to the housing market, a top U.S. banking regulator said on Monday.
For Many Market Strategists, Equities are Top Dog Again. In 2011, strategists expect the stock market to notch double-digit gains and recommend investors boost allocations to ride the wave, whether its lower-risk consumer staples stocks or global companies tapping into emerging market supply needs.
Increased Money Supply is Band Aid: Principal Global CEO. Quantitative easing, a government tool used to increase the money supply in a recessionary economy, could be effective as a temporary strategy, but it could have adverse effects if kept in place for an extended period of time, according to Jim McCaughan, CEO of Principal Global Investors.
USDA: Food Inflation to Accelerate Into 2011. Food inflation will “accelerate” during the final months of 2010 and into the first six months of 2011, especially for meat, cereal and dairy products, the U.S. Agriculture Department said Monday.
United Federation of Teacher's $6.3 Million Albany Tab. The teachers union gets an A in political science -- it spent a whopping $6.3 million in lobbying fees and campaign contributions to Albany this election cycle to defend traditional public schools and teacher tenure while fighting to limit charter schools.
New York Times:
Carlyle Bids to Take CommScope Private. CommScope, the telecommunications equipment maker, said Monday that it had been approached by Carlyle Group with an offer to take the company private, confirming an earlier report in DealBook.
Detroit News:
Congressman Want to Postpone GM Dealer Closings. Two Ohio Republicans want General Motors Co. to halt its planned closing of about 500 dealers by the end of the month. U.S. Reps. Steven LaTourette and House Minority John A. Boehner want the Obama administration "to immediately suspend GM closures until a current investigation of dealer terminations is completed." "There is too much at stake to proceed in an atmosphere where dealers were denied so much crucial information in a process rife with secrecy," the lawmakers said. "We believe it is necessary to thoroughly analyze its results before continuing with the closures of hundreds of dealerships, and the potential loss of thousands of jobs."
TheStreet.com:
Citi(C) Shares Jump on Goldman(GS) Call. Citigroup(C)'s stock price was up in early trading Monday after Goldman Sachs(GS) added the bank to its "conviction list."
Politico:
Health Care: Freddy Krueger Lives. Caught in a cobweb of false promises, the American people were fed a story about how health care reform would insure everyone, allow people to keep their own insurance policies and reduce health care spending while improving quality. Sadly, these were fantasies masquerading as fact. The scary tale that follows needs no skeletons or vampires; statistics alone can frighten you.
Poll: Independents Siding With GOP. Republicans are on the verge of broad wins next week for one big reason: independent voters are ready to boot Democrats from office, according to a new POLITICO/George Washington University Battleground Poll. Expressing deep dissatisfaction with President Obama’s policies and performance, independents have increasingly sided with conservatives in the belief that government grew too large, too fast under Obama—and that it can no longer be trusted. In the final pre-election Battleground Poll, Republicans hold a 14-point edge among independents and lead overall, 47 percent to 42 percent, in the generic ballot match up.
Reuters:
Security Software Gears Up for More M&A: Sources. Tech behemoths rushing to fill hardware and software holes in their portfolios may buy up most of the remaining public security software companies over the next 12 to 24 months, according to tech investment bankers and analysts. Security companies such as Websense Inc (WBSN), Sourcefire Inc (FIRE) and Fortinet Inc (FTNT) would fit into the portfolios of tech giants looking for ways to increase security in their data centers, said two other software bankers.
Bloomingdale's Has Good Fall, Led by Accessories. Upmarket U.S. department store chain Bloomingdale's is enjoying a good fall season, although the rise in sales is not as strong as that recorded during the spring, its chairman and chief executive said on Monday.
Wall Street Journal Remains US Largest Newspaper. The Wall Street Journal remains the nation's top newspaper with more than 2 million in average daily circulation according to the latest industry numbers.
Financial Times Deutschland:
Adobe Systems(ADBE) values its independence and aims to exploit growth opportunities on its own, CEO Shantanu Narayen said in an interview. The graphic-design software maker is looking for small acquisitions to fuel growth, Narayen said.
Economista:
Spain's Finance Ministry is working on a plan to shore up revenue with tax increases in case economic growth falls short of forecasts. The government may raise tax on tobacco, fuel, alcohol and electricity if growth is slower than expected.
