Republican Victory in U.S. Midterm Elections May Keep Bull Market Alive. The midterm elections that ended Democrats’ control of the U.S. House of Representatives are likely to sustain the bull market that began in March 2009 at the depths of the financial crisis. U.S. stocks will continue their ascent because victorious Republicans probably will block Democrats’ plans to raise taxes and impose stricter regulations on businesses, according to money managers interviewed before the vote. “The near-term issue of importance to investors is the Bush-era tax cuts,” said Robert Doll, chief equity strategist at New York-based BlackRock Inc., the world’s largest fund manager with $3.45 trillion in client assets. The new Republican majority in the House may force President Barack Obama to back off efforts to let tax cuts enacted under President George W. Bush expire and to raise rates on dividends and capital gains. That would boost optimism among investors and company executives, driving improvements in financial markets and the economy, according to Barclays Capital in New York.
U.S. Labor Unions Face 'Huge Sinkhole' for New Agenda as Republicans Win. Organized labor’s window of opportunity in Congress slammed shut last night. “The election profoundly reshapes labor’s agenda,” said Harley Shaiken, a professor of labor relations at University of California at Berkeley, in an interview. “The Republican pickup of seats in the House is going to be a huge sinkhole for labor.”
Mortgage Bond Returns Accelerate as Fed Moves Toward QE2: Credit Markets. Relative returns on government-backed mortgage bonds are showing debt investors have little confidence the Federal Reserve’s efforts to contain interest rates will break the gridlock in homeowner refinancing. U.S. agency mortgage bonds returned 0.92 percentage point more than similar government debt in October, the second-best performance on record, and the most since April 2008, the month after the central bank calmed markets with its rescue of Bear Stearns Cos., Barclays Capital index data show.
Credit-Default Swaps Fall to Six-Month Low While Fed Decides. The cost of protecting U.S. corporate bonds from default fell to the lowest since May as investors awaited a Federal Reserve decision on whether the central bank would act to boost the economy and election results that may divide Congress. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 2 basis points to a mid- price of 92.4 as of 4:56 p.m. in New York, according to index administrator Markit Group Ltd. Swaps on Wells Fargo & Co. dropped for the first time in five days. The cost to protect debt issued by Wells Fargo fell 6.9 basis points to 114.7 and contracts on JPMorgan Chase & Co. dropped 3.9 basis points to 91.5, according to CMA. Swaps on Goldman Sachs Group Inc. eased 5.1 basis points to 127.3, and those on Citigroup fell 6.5 basis points to 144.3, CMA data show.
Oil Rises to a Six-Month High on U.S. Stimulus Bets, Fuel Supply Forecast. Crude oil surged to its highest level in six months as the dollar weakened against major currencies on speculation the Federal Reserve will take measures to stimulate the economy. Crude rose 1.2 percent as the dollar’s decline boosted the appeal of commodities as an alternative investment. The Fed will probably start a fresh round of stimulus tomorrow, announcing a plan to purchase at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News. “It’s the weaker dollar and expectations for the stimulus package,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “Half a trillion dollars was supposedly priced in since we rallied from September to October, but people are already anticipating that it could be larger.” Crude for December delivery rose 95 cents to $83.90 a barrel on the New York Mercantile Exchange, the highest settlement price since May 3.
Greece Halts Foreign Mail Service on Athens Blasts, Merkel. Greece suspended mail deliveries to foreign destinations after parcel bombs exploded at the Swiss and Russian embassies in Athens and German Chancellor Angela Merkel was sent a package mailed from the country. Overseas mail will be halted for 48 hours, Greek’s Civil Aviation Authority said in a statement today. The move came after police defused two makeshift explosive devices at Athens International Airport and at least three other packages around the city.
Wall Street Journal:
Republicans Poised to Recapture House. Republicans claimed a slew of victories that put them on the verge of taking control of the House of Representatives late Tuesday, as voters dealt a rebuke to President Barack Obama and the Democratic Party.
CFTC Probing Trading Activity in Natural Gas Market - Sources. The Commodity Futures Trading Commission is probing a wide range of natural gas derivatives-trading activity spanning parts of 2008, according to people familiar with the matter. The CFTC's enforcement division sent out subpoenas broadly across the industry to hedge funds and other large natural gas traders last month seeking information about trading that was discussed in emails, voice recordings, instant messages and other documents.
Pride International(PDE) Weighs Strategic Options. Offshore driller Pride International Inc. is evaluating strategic options that could include a possible sale of the company after recent merger interest from rivals, people familiar with the matter said.
BP(BP) Dividend Takes Back Seat to Growth. BP PLC will likely pay a much smaller dividend and spend more on oil exploration as it remakes itself into a leaner, more growth-oriented company following the Gulf of Mexico oil spill, its new chief executive said Tuesday.
High Rollers at the Fed. The Federal Reserve's Open Market Committee seems poised today to make a historic decision to expand its balance sheet by as much as $1 trillion or more to boost inflation and reduce unemployment. We've said before that we think this is a monetary mistake, but the public and Congress should also be aware that it increasingly carries fiscal risks.
CNBC:
Banks Go Toe to Toe as Wall Street Woos Hedge Funds. The battle to be the top dog in the lucrative business of clearing trades and lending money to hedge funds is heating up as a handful of U.S. and European banks are intensifying their push into the space.
House Switch Imminent as Republican Wave Crashes on Democrats. Republicans made deep inroads into the Democratic House majority and racked up a series of big-ticket Senate wins Tuesday evening, appearing on their way to capturing at least one chamber of Congress in a powerful electoral wave. The Democrats’ House losses quickly grew to alarming proportions. The GOP claimed the seats of several highly endangered Democrats, including Florida Reps. Suzanne Kosmas and Alan Grayson and New Hampshire Rep. Carol Shea-Porter. But the insurgent conservative party also knocked off entrenched incumbents like Texas Rep. Chet Edwards, who had long survived in a challenging district and Virginia Rep. Rick Boucher, a coal-country centrist who had been expected to prevail against Republican state Del. Morgan Griffith.
Exit Polls: Voters Sour on Economy. Voters may not love Republicans, but they trust Democrats even less to turn around the sputtering economy. That’s the message emerging from exit polls amid the GOP’s growing gains in congressional and governor’s races.
Reuters:
Republican Leader Vows to Repeal US Health Care Reform. U.S. Representative Eric Cantor, who is likely to become majority leader in the new Republican-led House of Representatives, vowed on Tuesday to repeal healthcare reform and cut federal spending. "We will repeal the trillion-dollar health care bill that threatens to bankrupt ... this country," he said, according to prepared remarks. "We will get to work right away to reduce the deficit by cutting federal spending next year down to 2008 levels. That will save $100 billion in the first year alone," he said.
Wynn(WYNN) Meets 3rd - Quarter Estimates, Sets $8 Dividend. Casino operator Wynn Resorts Ltd's (WYNN) quarterly profit met Wall Street estimates as revenue in Macau rose 50 percent and it made money on nightclubs in Las Vegas. The company also said it would pay a cash dividend of $8 per share on Dec. 7. Its shares, which have nearly doubled so far this year, fell about 1.8 percent.
Discovery(DISCA) Profit Nearly Doubles; Advertising Surges. Discovery Communications Inc's (DISCA) quarterly profit nearly doubled and the media company raised its outlook for 2010 revenue, reaping the rewards of bigger audiences and stronger advertising at its roster of cable networks.
OpenTable(OPEN) Q3 Profit Beats Street View; Shares Rise. OpenTable Inc, the restaurant reservation platform, reported a higher third-quarter profit that topped Wall Street estimates as more restaurants used its services, sending its shares up 11 percent in extended trade. The San Francisco-based company reported a net profit of $3.8 million, or 16 cents a share, compared with $896,000, or 4 cents a share, a year ago. Excluding items, the company earned 23 cents a share. Revenue rose 44 percent to $24.5 million. Analysts had expected a profit of 15 cents a share, excluding exceptionals, on revenue of $23.2 million, according to Thomson Reuters I/B/E/S. The company's installed restaurant base as of Sept. 30 was up 31 percent at 15,246, and seated diners jumped 54 percent to 15.9 million. OpenTable stock, which has more than doubled in value this year, rose to $68.21 Tuesday in trading after the bell. The stock closed at $61.40 on Nasdaq.
GM Can Avoid Federal Taxes on $50 Billion of Profits - WSJ. General Motors Co [GM.UL] will not have to pay U.S. federal taxes on up to $50 billion of profits for as long as 20 years, The Wall Street Journal reported on Tuesday, citing people familiar with the matter. With the standard federal corporate tax rate at 35 percent, that tax break could save GM $17.5 billion, not factoring in tax deductions, the Journal reported. Under the Troubled Asset Relief Program, $50 billion of losses that GM racked up before its government-funded bankruptcy can be used to offset its future tax liabilities, the Journal reported.
The Standard:
Flat Costs Reflect Tale of Two Cities. Prices fell in Beijing but rose in Shanghai in October - the first month since the initiatives. Those in the capital declined 6.6 percent month-on-month to 19,160 yuan (HK$22,223) per square meter. It was the first time this year that prices in Beijing fell below 20,000 yuan psm.Transactions fell 36 percent from September, after advancing for four months running. It is a tale of two cities regarding property prices after the central government launched a second round of tightening to squash speculation.
Evening Recommendations Citigroup:
Reiterated Buy on (OPEN), boosted target to $80.
Reiterated Buy on (ENR), target $86.
Reiterated Buy on (ABC), target $38.
Reiterated Buy on (ADM), target $38.
Night Trading
Asian equity indices are unch. to +1.25% on average.
Asia Ex-Japan Investment Grade CDS Index 103.0 -1.0 basis point.
Asia Pacific Sovereign CDS Index 97.25 -.25 basis point.
The ADP Employment Change for October is estimated at +20K versus -39K in September.
10:00 am EST
ISM Non-Manufacturing for October is estimated to rise to 53.5 versus 53.2 in September.
Factory Orders for September are estimated to rise +1.6% versus a -.5% decline in August.
10:30 am EST
Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a +5,007,000 barrel gain the prior week. Gasoline supplies are estimated unch. versus a -4,387,000 barrel decline the prior week. Distillate supplies are estimated to fall by -1,000,000 barrels versus a -1,613,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.3% versus a +1.2% gain the prior week.
2:15 pm EST
The FOMC is expected to leave the benchmark fed funds rate at .25%.
Afternoon
Total Vehicle Sales for October are estimated to rise to 11.8M versus 11.73M in September.
Upcoming Splits
None of note
Other Potential Market Movers
The Challenger Job Cuts report for October, weekly MBA mortgage applications report, Oppenheimer Healthcare Conference, Goldman Sachs Industrials Conference and the (PMTC) investor day could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by financial and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.
North American Investment Grade CDS Index 93.22 bps -.49%
European Financial Sector CDS Index 95.17 bps -.38%
Western Europe Sovereign Debt CDS Index 153.33 bps +2.61%
Emerging Market CDS Index 202.37 bps -1.17%
2-Year Swap Spread 16.0 unch.
TED Spread 17.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .11% +1 bp
Yield Curve 224.0 -4 bps
China Import Iron Ore Spot $150.20/Metric Tonne +.20%
Citi US Economic Surprise Index +10.0 +.9 point
10-Year TIPS Spread 2.17% -2 bps
Overseas Futures:
Nikkei Futures: Indicating +45 open in Japan
DAX Futures: Indicating +12 open in Germany
Portfolio:
Higher: On gains in my Tech, Biotech, Retail and Medical 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, bank stock weakness and euro sovereign debt concerns. On the positive side, Gaming, Retail, Homebuilding, HMO, Oil Tanker and Alternative Energy shares are especially strong, rising 2.0%+. Small-caps are substantially outperforming. Copper is rising +1.14%. Oil Tanker rates have jumped 33.0% in 5 days. Weekly retail sales rose +2.6% this week versus a +2.7% gain the prior week. The European Investment Grade CDS Index is falling -1.05% to 79.5 basis points. On the negative side, Bank and Disk Drive shares are down slightly. (XLF) has underperformed throughout the day. The Portugal sovereign cds is gaining +2.02% to 402.33 bps, the Ireland sovereign cds is gaining +3.96% to 515.37 bps and the Emerging Market Sovereign CDS Index is gaining +2.46% to 186.22 bps. The odds that neither party controls the Senate after today's midterms have surged to a contract high of 44.0% on Intrade.com. The market has already priced in a GOP victory in the House. A tie or outright victory by the GOP in the Senate is not priced into stocks, in my opinion, and would result in further US equity strength. If the GOP fails to take the House, the market would likely experience significant weakness. I expect US stocks to trade mixed-to-higher into the close from current levels on tax policy/election optimism, less economic fear, buyout speculation, investment manager performance angst and earnings optimism.
Volcker Says Quantitative Easing May Create Inflation in Future. Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, said quantitative easing may spark inflation in the future and the amount involved may be a cause for concern. “When money is too easy for too long, we will have more” asset bubbles, Volcker, 83, said in Singapore today.
Cotton Advances to Record in New York. Cotton surged to records from New York to China on concern global demand will outstrip supply after cold weather in China and U.S. storms hurt crops. Cotton for December delivery advanced as much as 1.9 percent to $1.3176 a pound on ICE Futures U.S. and traded at $1.3116 at 4 p.m. Tokyo time, gaining for a third day.
Raw Sugar Jumps to 29-Year High. Raw sugar surged to a 29-year high as dry weather crimps output in Brazil, the world’s biggest producer, and India may limit exports to bolster domestic inventories. Output in Brazil’s Center South, the country’s biggest producing-region, tumbled 30 percent in the first half of October from a year earlier, industry association Unica said on Oct. 28. Stockpiles in India, the second-largest grower, are about 4 million metric tons, compared with the nation’s preferred level of 10 million tons, according to Rabobank International.
Oracle(ORCL) to Acquire Art Technology(ARTG) for $1 Billion to Add E-Commerce Software. Oracle Corp., the world’s second- largest software maker, agreed to buy Art Technology Group Inc. for about $1 billion in cash to add e-commerce programs. Art Technology investors will receive $6 a share, Oracle said in a statement today. That’s 46 percent more than the company’s closing price yesterday.
MasterCard(MA) Profit Beats Estimates as Spending Climbs. MasterCard Inc., the world’s second- biggest payments network, posted third-quarter profit that exceeded most Wall Street estimates as more consumers paid with credit and debit cards. Net income climbed 15 percent to $518 million, or $3.94 a share, from $452 million, or $3.45 a share, in the same period a year earlier, the Purchase, New York-based company said today in a statement. The average estimate of 29 analysts surveyed by Bloomberg was for earnings of $3.54 a share.
China Said to Tell Banks to Demand Faster Payment of Local Government Debt. China told banks to ask for faster repayment of local-government infrastructure loans on concern existing debt terms leave them with too much risk, a person with knowledge of the matter said. About 50 percent of loans to the financing vehicles of local governments are for five years or more, with terms for most credits requiring repayment of the principal on maturity, said the person, who requested anonymity. China’s bank regulator asked lenders to revise terms so that payments start when projects are completed and are made in at least two installments a year after that, the person said. The government is trying to limit risks brought about by last year’s surge in loans to local-government finance vehicles for roads, bridges and railroads.
U.S. Homeownership at Decade Low as Foreclosures Rise. The U.S. homeownership rate was unchanged at a 10-year low in the third quarter as banks stepped up property seizures from borrowers who defaulted on mortgages. The homeownership rate was 66.9 percent, matching the second-quarter level that was the lowest since 1999, the U.S. Census Bureau said in a report today.
Buy VIX Put Options on U.S. Midterm Vote, Fed Easing, Goldman(GS) Says. Investors should buy VIX puts because the benchmark measure of U.S. options prices will probably fall should tonight’s elections and the Federal Reserve’s announcement tomorrow meet expectations, Goldman Sachs Group Inc. said.
Ireland Leads Rise in Government Credit-Default Swaps in Europe. Ireland led an increase in the cost of insuring against losses on European government bonds, according to traders of credit-default swaps. Contracts on Ireland surged 28 basis points to 526, surpassing yesterday’s record closing price, according to data provider CMA. Greek credit-default swaps climbed 18 basis points to 850, the highest level since Sept. 17, while Portugal jumped 15.5 basis points to an almost one-month high of 395. Spain rose 6 to 230 and Italy increased 3.5 to 178.5. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 2.5 to a one-month high of 160. The cost of insuring corporate bonds was little changed, with the Markit iTraxx Europe index of 125 investment-grade companies up 0.75 basis point at 99.25 and the Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers 1 higher at 127.5, according to JPMorgan Chase & Co. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings was unchanged at 457.
Gene Patent Ruling Raises Questions for Industry. When the Justice Department declared in a court filing late Friday that genes should not be eligible for patents because they are products of nature, Harold C. Wegner, an influential patent lawyer in Washington, did not mince words. “Eric Holder Hijacks the Patent System, Flunks Patents 101,” Mr. Wegner wrote in an e-mail to 1,250 people, referring to the attorney general. Sharp reaction greeted the declaration that human and other genes are not patentable, a reversal of what had been the government’s policy for decades.One patent lawyer characterized the new position as dumb. The Biotechnology Industry Organization warned that such a policy, if carried out, would “undermine U.S. global leadership and investment in the life sciences.”
FINalternatives:
Illinois Firm Launches Iraqi-Focused Hedge Fund. Illinois-based hedge fund firm Global Capital Investments has launched a new fund that will primarily invest in shares listed on the Iraq Stock Exchange.
Politico:
What to Watch Tonight. All the outstanding questions of the 2010 campaign boil down to this: How big is the wave? Republicans appear to be on the cusp of a historic victory, potentially extending into every level of state and federal government. Beyond the race-by-race polling — across 435 House districts, 37 Senate races and 37 gubernatorial races — all the large-scale signals point toward the GOP.
Dems Prepare for a Long, Tough Night. Democrats braced for deep losses across the country as voters headed to the polls Tuesday, casting ballots in an election that’s expected to deliver a painful rebuke to the party that currently controls both chambers of Congress, a majority of the nation’s governorships and the White House.
Rasmussen Reports:
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday, Election Day, shows that 30% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).
Applebee's Improves, DineEquity(DIN) Shares Soar. DineEquity Inc's (DIN) Applebee's chain posted its first quarterly gain in sales at established restaurants in more than two years and shares rose 13.5 percent.
Option Traders Turn Wary Before Fed, Job Report. In a week of great uncertainty, with the announcement of a massive Federal Reserve buying program widely expected and the jobs report for October due, options traders have become more defensive as they await the unknown.
Oil Price Spikes on Libyan Talk of $100 Barrel. Oil jumped after OPEC member Libya said oil producers would find prices of $100 a barrel more comfortable because of higher food prices and a weaker dollar.
Handelsblatt:
German exports to Iran climbed 11.6% in the first eight months of the year, indicating that European Union sanctions aren't deterring companies from doing business with the Gulf nation.
Kathimerini:
Greece will have to implement further spending cuts this year after lower-than-targeted revenue for 2010, with even stronger measures for 2011. A 2.3% increase on the year in state revenue in the first 10 months, compared with an annual target for an 8.7% rise, will probably lead to revenue shortfall of as much as 2 billion euros and impact on the 2010 budget deficit target.
Les Echos:
BlackRock Inc.'s(BLK) CEO Laurence D. Fink said investors should buy stocks, citing an interview. "Today, bonds are too expensive," Fink said. "We're seeing there is a very significant source of opportunities." The "main threat" isn't that of double dip recession but "a too rapid recovery," Frank said. This would be very damaging for investors, "most of whom are over-invested in bonds and are very reluctant to buy stocks," he said.
Xinhua:
Almost 40% of China's cities are developing in an unsustainable way, citing joint research by Columbia University, Tsinghua University and McKinsey & Co. Of the 112 cities studied in the 2005-2008 period, 44 had become mush less sustainable during the period.
