Tuesday, April 05, 2011

Wednesday Watch


Evening Headlines

Bloomberg:
  • NATO Gets Blamed as Libyan Rebels Flee Assault by Qaddafi Forces. Libyan rebels retreated under heavy fire from the central oil port of Brega, prompting their top commander to lash out at NATO for not doing enough to stop artillery attacks by Muammar Qaddafi’s forces. The North Atlantic Treaty Organization is slow “in responding to our instructions” on targets and is failing to ‘give us what we need,’’ said Abdel Fattah Younes, head of the rebel army and Qaddafi’s former interior minister. He was particularly critical of the alliance for failing to stop Qaddafi’s weeks-long siege of Misrata, the rebel-held city near Tripoli that has been the scene of the most protracted attacks on civilians. “We’re disappointed in NATO,” said Younes, speaking at a press conference in Benghazi broadcast on al-Jazeera.
  • U.S. Fiscal Crisis in Spitting Distance: Laurence Kotlikoff. The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot. Arguing over lowering our deficit by just 0.4 percent of GDP when we need to run massive surpluses to deal with the baby boomers’ impending retirement is, pick your metaphor -- rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s Last Stand. Is this malign fiscal neglect, or has Congress somehow missed what its own Congressional Budget Office is indicating? CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold -- a 90 percent ratio of federal debt held by the public to gross domestic product -- has moved four years closer, in just nine months! On March 18, when the CBO released a new forecast that incorporated the president’s budget, the 90 percent mark had moved up to 2017. Actually, 2017 is optimistic.
  • Japan May Restrict Power Use as Summer Worsens Shortages. Japan’s government said it may impose legal limits to electric power use as policy makers prepare for shortages that are likely to worsen as the summer approaches. Energy-supply constraints due to the damage to the Fukushima Dai-Ichi nuclear power plant following last month’s earthquake and tsunami mean the step must be considered, Chief Cabinet Secretary Yukio Edano said yesterday. “We want to ask companies to reduce their electricity use, especially during the peak, in a way that won’t affect their business,” Edano told reporters at a press conference in Tokyo. “Before we resort to forcible measures, we must first ask for cooperation that would impose minimal disruption. We will then consider other measures.” “This shortage is extremely damaging to the economy,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “We’ll see a lot of investment once reconstruction gets under way, but we’re not going to get much growth until we solve this electricity problem.”
  • U.S. Homebuilders Default Swaps Jump as KB Home(KBH) Misses Earnings Estimates. The cost to protect the bonds of U.S. homebuilders surged after KB Home (KBH) reported a bigger-than- expected loss as orders plunged. Credit-default swaps protecting the debt of the Los Angeles-based homebuilder, which targets first-time buyers, jumped 21.2 basis points to 436.9 basis points, according to data provider CMA. “This recovery has yet to include significant job growth and has not spilled over into housing,” Chief Executive Officer Jeffrey Mezger said in an earnings call today. “These headwinds will not go away, and a sustained broad-based housing recovery will not occur until we start to experience material job creation and higher consumer confidence levels.” Credit-default swaps on Lennar Corp. jumped 7.5 basis points to 355.9 and those on Pulte Group Inc. climbed 8.8 basis points to 325, CMA data show. Contracts on Ryland Group Inc. added 9.6 basis points to 249.5, the data show.
  • European, U.S. Divide Deepens in Ratings Slump: Credit Markets. European credit quality is deteriorating by the most since 2009 as the continent's sovereign debt crisis stifles growth and underscores a divergence from the U.S. Moody's Investors Service lowered long-term credit ratings on 182 banks, governments and companies in western Europe this year, including Spanish lender Banco de Sabadell SA and Paris-based grocer Carrefour SA, according to data compiles by Bloomberg. It upgraded 39 entities, translating into the smallest ratio since the full year of 2009. In the U.S., upgrades are outpacing downgrades by 25%.
  • Corn Futures Extend Rally to 33-Month High as Demand Outpaces U.S. Supply. Corn prices climbed to the highest since July 2008 on speculation that U.S. inventories will tighten as demand increases for food, livestock feed and fuel. U.S. corn stockpiles on March 1 dropped to the lowest for the date in four years, the Department of Agriculture said last week. The agency may cut its forecast this week for supplies held as of Aug. 31. The U.S. sold 101,600 metric tons to unknown destinations, the USDA said today. High fuel costs are boosting demand for grain-based ethanol, and feed demand is rising as cattle and hog prices climb. “Meat is at all-time highs, so obviously feed usage isn’t likely to be rationed,” said Frank Cholly Sr., a senior strategist at Lind-Waldock, a broker in Chicago. “The ethanol grind isn’t likely to slow down as long as they’re profitable, so corn prices have to go higher.”
  • Oil Falls a Second Day After Signals U.S., China Demand Growth May Falter. Crude oil declined for a second day in New York amid signs that the pace of fuel demand recovery may falter in the U.S. and China, the world’s biggest energy- consuming nations. Oil for May delivery fell as much as 62 cents, or 0.6 percent, to $107.72 a barrel, in electronic trading on the New York Mercantile Exchange. It was at $107.85 at 9:40 a.m. Sydney time. Yesterday, the contract slid 13 cents to $108.34. Futures are 24 percent higher than a year ago.
  • Cephalon(CEPH) Rejects Valeant's(VRX) $5.7 Billion Offer as Too Low.
  • Exchanges Revamp U.S. Curbs to Limit Stock Moves Instead of Halting Trades. Concern that halting stocks to limit price volatility did more harm than good spurred the biggest U.S. exchanges to propose modifying the program.
  • Swaps Signal Further Rate Increases Adding to Yuan Pressure: China Credit. The cost of fixing borrowing costs in China suggests policy makers will raise interest rates at least once more this year as food and fuel costs surge, adding pressure on the yuan to strengthen. The five-year non-deliverable swap rate jumped 26 basis points in the past three weeks to 4.23 percent, after a report showed a higher-than-forecast inflation rate of 4.9 percent in February. The People’s Bank of China’s latest increase was announced yesterday before an April 15 report that will show consumer prices climbed 5.2 percent in March, according to the median estimate in a Bloomberg News survey of nine economists. Brazil, Poland, India, South Korea and Thailand all raised benchmark borrowing costs in the past month, increasing the allure of local currency-denominated assets as interest rates in the U.S. and Europe remain near zero. China’s deposit rate of 3.25 percent compares with benchmarks of 11.75 percent in Brazil, 8 percent in Russia and 6.75 percent for India.
Wall Street Journal:
  • Egypt's Muslim Brotherhood to Rejoin Protests. After two months of working closely with Egypt's new military rulers, the country's most powerful Islamist group said it will join demonstrations this Friday—a move that could reinvigorate a revolutionary movement damped since protesters ousted the country's president in February. Muslim Brotherhood members have said the group will throw its official weight behind demonstrations against the country's provisional military leadership, which many youth protest leaders complain has been too slow to purge and prosecute lingering elements of the former regime. Its participation in Friday's protests calls into question the perceived alliance between the military and Islamist politicians, whose support has formed an essential political ballast in the military's hasty transition to democratic rule. If this Friday's protests succeed in pressuring the military to purge what is left of ex-President Hosni Mubarak's National Democratic Party, they could help the 83-year old Islamist group reclaim its revolutionary bona fides before parliamentary elections scheduled for September.
  • Al Qaeda Makes Afghan Comeback.
  • Budget Talks Head to Brink. Parties Far Apart on 2012 Spending, Long-Term Vision as Friday Deadline Nears.
  • Fed's Bullard to Push for Curtailing QE2 at April Meeting. James Bullard, president of the Federal Reserve Bank of St. Louis, said he would push at the Fed’s upcoming two-day policy meeting (April 26 and April 27) to reduce the central bank’s quantitative easing program by $100 billion, but held out little hope of being successful. “I don’t always get my way on the committee,” he noted in an interview with the Wall Street Journal. Most Fed officials want to carry the program through to its end in June. “Any changes that we’re going to make we’re going to have to make at this meeting,” he added. “We got a stronger economy and we got higher inflation and higher inflation expectations than we expected at the time,” he said. “The logical thing to do is to pull back.” But Mr. Bullard isn’t looking to a quick or aggressive shift to tight monetary policy. He said he wants to reduce the asset purchase program, slowly taper it off and then watch to see how the economy performs before taking further steps. “We’d be pulling back just a little bit from where we said we were going to be based on economic developments. Then we would be on pause for a little while,” he said. He was generally optimistic about the economy — describing it as “fairly robust” and likely to bounce back in the second quarter after subpar growth in the first quarter. Inflation, meanwhile, he said “appears to have bottomed out over the winter and may be headed higher.” “It is tumultuous times for monetary policy and that is why you’re hearing more from the Fed,” he said. “A tightening cycle is the hardest thing for a central bank to do. There is a lot of risk that you might fall behind the curve and wind up with a lot of inflation. On the other hand you hate to choke off a fledgling recovery. And so there is a lot of debate about it.” In the past, the Fed hasn’t explained itself well. “We’re trying to do a better job of communicating.”
  • Our Unaccountable Fed. 'I will maintain to my deathbed that we made every effort to save Lehman, but we were just unable to do so because of a lack of legal authority." So said Federal Reserve Chairman Ben Bernanke in 2009. The statement was striking—not because it was false, but because the Fed lacked explicit legal authority to do so much of what it did during the financial crisis. Drawing the line at Lehman seemed arbitrary, and it proved that the Fed has become an unaccountable power within American government.
MarketWatch:
Business Insider:
Zero Hedge:
IBD:
  • Auto Parts Stores Operate in High Gear. Top players O'Reilly Automotive (ORLY) and AutoZone (AZO) have watched both sales and profits climb at double-digit rates the past four quarters. Advance Auto Parts (AAP) has seen such growth the past two quarters.
CNN Money:
  • In Beijing, "Luxury" Becomes a Dirty Word. Starting next week, mum's the word on luxury in Beijing. After April 15, any company that puts up a public advertisement in China's capital city using the adjective -- or a few other flowery phrases like it -- will be fined around $4,500. The municipal government says on its website that such words induce hedonism and spiritual emptiness. The state media cites the growing gap between the rich and the poor.
Rasmussen Reports:
  • 50% Acknowledge Conflict Between Economic Growth and Environmental Protection, Highest Level Yet. The number of voters who believe protecting the environment gets in the way of a growing economy has reached its highest level in just over two years. A new Rasmussen Reports national telephone survey finds that 50% of Likely Voters say there’s a conflict between economic growth and environmental protection. That’s up seven-points from earlier this year and is the highest level measured since January 2009. In the latest survey, 30% do not believe there’s a conflict between those two areas.
Politico:
  • Nobel Panel: Give War a Chance. When the Norwegian Nobel Committee awarded Barack Obama its 2009 peace prize, its members probably didn’t anticipate that the American president would send the U.S. military to fight in Libya just over a year later. And that has some Obama critics demanding that he return it. “The Nobel Peace Prize is no declaration of sainthood,” Geir Lundestad, the committee’s secretary, told POLITICO in an interview from Norway. “And no American president will ever be a saint.”
Reuters:
  • Reuters Summit - Nasdaq, NYSE Listings The Same - Bankers. Little difference remains between listing shares on the Nasdaq versus on the New York Stock Exchange, capital markets bankers said on Tuesday, undercutting concerns that hang over a proposed merger of the two.
  • Verizon(VZ) Customers Exposed in Massive U.S. Data Breach. Customers of Verizon Communications had their email addresses exposed in a massive online data breach last week, according to an email to customers obtained by Reuters. In what could be one of the biggest such attacks in U.S. history, a computer hacker penetrated the online marketer Epsilon, which controls the customer email databases for a broad swath of companies.
  • Japan Quake to Boost 2011 Global Chip Sales by $5 Billion - iSuppli. Global semiconductor sales are likely to grow by 7 percent to $325 billion this year, as last month's earthquake in Japan boosted prices of computer memory chips, research firm IHS iSuppli said on Wednesday.
Financial Times:
  • The freeze on the Libyan regime's assets has also limited the opposition's access to cash, citing Ahmed el-Sharif, head of the opposition's central bank. Banks in rebel-held areas are short of currency and could run out within weeks if access to Libyan assets abroad continues to be denied, el-Sharif said, noting that there may not be enough money to pay public-sector workers. He said he would recommend that oil exports cease unless the asset freeze is lifted for the opposition.
Times of India:
  • Beer and liquor will cost between 40% and 60% more in Mumbai and the rest of Maharashtra state following an increase in excise duty in the state's budget.
People's Daily:
  • China's inflation pressure may continue to increase this year, Chen Jiagui, a researcher with the Chinese Academy of Social Sciences, wrote. China needs to control its economic growth while increasing the supply of agricultural products and tightening liquidity, the researcher wrote.
Shanghai Securities News:
  • Pressure for yuan appreciation is increasing and the risk of imported inflation in China is rising, the State Information Center, China Development Bank Corp. and the Shanghai Securities News said in a joint report in today's newspaper. The global economic environment is becoming more complicated as a result of the Japanese earthquake and its aftermath and the war in Libya, the report said. Preventing prices from rising too rapidly while maintaining steady economic growth is the main problem facing China's macro-economic controls, according to the report.
China Securities Journal:
  • China should make property prices one of its main monetary policy goals, Yin Zhongli, a researcher from the Chinese Academy of Social Sciences wrote in a commentary. One way could be to peg property prices with the consumer price index and link consumer prices with the interest rate on deposits, Yin wrote.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (ANF), raised target to $76.
Piper Jaffray:
  • Raised (URBN) to Overweight, target $36.
  • Raised (ZUMZ) to Overweight, target $33.
  • Raised (WTSLA) to Overweight, target $5.
Night Trading
  • Asian equity indices are -.50% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 104.0 unch.
  • Asia Pacific Sovereign CDS Index 110.0 unch.
  • S&P 500 futures +.12%.
  • NASDAQ 100 futures +.18%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (MSM)/.70
  • (MON)/1.84
  • (WDFC)/.68
  • (SMSC)/.22
  • (BBBY)/.97
  • (RT)/.31
  • (BLUD)/.26
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,000,000 barrels versus a +2,945,000 barrel gain the prior week. Distillate inventories are expected to remain unch. versus a +710,000 barrel increase the prior week. Gasoline supplies are estimated to fall by -1,900,000 barrels versus a -2,684,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus unch. the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, weekly MBA mortgage applications report, BB&T Commercial/Industrial Conference, UBS Clean Energy Conference, (FE) analyst meeting and the (GG) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Slightly Higher into Final Hour on Buyout Speculation, Lower Energy Prices, Short-Covering


Broad Market Tone:

  • Advance/Decline Line: Slightly Higher
  • Sector Performance: Mixed
  • Volume: Slightly Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 16.90 -3.43%
  • ISE Sentiment Index 110.0 +7.84%
  • Total Put/Call .83 -21.70%
  • NYSE Arms .81 -21.96%
Credit Investor Angst:
  • North American Investment Grade CDS Index 93.51 +.29%
  • European Financial Sector CDS Index 84.25 -.90%
  • Western Europe Sovereign Debt CDS Index 163.83 bps -.81%
  • Emerging Market CDS Index 199.34 +.32%
  • 2-Year Swap Spread 17.0 -1 bp
  • TED Spread 23.0 -3 bps
Economic Gauges:
  • 3-Month T-Bill Yield .06% +2 bps
  • Yield Curve 266.0 unch.
  • China Import Iron Ore Spot $173.90/Metric Tonne unch.
  • Citi US Economic Surprise Index +37.10 -4.0 points
  • 10-Year TIPS Spread 2.59% +4 bps
Overseas Futures:
  • Nikkei Futures: Indicating +70 open in Japan
  • DAX Futures: Indicating +35 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Medical, Retail and Biotech sector longs
  • Disclosed Trades: None
  • Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite weaker economic data, growing Mideast unrest, eurozone debt worries, more hawkish fed commentary and recent equity gains. On the positive side, Paper, Semi, Disk Drive, Biotech, Retail and Education shares are especially strong, rising 1.0%+. Small-caps are outperforming. The Ireland sovereign cds is falling -3.61% to 577.87 bps. Oil is falling -.49%. On the negative side, Airline, Road & Rail, Insurance and HMO shares are under pressure, falling more than -1.0%. The Transports are underperforming. Gold is surging +1.36% and Lumber is falling -2.55%. The 10-year yield is rising +7 bps. The US price for a gallon of gas is up +.03 today to $3.69/gallon. It is up .57/gallon in 49 days. Weekly retail sales rose +1.9% this week versus a +2.3% gain the prior week. This was the weakest showing since the week of March 2nd, 2010 and down from a +3.6% gain the week of January 4th of this year. The Portugal sovereign cds is rising +1.03% to 585.17 bps, the Russia sovereign cds is rising +2.35% to 124.35 bps and the Hungary sovereign cds is gaining +1.88% to 230.39 bps. Despite the deal in semis, tech overall isn't trading very well again, which is a big negative. I still think that the tech and financial sectors must join in the recent rally soon for it to gain much traction from current levels. Both sectors remain below their 50-day moving averages with poor leadership. Trading has become very choppy again and breadth/volume remain lackluster. Odds are increasing for a pullback in the major averages from around current levels. One of my longs, (GOOG), is under pressure today on news of a US FTC antitrust probe. This uncertainty will likely cap any gains in the shares for awhile. Longer-term, I still see meaningful upside in the shares from around current levels. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, technical selling, emerging market inflation fears, Mideast unrest and Japan concerns.

Today's Headlines


Bloomberg:
  • U.S. Service Industries Grew Less Than Forecast in March. Service industries in the U.S. expanded less than forecast in March, a sign the biggest part of the economy is trailing the gains in manufacturing. The Institute for Supply Management’s index of non- manufacturing businesses decreased to 57.3 from 59.7 in February. Higher fuel costs, also a headwind for American consumers, and the effect on supply chains from the earthquake in Japan are hurdles facing U.S. companies in coming months. “It looks like April is continuing to struggle under some of these clouds. We’re seeing a little bit of a slowdown” in the economy, he said. The measure of new orders decreased to 64.1 from 64.4 in February, while the gauge of business activity fell to 59.7 from 66.9. The group’s employment gauge dropped to 53.7 from 55.6 a month earlier. The index of prices paid declined to 72.1 from 73.3. Economists at IHS Global Insight in Lexington, Massachusetts, today were the latest to cut forecasts for U.S. growth over the first half of the year, reflecting the jump in food and fuel costs and the possible disruptions to factory supplies following the earthquake in Japan. The reductions come on the heels of similar moves by economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. The economy probably grew at a 2.3 percent annual rate last quarter, a percentage point less than IHS Global previously estimated, according to a note from Nigel Gault, the firm’s chief U.S. economist. “The recovery will withstand the twin shocks from higher oil prices and the natural disaster in Japan, as long as they do not worsen,” Gault wrote. “But, the economy will not escape the twin shocks unscathed.”
  • China Raises Interest Rates to Counter Inflation Pressure. China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy. The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People’s Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent. The move comes as a surprise to some, after Credit Suisse Group AG, Morgan Stanley and Bank of America-Merrill Lynch said officials may pause in tightening. While Japan’s disaster and Europe’s debt woes are clouding the global outlook, Premier Wen Jiabao’s government is more focused on the estimated 5 percent jump in consumer prices last month, said analyst Shen Jianguang. It’s “very significant” that China raised rates before the March inflation data has even been announced, said Shen, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank. Premier Wen last month described inflation as “a tiger” that once set free will be difficult to cage, and also as a potential threat to social stability. “Exorbitant” house price increases in some cities are a top public concern, he said. China’s inflation accelerated to 5.2 percent last month, the fastest pace since July 2008, according to the median estimate in a Bloomberg News survey of nine economists. China’s key lending rate will rise to 6.56 percent by year- end, with the deposit rate climbing to 3.5 percent, according to the median forecast in a Bloomberg News survey of economists on March 22.
  • Bernanke Inflation Outlook Pollyannish, Pimco's Gross Tells CNBC. Federal Reserve Chairman Ben S. Bernanke’s view that the impact of rising commodity costs on inflation is transitory is “pollyannish,” according to Pacific Investment Management Co.’s Bill Gross. Treasury 10-year note yields at 3.5% are unattractive, Gross, who runs the world’s biggest bond fund, told CNBC in an interview today.
  • Gold Surges to Record $1,452 on Demand for 'Chaos' Hedge, Silver Tops $39. Gold futures surged to a record of $1,452 an ounce as sovereign-debt concerns boosted demand for the precious metal as an alternative asset. Silver topped $39 an ounce. The cost of insuring Portugal’s debt rose to an all-time high. The conflict in Libya and the nuclear crisis in Japan spurred demand for gold as an investment haven. Before today, the metal jumped 27 percent in the past year, and silver more than doubled. “There’s still turmoil in the Middle East, uncertainty in Japan and possible sovereign-debt defaults,” said Adam Klopfenstein, a senior strategist at Lind-Waldock, a broker in Chicago. “There’s still demand for gold and silver as a hedge against chaos.” Gold futures for June delivery rose $17.40, or 1.2 percent, to $1,450.40 at 12:12 p.m. on the Comex in New York. The previous record was $1,448.60 on March 24. Gold for immediate delivery rose as much as 1.2 percent to a record of $1,450.65.
  • Libyan Rebels Prepare to Export Oil as Forces Loyal to Qaddafi Gain Ground. Libyan rebels were pushed back from the central port of Brega by forces loyal to Muammar Qaddafi as the opposition prepared to export crude oil for the first time since the conflict began six weeks ago. Rebels retreated from Brega after capturing part of it yesterday, the Associated Press reported. Regime forces fired rockets and artillery at the rebels today, sending many of them back to the city of Ajdabiya, the AP reported.
  • Portugal's Long-Term Credit Rating is Lowered One Level to Baa1 by Moody's. Portugal’s credit rating was cut by Moody’s Investors Service for the second time in three weeks amid expectations it will be unable to avert a European bailout. Moody’s downgraded Portugal’s long-term government bond ratings by one level to Baa1 from A3, and said it’s considering another reduction. Today’s move put the country at the same level as Ireland, Russia, Mexico and Thailand. Fitch Ratings on April 1 downgraded Portugal three notches to BBB-, the lowest investment grade, and kept the rating on “watch negative.” “Moody’s rating action was driven primarily by increased political, budgetary and economic uncertainty,” the company said in an e-mailed statement today. It expects the winner of June 5 elections to tap the European Financial Stability Facility with “urgency,” and that Portugal will be able to get support from other euro members before then if necessary. Investors are increasing bets Portugal will follow Greece and Ireland into seeking a rescue as its borrowing costs surge to record highs. The gap between Portuguese and German 10-year bonds surged to 536 basis points today, the highest level since the start of the euro. The yield on five-year notes also climbed to a euro-era record of 10.06 percent today. The country plans to sell as much as 1 billion euros ($1.4 billion.) of six- and 12-month bills tomorrow. The cost of protecting against a Portuguese default rose to a record, surpassing the price for Irish debt insurance for the first time in seven months. Credit-default swaps on Portugal’s bonds climbed 12 basis points to 592, implying a 41 percent probability the government will renege on its debts within five years, according to CMA. Contracts tied to Ireland’s notes dropped 11.5 basis points to 587.5.
  • Office Market in U.S. Begins Recovery as Vacancy Rate Declines. Office vacancies in the U.S. dropped for the first time in more than three years in the most recent quarter and rents climbed, signaling the market is beginning a recovery as the economy improves. The national vacancy rate fell to 17.5 percent in the first quarter from 17.6 percent in the previous three months, Reis Inc. said in a report today. The drop was the first since July through September of 2007. Asking and effective rents rose for the second straight quarter after more than two years of declines, the New York-based property-research firm said. “This is the first quarter, at least on a national basis, where the change is strong enough to qualify it as the first quarter of a recovery,” Ryan Severino, an economist at Reis, said in an interview. “We have finally gotten to an inflection point where the good is starting to outweigh the bad.”
  • China's Crackdown on Human Rights Sparks Little Outcry in Washington. China’s latest crackdown on dissidents has drawn scant outcry in Washington, with U.S. officials distracted by military intervention in Libya and doubtful that public denunciations will change China’s behavior. The administration is “scared to death to speak out on very sensitive issues” that might offend China and turn them against U.S. policy on Libya, Rep. Randy Forbes, co-chairman of the Congressional China Caucus, said in an interview yesterday. On Capitol Hill, likewise, legislators are reluctant to devote energy to an issue that hasn’t grabbed the public’s attention and isn’t tied directly to American jobs or the budget, Forbes, a Virginia Republican, added. Neither President Barack Obama nor Secretary of State Hillary Clinton has singled out China for public criticism over the latest wave of arrests. The Delegation of the European Union to China issued a statement today saying its attention had been brought to Ai’s case. The EU is concerned by the “increasing use of arbitrary detention against human rights defenders, lawyers and activists,” according to the e-mailed statement. The Chinese government’s latest wave of arrests has coincided with a campaign by some dissidents to spark democracy protests similar to those that have spread across North Africa and the Middle East in recent months. The administration and Congress should “make clear to the Chinese government that this crackdown is unacceptable, wholly in tension with international standards and Chinese law, and will have serious consequences for the bilateral relationship,” said Sophie Richardson, Asia advocacy director for Human Rights Watch, a New York-based watchdog group. Rep. Frank Wolf, a Virginia Republican and one the most outspoken China critics on Capitol Hill, said in an interview that he is appalled by the series of arrests. The Obama administration has been “very, very weak and inconsistent and ineffective on China,” he said. Wolf said he doesn’t expect much from his colleagues in Congress either, where he said neither party “has the heart to take this issue on” or to press China to change its human rights record by threatening punitive measures on trade or currency.
  • OECD Says G-7 Recovery Gaining Strength, Sees Price Risks. The Organization for Economic Cooperation and Development said an economic recovery among the world’s most advanced economies is gathering strength and called faster inflation a threat. “With financial conditions improving across the board, it seems likely that the recovery is becoming self-sustained,” the Paris-based organization said in its interim assessment published today. While “public finances remain in distress in most OECD countries,” some central banks “will need to deal with a risk that inflation expectations may become unanchored.”
  • Munger Says He Told Buffett of BYD Stake, Stayed Out of Talks. Berkshire Hathaway Inc. (BRK/A) Vice Chairman Charles Munger said his family was invested in BYD Co. “for years” before his company took a stake in the Chinese automaker and that he disclosed the financial interest to his business partner Warren Buffett. “I certainly suggested that Berkshire look at investing in something that the Mungers were already invested in, but we’d been in it for years,” he said today in a telephone interview.
  • Treasuries Decline After Federal Reserve Releases Minutes of March Meeting. Treasuries fell, pushing yields up, after the Federal Reserve released minutes of its March 15 meeting, where policy makers said the recovery is gaining strength while reaffirming plans to buy $600 billion of Treasuries through June.

Wall Street Journal:
  • Boehner, Obama Fail to Reach Budget Deal. House Speaker John Boehner (R., Ohio) on Tuesday said no budget deal was reached after meeting with President Barack Obama at the White House, raising the stakes ahead of a possible government shutdown at the end of the week. The White House earlier said it ordered top officials at multiple federal agencies to ensure contingency plans were ready for a potential partial shutdown. "While there was a good discussion, no agreement was reached," Mr. Boehner's office said in a summary of the meeting that he had with Mr. Obama, Vice President Joe Biden and other congressional leaders.
  • FBI Questioning Libyans. The Federal Bureau of Investigation has begun questioning Libyans living in the U.S., part of an effort to identify any Libyan-backed spies or terrorists, and collect any information that might help allied military operations. The move reflects concerns among U.S. officials—in the wake of an allied bombing campaign that established a no-fly zone over Libya to prevent the massacre of antigovernment rebels—that Libyan leader Moammar Gadhafi might try to orchestrate revenge attacks against U.S. citizens.
  • Apple(AAPL) Crunched in Nasdaq Rebalance. Nasdaq OMX plans to rebalance its Nasdaq-100 Index, cutting Apple's weighting from more than 20% at prsent to 12%. The changes, due to be announced today, will take effect on May 2.
  • New Fee Shakes Up a Lending Market. The money market has been roiled by a sudden shortage of Treasury securities, another unintended consequence of government involvement in financial markets. The disappearance of Treasurys in recent days has created a scramble among banks and investors, who depend on a fluid supply for short-term borrowing and lending. It is an unusual event, considering the market is generally awash in Treasurys, with about $9 trillion outstanding. But recent rule changes mandated by the Dodd-Frank laws have made it too expensive for some banks to offer out their Treasurys holdings as part of a key overnight lending market known as the repurchase or "repo" market. Banks typically borrow in this market, using Treasurys as collateral, parking the cash with the Federal Reserve and earning a better interest rate. Investors and money market funds use the market to lend out their cash overnight and earn a small return. The lack of supply was so severe on Monday, and some investors so desperate for Treasurys, that they accepted negative yields—effectively paying to lend money to the banks. That is something that has rarely been seen since the financial crisis. Exacerbating the problem, the Treasury has stopped selling some short-term Treasurys amid the debate in Washington over the government debt ceiling. At the same time, the Federal Reserve is suctioning up most of the new Treasurys that the government is selling, adding to the shortage of Treasury supply. "It is a perfect storm of collateral being pulled from the market when it is most needed," said Thomas Roth, executive director in the U.S. government bond-trading group at Mitsubishi UFJ Securities (USA) Inc. in New York.
  • LivingSocial Raises $400 Million To Fuel Expansion. LivingSocial, the number two player in the burgeoning daily coupon website market, has raised $400 million to help fuel its expansion and keep up with rival Groupon Inc., according to people familiar with the situation.
  • The GOP Path to Prosperity by Paul Ryan. Congress is currently embroiled in a funding fight over how much to spend on less than one-fifth of the federal budget for the next six months. Whether we cut $33 billion or $61 billion—that is, whether we shave 2% or 4% off of this year's deficit—is important. It's a sign that the election did in fact change the debate in Washington from how much we should spend to how much spending we should cut.
MarketWatch:
CNBC.com:
  • Buffett Has Conned Virtually Everyone: Steinhardt. Berkshire Hathaway(BRK/A) Chairman Warren Buffett is the "greatest PR person of recent times" and has "managed to achieve a snow job that has conned virtually everyone in the press," Wisdom Tree Investments Chairman Michael Steinhardt told CNBC Tuesday. "It is remarkable that he continues to do it."
Business Insider:
Zero Hedge:
NY Post:
  • Street Trades Slump. A shrinking Wall Street bull bodes more bad news for the cash-strapped Big Apple. The nation's biggest banks, many of which are headquartered in New York, are expected to produce much smaller profits this year -- and some analysts say for the foreseeable future -- than they did during the market's halcyon days. According to the city's Independent Budget Office, Wall Street profits are forecast to fall almost 30 percent to $14.9 billion in fiscal 2012, compared to an estimated $21 billion in profits for fiscal 2011. New York's fiscal calendar year ends June 30.
New York Times:
  • Sokol's Ways Questioned in Past Suits. Lawsuits involving David L. Sokol after he joined Berkshire Hathaway(BRK/A) suggest that management had some warnings about his rules-pushing nature long before his resignation last week for buying stock in a company shortly before Berkshire acquired it.
Charlotte Observer:
  • FreedomWorks: 'Fire Jim Rogers'. FreedomWorks, a conservative group aligned with the tea party movement, has launched a petition drive to fire Duke Energy(DUK) CEO Jim Rogers for guaranteeing a $10 million line of credit to the 2012 Democratic National Convention.
Real Clear Politics:
  • Immelt, the Jobs Czar from Hell. The New York Times reported last month that General Electric earned $14.2 billion in international profits, including, $5.1 billion in the United States. Yet GE did not pay a dime in federal income taxes last year. Oddly, President Obama chose GE Chairman and chief executive Jeffrey Immelt to head his President's Council on Jobs and Competitiveness.
Politico:
  • Rep. Paul Ryan's Budget Sets 2012 Stage. House Budget Committee Chairman Paul Ryan unveiled his much-anticipated fiscal 2012 budget Tuesday, giving structure to the conservative vision for America’s future and possibly laying the policy groundwork for the 2012 Republican presidential nominee.
Rasmussen Reports:
  • 50% Favor Drilling in ANWAR to Reduce Foreign Oil Dependence. A new Rasmussen Reports national telephone survey finds that 50% of Adults believe the United States should produce more domestic oil by allowing drilling in the ANWR, an issue that Congress has debated for years. Thirty-five percent (35%) oppose drilling in the refuge, while 14% are not sure.
Reuters:
Telegraph:
  • 'One in Seven' Chance That Nations Will Abandon Euro.The risk is roughly one in seven that Europe's ongoing debt crisis will push member nations to abandon the shared currency, raising the spectre of the "effective end of the euro area," the Economist Intelligence Unit has warned. Attempts to restore investors' confidence in debt-laden nations' ability to honour their commitments could see the weaker eurozone members grow ever wearier of the demands placed on them, according to a new report from the research body. Meanwhile, those countries whose finances are in better shape could lose patience with propping up other member nations, in this worse case or "ultimate risk" scenario.
  • How The Oil Price Affects What You Pay for Everything.

Bear Radar


Style Underperformer:

  • Large-Cap Growth (+.06%)
Sector Underperformers:
  • 1) Airlines -.75% 2) Road & Rail -.60% 3) HMOs -.60%
Stocks Falling on Unusual Volume:
  • SCHN, PSEC, SEMG, KBH, CIE, EW, ARUN, LAMR, WMGI, LEDS, ULTI, UTEK, CREE, OTEX, ARBA, HMC, GOOG, HNT, NSANY, AMT, MBT, MERU, KYN, TGP and KBH
Stocks With Unusual Put Option Activity:
  • 1) SVNT 2) DHI 3) NSM 4) PAY 5) COST
Stocks With Most Negative News Mentions:
  • 1) CLR 2) MDU 3) GEOI 4) MEE 5) WLL
Charts:

Bull Radar


Style Outperformer:

  • Small-Cap Growth (+.43%)
Sector Outperformers:
  • 1) Semis +7.96% 2) Disk Drives +1.52% 3) Gold & Silver +1.26%
Stocks Rising on Unusual Volume:
  • NSM, ISIL, PBY, CSTR, BTM, CBST, DMND, QCOR, SMTC, GOLD, EXPE, LULU, ANF, FCS, CIEN, MCRL, MPWR, VRUS, OLN, ONNN, LTD, SSYS, SMH, VHC and DNDN
Stocks With Unusual Call Option Activity:
  • 1) NSM 2) TYC 3) DCTH 4) ANF 5) GOLD
Stocks With Most Positive News Mentions:
  • 1) CBST 2) HMSY 3) PNR 4) IEX 5) ATK
Charts:

Monday, April 04, 2011

Tuesday Watch


Evening Headlines

Bloomberg:
  • Bernanke Says Fed Will Act If Inflation More Than 'Transitory'. Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a “transitory” boost in U.S. inflation and that the central bank would act if he’s proven incorrect. “We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” he said. “So long as inflation expectations remain stable and well anchored” and commodity-price increases slow, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said today in response to audience questions after a speech in Stone Mountain, Georgia.
  • Qaddafi Diplomacy Rebuffed as Europeans Back Rebel Demands. Muammar Qaddafi’s diplomatic outreach failed to entice European leaders, as Italy rejected a reported cease-fire proposal and recognized the rebels’ interim council as the nation’s only legitimate government. In Libya, rebels pushed back regime loyalists to gain control of most of the oil port at Brega, according to al- Jazeera television. U.S. and NATO warplanes continued to destroy regime targets, such as military vehicles near Brega hit by a U.S. A-10 Thunderbolt II ground-attack jet, according to a statement from the Pentagon.
  • Geithner Says U.S. to Reach Debt Limit No Later Than May 16. The U.S. will reach its $14.29 trillion legal debt limit no later than May 16 unless Congress acts before then, Treasury Secretary Timothy F. Geithner said today. If the limit hasn’t been raised by May 16, the Treasury Department will turn to a toolkit of emergency measures that can provide up to eight weeks of additional borrowing room, Geithner said. That extra time would end about July 8, the Treasury chief said.
  • NYSE(NYX) Shareholders Anticipate Counterbid From Deutsche Boerse After Nasdaq(NDAQ). Deutsche Boerse AG will probably raise its offer for NYSE Euronext to fend off Nasdaq OMX Group Inc. (NDAQ)’s unsolicited bid, according to three shareholders of the biggest U.S. stock exchange operator.
  • BofA(BAC) Was Pressed by SEC on Reserves for Mortgage Repurchases. Bank of America Corp. (BAC), in an exchange of letters with U.S. regulators that lasted over a year, was pressed for information about its reserves to cover the cost of buying back faulty home loans. “Discuss the level and type of repurchase requests you are receiving, and any trends that have been identified, including your success rates in avoiding settling the claim,” the Securities and Exchange Commission said in a Jan. 29, 2010, letter to the Charlotte, North Carolina-based bank that was released today. “Tell us and disclose in future filings how you establish repurchase reserves for various representations and warranties that you have made.”
  • Google(GOOG) Said to Be Possible Target of U.S. FTC Antitrust Probe. The U.S. Federal Trade Commission is considering a broad antitrust investigation of Google Inc. (GOOG)’s dominance of the Internet-search industry, two people familiar with the matter said. Before proceeding with any probe, the FTC is awaiting a decision on whether the Justice Department will challenge Google’s planned acquisition of ITA Software Inc. as a threat to competition in the travel-information search business, said the people, who spoke on condition of anonymity because the matter is still confidential. The FTC and Justice Department share responsibility for oversight of antitrust enforcement, and the outcome of the ITA matter may determine whether the two agencies will vie for control of a broader probe of Google, the people said. The two agencies sometimes negotiate which one will handle major antitrust investigations, with the decision turning on their respective expertise. The Justice Department may soon announce its decision on Google’s purchase of ITA, said the people familiar with the matter.
  • Options, Volume Surge on Barclays' Long-Term Treasury ETF(TLT). Trading of bullish options on an exchange-traded fund tracking long-term Treasuries jumped to the highest level since September after a single block trade that profits if bond prices increase, driving yields lower. The block of 45,000 June $101 calls to buy the iShares Barclays 20+ Year Treasury Bond Fund traded at the ask price and exceeded the prior open interest of 764 contracts, indicating a buyer who expects the ETF to rally initiated the transaction. Total call trading volume for the fund, which rose 0.1 percent to $92.29 at 4 p.m. New York time, was 65,687 contracts, or quadruple the four-week average.
  • TI(TXN) to Buy National Semi(NSM) for $6.5 Billion, Expanding Analog Chip Leadership. Texas Instruments Inc. (TXN), the second- largest U.S. chipmaker, agreed to buy National Semiconductor Corp. (NSM) for about $6.5 billion, its biggest acquisition, to add higher margin analog semiconductors. National Semiconductor shareholders will get $25 a share in the all-cash transaction, the Dallas-based company said today in a statement. That’s a 78 percent premium to National Semiconductor’s closing price today of $14.07.
  • EU Regulator Starts Probe Into High Speed Trading. The European Securities and Markets Authority has begun an investigation into automated trading firms, asking for details on trading strategies and the computer algorithms that drive their trading deals, the Financial Times reported, citing a questionnaire sent to companies across Europe. The probe is part of a fact-finding project to enable ESMA to “better understand high frequency trading strategies and the impact of these strategies on the functioning of the markets as a whole, including the risks associated with HFT,” the questionnaire said, according to the FT.
Wall Street Journal:
  • Rebel Chief Asks for Timely Strikes, Helicopters. The top military commander of Libya's rebels said opposition fighters are unlikely to make significant gains against Col. Moammar Gadhafi's forces unless the North Atlantic Treaty Organization responds more quickly to requests for airstrikes, and gives the rebels advanced weapons, including helicopters. "If NATO listens to us and takes our requests seriously, this war won't last long," said rebel Chief-of-Staff Gen. Abdel Fattah Younis, in an interview at a safe house in a rural suburb of Benghazi. "If they don't give us what we are asking for, I don't know how long it will last."
  • U.S. Lenders Near Pacts in Foreclosure Probe. Fourteen U.S. lenders are on the verge of agreements with federal bank regulators to overhaul their handling of foreclosures and treatment of delinquent borrowers in response to allegations of abuses that emerged last fall. Regulators including the Office of the Comptroller of the Currency, Federal Reserve and Office of Thrift Supervision could announce the agreements with the banks and thrifts as early as next week, though a date wasn't final, according to people familiar with the matter.
  • Hedge Funds Had 'Challenging' March. Hedge funds struggled to avoid losses in March as the $2 trillion industry was hit by the mid-month market slump triggered by Japan's massive earthquake and tsunami. "Hedge funds had a challenging March," Mary Ann Bartels, who tracks industry activity at Bank of America Merrill Lynch, wrote in a note to investors Monday. Investable hedge-fund indexes tracked by Bartels lost 0.91% last month, through March 30, while the Standard & Poor's 500 index rose 0.08% in the same period.
  • Siemens' Business Surges in Iran.
Business Insider:
Commercial Times:
  • Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. have received increased orders after the earthquake in Japan disrupted production in the nation.
People's Daily:
  • Conditions supporting China's high growth may gradually weaken, citing Ma Jiantang, head of the country's National Bureau of Statistics. The country is facing a difficult task to meet domestic grain demand which may continue to increase.
China National Radio:
  • The likelihood of an interest rate increase in China is getting larger, citing Zhu Baoliang, chief economist at the State Inflation Center. The country's consumer prices may gain as much as 5% this year, citing Zhu.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -1.0% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 104.0 -.5 basis point.
  • Asia Pacific Sovereign CDS Index 110.0 -1.0 basis point0.
  • S&P 500 futures -.15%.
  • NASDAQ 100 futures -.15%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (KBH)-.30
  • (VRNT)/.51
  • (ISCA)/.47
Economic Releases
10:00 am EST
  • The ISM Non-Manufacturing Composite for March is estimated at 59.5 versus 59.7 in February.
2:00 pm EST
  • FOMC Meeting Minutes.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Plosser speaking, Fed's Kocherlakota speaking, Treasury's Geithner speaking, $24 Billion 1-Year Treasury Bills Auction, weekly retail sales reports, Needham Healthcare Conference, (TECD) investor day, (EM) investor summit and the (AYR) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.