Sunday, September 21, 2008

Monday Watch

Weekend Headlines

- Investors pulled $4767 million from commodity and energy funds in the week ended Sept. 17, according to money-flow researcher EPFR Global. Net outflows from commodity funds reached $269 million in the period while energy funds lost $498 million, EPFR said. Since mid-July, $3.9 billion has been pulled from the two fund groups. The Reuters/Jeffries CRB Index has dropped 22% since June 30 and is headed for its largest quarterly loss on record.

- The cost to protect Australian corporate debt from default fell, credit-default swaps show. The Markit iTraxx Australia Series 9 Index was quoted 17.5 basis points lower at about 150 basis points at 9:41 am in Sydney, according to Citigroup Inc. prices.

- Hedge funds raised cash holdings during the biggest two-day global stock rally in history because they aren't sure where markets are headed after the U.S. moved to bail out banks and limit bets against financial companies. ``The rally hurt us quite a bit'' because the firm shorted some stocks in expectation they would fall, said Chris Wang, co- founder of SYW Capital Management LLC in New York, which oversees less than $100 million. The Standard & Poor's 500 Index jumped 4 percent yesterday, capping its steepest back-to-back gain since the aftermath of the October 1987 crash. Markets from the U.K. to China posted their biggest one-day gains ever. Keith McCullough, who runs an independent research company Research Edge LLC in New Haven, Connecticut, told his 5,000 subscribers yesterday that he recommended having 96 percent of assets into cash. ``I've had a lot of people telling me they were doing what I did today,'' he said of his clients, who include hedge funds. Hedge funds were sitting on a record $156 billion of cash as of the end of July -- according to a report published earlier this week by Mary Ann Bartels, an analyst at Merrill Lynch & Co. Atticus Captial LP, a New York-based hedge fund run by Timothy Barakett, 43, told investors in the beginning of September that the Atticus Global fund was investing 28 percent of its assets on stocks it expected to rise and 28 percent in stocks it was wagering would tumble. The fund fell 25 percent through the end of August. Hedge-fund investors said that some funds were keeping their short positions in financial stocks or in the overall markets, even as shares climbed. San Francisco-based Passport Management LLC, the $4.7 billion hedge-fund firm run by John Burbank, 44, had a net market exposure -- or the amount of money used to bet on the rising prices of securities minus the amount used to bet on falling prices -- of 16 percent at the end of August. The only time the figure was lower this year was in January, when it was 11 percent, according to a report sent to investors. The Global Strategy fund was down 8.3 percent this year through August, with most of the decline coming last month from wagers that financial stocks would tumble. The fund continues to keep its bets on falling financials stocks, which accounted for 54 percent of net assets at the end of August, said investors in the fund.

- French Finance Minister Christine Lagarde said the financial crisis may delay reform to the French economy as growth is likely to be “soft” next year. Lagarde predicted Europe’s third-largest economy would end next year better than it begins it.

- GE(GE), Morgan Stanley(MS) Bonds Gain as Credit Markets Thawed by Plan. Corporate borrowing costs fell for the first time in almost two weeks amid U.S. government plans to stem the collapse of confidence in the financial markets.

- Nickel headed for its biggest weekly drop in almost four years as stocks of the metal rose to a nine- year high, signaling weak demand. Stockpiles in warehouses monitored by the London Metal Exchange advanced 0.9 percent to 52,326 tons, the highest since July 1999. Output of stainless steel, where nickel is mainly used, slid 0.6 percent in the second quarter from a year before, the International Stainless Steel Forum said this week.

- The Comex division of the New York Mercantile Exchange raised margin payments on gold and silver futures by as much as 47 percent after price swings accelerated.

- House Financial Services Committee Chairman Barney Frank sought authority to oversee and audit Treasury Secretary Henry Paulson's $700 billion program to buy bad mortgage investments. Frank, a Democrat from Massachusetts, proposed that the U.S. Comptroller General ``commence ongoing oversight of the activities and performance'' of the plan, according to legislative language presented to Treasury officials today and obtained by Bloomberg News. Frank also recommended limits on executive compensation of companies participating in the debt purchase plan, called the Troubled Asset Relief Program, or ``TARP.'' Companies seeking to sell assets through the program must meet ``appropriate standards'' for executive pay and shareholder disclosure, Frank proposed. These include limits on pay to exclude incentives for executives to take risks that are ``inappropriate or excessive.''

- U.S. Treasury Secretary Henry Paulson is sending a financial-rescue plan worth about $700 billion to Congress as Democrats prepare to turn it into a vehicle to help people with high-cost mortgages stay in their homes.

- The short-selling of bank and financial stocks was banned temporarily by Canada's main stock- market regulator following similar moves by U.S. and U.K. officials.

- Taiwan's financial regulator placed a ban on the short-selling of 150 stocks for two weeks starting Sept. 22, following similar moves by U.S., U.K. and Canadian regulators.

- China ordered widespread inspections of dairy companies and promised to punish ``anyone'' responsible for the contamination of milk by the industrial chemical melamine, which has been linked to the deaths of at least four babies.

- India's Essar Steel Holdings Ltd., which acquired Minnesota Steel Industries LLC last year, plans to invest $4 billion to expand its operations in North America.

- The suicide bombing yesterday of Islamabad's Marriott hotel, the city's most prominent American business, may increase tensions between the U.S. and Pakistan over how aggressively to combat terrorism.

- Crude oil fell for the first time in four days as Nigerian militants stopped attacks on oil facilities and investors awaited the U.S. government's proposed $700 billion rescue package for the finance industry.

- UK Housing Market ‘on Its Knees’ Amid Crisis, Rightmove Says.

Wall Street Journal:

- Short-Selling Ban May Have Loopholes. Many hedge funds have been more active in the credit-default-swap market lately, something regulators didn't address. Derivatives such as credit-default swaps aren't traded on public markets and already have raised alarms for their growth and their lack of transparency. The SEC said it might allow derivative-market makers to short stocks. That would allow investors to continue to bet against companies using the derivative markets, though that can be more difficult than shorting a stock. Investors still have exchange-traded funds enabling them to wager against the financial sector. These ETFs, such as ProShares UltraShort Financials, use derivatives and are popular among both professionals as well as individual investors.

- Hedge fund LTCM Lost Billions a Decade Ago; Now, a Second Fall? A decade ago, John Meriwether was at the epicenter of a financial crisis not unlike the one gripping Wall Street in recent days. Now, the famed hedge-fund manager is again up against a wall -- and this time, he is considering calling it quits.

- The Securities and Exchange Commission late Friday said it was expanding its probe into potential market manipulation and was turning its attention to the largely unregulated, obscure area of credit-default swaps. The SEC said it will require hedge-fund managers to submit, under oath, their trading activity in financial-company shares and related instruments such as credit-default swaps as part of its continuing examination of rumors and stock bets. The swaps trade directly between institutions, not on exchanges, and many investors believe their prices can be easily manipulated. They have become an increasingly popular way for firms to gamble on the fortunes of financial companies without actually trading securities issued by the firms. The cost of default insurance for Bear Stearns and Lehman Brothers Holdings Inc. spiked in the days before both Wall Street firms collapsed. In both cases, elevated swap prices fueled worries about the investment banks' solvency, triggering mass defections among clients and ultimately the companies' demise. Because credit-default swaps trade off exchanges, they are outside the scope of regulators. Growth of the swaps has exploded in recent years, and prices have often swung sharply ahead of major corporate news events, triggering suspicion that nonpublic information was leaking into the dealer market.

- Hedge-fund managers woke up Friday to a negative surprise. The government's ban on short sales of 799 financial stocks meant funds had to quickly alter the trading models they rely on every day in order to comply." This is a total change in the market," says Richard Del Bello, senior partner at Conifer Securities, which helps hedge funds handle trading, accounting and other operations. "Now the market is popping big time, and it's going to frustrate people. Are the short sellers wishing today that they could be shorting at these levels? Yes, they are." Still, for some funds, the stocks named in the SEC order represented as much as one-fifth of the companies that regularly cycle through their holdings, two hedge-fund managers said. As a result, some of the biggest hedge-fund firms that use complex computer models to select stocks, such as Renaissance Technologies and D.E. Shaw & Co., were making changes to those models Friday morning. Those firms oversee tens of billions of dollars. Kevin Lynch, a managing director specializing in hedge funds at RogersCasey, a Darien, Conn., consulting firm, said a renewal of this ban could rattle investors who see these actions becoming so commonplace as to curb the hedge-fund industry. "That could accelerate hedge-fund redemptions," he said.

- Major shareholders concerned about American International Group Inc.'s(AIG) $85 billion loan agreement with the federal government plan to meet Monday to discuss alternatives to the bailout plan, according to a person familiar with the matter.

- Counterparty credit risk in the derivatives market dropped Friday after the government and regulators announced several plans to halt this week's market meltdown. The CDR Counterparty Risk Index, which tracks credit-default swaps on leading banks and brokerage firms, fell more than 80 basis points to 302.1 during midday action. The index, compiled by New York-based Credit Derivatives Research, hit a record of more than 400 basis points earlier this week.

- Treasury Secretary Henry Paulson asked lawmakers to act quickly on a rescue plan for U.S. markets, saying Sunday that it's urgently needed to stabilize the financial system and protect the economy and taxpayers.

- Ambac Financial(ABK) said late Friday that a downgrade by ratings agency Moody's Investors Service would leave its guaranteed investment contract business short of collateral to meet liabilities.

- The stock market's dramatic comeback from its intraday lows on Thursday constitutes a textbook illustration of a "key reversal day," which has bullish consequences for at least the stock market's short-term prospects.

NY Times:

- Citigroup Inc.(C) CEO Vikram Pandit said his bank is gaining some new funds as competitors struggle. “We were a pillar of strength in the markets,” Pandit said. Pandit expressed confidence that the government’s proposed bailout plan for financial institutions could restore investor confidence and lead to banks making new loans.

- The AFL-CIO plans to spend $53 million to reach voters in 24 “priority” states before the US presidential election, while another group is working with about 50 unions and liberal organizations on voter drives. America Votes, which has a budget of $25 million, is working with unions and groups such as Emily’s List, the Sierra Club, Planned Parenthood and the NAACP Voters Fund to steer efforts to reach voters in 14 states.

- General Electric(GE) is best known as an industrial powerhouse, with manufacturing prowess in businesses that range from giant generators to jet engines to alternative energy technologies like wind mills and solar panels. Yet General Electric is as much a bank as a blue-chip industrial company. Half of its profits come from its giant finance arm, GE Capital, whose global portfolio spans aircraft leasing, commercial real estate lending, credit cards and home mortgages. Indeed, G.E. is the largest nonbank finance company in the United States, with assets of $696 billion and $545 billion in debt. If it were a bank, GE Capital would be the nation’s fifth-largest. So G.E. found itself engulfed last week in the market turmoil, treated by fearful investors as another financial company potentially in peril, until news of a planned federal bailout brought a rebound in the markets late Thursday and Friday. At one point on Thursday, G.E. shares were down 20 percent for the week, before they revived to close at $26.62 a share on Friday — down just 0.5 percent from Monday.

Washington Post:

- Senior administration officials meanwhile pressed their counterparts in Japan, Germany, Britain and elsewhere to establish similar programs to rescue their own troubled firms in what would be an unprecedented bailout of the worldwide financial system. The move comes in recognition that complex interconnections among financial institutions have created a global crisis that the United States cannot solve alone.

USA Today:

- Arguing that the Securities and Exchange Commission's emergency restrictions on short-sellers go too far, the nation's largest hedge fund association plans to press for modifications this week. The rules imposed last week require institutional investment managers with aggregate accounts valued at $100 million or more to give the SEC regular Monday disclosures of their stock-shorting moves for the preceding week. "By disclosing where we're investing … you're in essence taking Colonel Sanders' fried chicken recipe and giving it to Popeyes," said Richard Baker, president and CEO of the Managed Funds Association, which represents more than 600 hedge funds and managed future funds. Such public disclosure could drive some investors away from hedge funds, he said. Baker, hedge fund executives and other investment managers plan to press the SEC and Congress to ease the disclosure requirement in meetings expected to start Tuesday. Hedge funds would not object to the emergency rule if the SEC kept the disclosure reports private, he said. The SEC is evaluating the issue, spokesman John Nester said Sunday.

- Gas prices fell another 2 cents, marking the fourth straight decline after rising more than 18 cents in 8 days following Hurricane Ike, according to a nationwide survey of credit card swipes at gasoline stations.


- The SEC’s decision to ban short selling on financials has torpedoed the hedge fund community. One of the most widely implemented strategies among hedge fund managers is the long/short equity strategy and banning short selling, or betting on the expectation that a stock will fall, even on only individual stocks which the rule targets, interferes with thousands of funds' trading mode of operation. Much of the hedge fund community is up in arms, not only because their business has been handicapped, but also there appears to have been something of a communication breakdown between the US government’s decision to implement the ban and the investment community’s awareness of it.

San Francisco Chronicle:

- Wells Fargo(WFC) sees opportunities in economy woes.


- From boom to bust, China’s stocks casino loses luster. China's middle-class moms and blue-collar pensioners were among the world's most avid and successful investors last year. Now their record is one of lost fortunes, broken families and protest. China's stock market is down nearly two-thirds in eleven months and the anger of millions of ordinary citizens has unnerved the country's stability-obsessed government. "It's good the government has come in to rescue the market, but I'm afraid that we haven't hit rock bottom yet," said Zhan Ye, a driver for a property company who used to order stock trades from his car as he listened to the radio news. "As soon as people see prices falling, they'll just get scared and pull their money out again," he said. Millions of people with little money to spare and little knowledge of investing piled into the market as it more than tripled in value in less than two years. Since peaking last October, shares are now back to their level in late 2006. "Middle-class dreams have been buried. Life savings have vanished just like smoke," said Zhang Qi, an analyst at Haitong Securities in Shanghai. "Looking ahead, more family investors will stay far away from the stock market." The amazing bull run made stock trading a national obsession in China. The phrase to "stir-fry stocks" entered the vernacular as small investors flipped shares in a speculative frenzy. Chatrooms proffering investment tips exploded online. Demand was so high that those wanting mutual funds had to enter a lottery. The market boom enticed people to shift into stocks from secure, low-interest bank accounts. Corporate profits, derived in part from trading, have dwindled and scores of companies have put listing plans on hold.

- Institutional money managers will not have to disclose their short positions to the public immediately, the U.S. Securities and Exchange Commission said on Sunday. Under the SEC's emergency rule, the information will be made public two weeks after it is filed electronically to the commission, the agency said in a statement. The new order will take effect at 12:01 a.m. ET on Monday, September 22, the SEC said.

Financial Times:

- A $111bn backlog of bonds that need to be refinanced over the next year has built up in the emerging market economies and raised the threat of defaults and company closures. With the ability to raise money in the debt markets severely restricted because of the credit crisis, emerging market banks and companies could struggle to roll over the maturing debt, according to ING (ING) Wholesale Banking. David Spegel, global head of emerging markets strategy at ING, said: "Many corporates and banks in the emerging markets are highly levered without cash to fall back on. These will struggle should they need to raise money in the markets.


- The European Parliament will support calls tomorrow for Europe-wide legislation aimed at making the inner workings of hedge funds and private equity more transparent.


- A group of the world's biggest hedge funds are planning to sue the Financial Services Authority for millions of pounds of losses incurred as a result of the regulator's ban on short-selling last week. Lawyers are being galvanized on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused "wide-spread capital destruction." Prime brokers in London estimated that 35 per cent of European hedge funds were organizing emergency measures to avoid closing funds as a ban on short-selling has hamstrung managers at a time when they need flexibility to survive. The collapse of Lehman Brothers, the ban on short-selling and the surge in global markets has created a lethal cocktail for funds. The most recent figures from HSBC private bank showed that some hedge funds are nursing losses of as much as 50 per cent this year, with many funds having dropped more than 10 per cent last week alone. Insiders said some of the best-known funds, including Och-Ziff, Atticus, RAB Capital and Tosca are nursing heavy losses.

The Independent:

- Jeremy Warner’s Outlook: Short sellers are just the start of regulatory purge. Better late than never, I suppose. I've been warning for years about the explosive growth of short trading, but nobody in Government or at the Financial Services Authority took any notice, preferring instead to take their instruction from the tortuous defense of this invidious practice that you tend to read in the establishment press. You know the sort of stuff – oh, but it would interfere with the efficient workings of capital markets and price discovery if you did anything about it, or, horror of horrors, undermine London's competitiveness as a financial centre. The way things are going, there will soon be no financial centre left to be competitive. Having been banned from attempting to bring the banking system to its knees, the hedgies will merely move on to something else – retailers, housebuilders and so on. Where there's a way there's a will. Collusion between hedge funds in shorting the London market has become as endemic as insider dealing, yet, only after it threatened to bring down the banking system, putting billions of pounds of savers' money at risk, did regulators move to do anything about it. As ever with financial markets, practitioners have pushed the acceptability of a practice which may originally have had some legitimacy beyond its limits, and in so doing they have invited a vicious regulatory crackdown. The still largely unregulated hedge fund industry is not about to escape the political backlash which is about to be unleashed on the capital markets. Some of the hedge funds that have been shorting bank stocks are bigger counterparties than the banks they are doing it to. Much of their "leverage" may have come from the very banks they are attempting to trash. In any case, in the root-and-branch reform of the regulatory system promised yesterday by Hank Paulson, the US Treasury Secretary, they may soon find themselves regulated like banks, with the requirement to put up the same high levels of regulatory capital. That ought to slow them down a bit.

Der Spiegel:

- The German government will probably lower its forecast for economic growth next year due to the financial market turmoil. The forecast may be cut to .5% from a current estimate of 1.2%, citing experts close to Economy Minister Michael Glos.

NZZ am Sonntag:

- UBS AG is likely to benefit from the US rescue plan for the banking industry even if it can’t sell its own bad assets, citing UBS spokesman Christoph Meier in an interview. By buying the bad investments of US-based banks, the US government is reviving the market for such securities, which helps the global banking system.


- The banking crisis will put a damper on the Swiss economy, citing an interview with Finance Minister Hans-Rudolf Merz.

RIA Novosti:

- Russia plans to reduce its food imports by 50% within two to three years by boosting local production, citing Agriculture Minister Alexei Gordeyev.

Australian Financial Review:

- Australian builders warned a labor shortage and the crisis in global financial markets may spark delays in more than $101 billion of new projects.

The Age:

- The Australian Securities and Investments Commission has dramatically widened its crackdown on short-selling, banning the practice across the entire sharemarket for at least a month as a "circuit breaker" to restore confidence. The Australian position goes further than US and British regulators, which last week detailed measures to ban short-selling on financial stocks only as part of efforts to prevent wild swings on global bank shares. But last night ASIC widened its ban to include all shares, fearing that restrictions on short-selling on other exchanges would intensify risks on the Australian market. "To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short-sell plays," Mr D'Aloisio said.


- The possibility of a recession in Singapore can’t be ruled out amid the worst financial turmoil in global markets since the 1930s, citing Finance Minister Tharman Shanmugaratnam.


- Islamic bankers are learning the hard way that no financial market is immune to international turmoil. A report yesterday by the Islamic Finance Information Service said that the issuance of Islamic bonds had fallen 54 per cent in the first half of this year compared with the same period last year. “The drop in issuance confirms that Islamic finance has become intertwined with global financial markets and is in no way an isolated market,” the report said.

Jordan Times:

- Support for Osama bin Laden among Jordanian Muslims plunged to 19% this year from 61% three years ago, citing a study by the Pew Global Attitudes Project. In Lebanon, only 2% support the al-Qaeda leader and in Turkey only 3% do so, citing the study.

Weekend Recommendations
- Made positive comments on (MOLX), (ZMH), (BK), (STT), (GOOG), (BAC) and (LM).

- Made negative comments on (USB) and (MCO).

Night Trading
Asian indices are +1.0% to +3.25% on avg.
S&P 500 futures -.67%.
NASDAQ 100 futures -.69%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
Commodity Movers
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Rasmussen Business/Economy Polling

Earnings of Note
- (AZO)/3.87

- (KMX)/.09

- (COMS)/.06

- (ARTC)/.39

Upcoming Splits

- (ILMN) 2-for-1

Economic Releases

- None of note

Other Potential Market Movers
- The (TOMO) investor presentation, (JSDA) analyst meeting, UBS Global Life Sciences Conference, Deutsche Bank Homebuilding Symposium, RBC Capital Markets Manufacturing/Tech/Services Conference and Thomas Weisel Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by financial and automaker shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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