Sunday, September 28, 2008

Monday Watch

Weekend Headlines

- President George W. Bush and congressional leaders said they reached an agreement on a $700 billion bank-rescue package designed to revive moribund credit markets. The House may consider the plan tomorrow and the Senate will vote by Oct. 1, lawmakers said today. While Bush and House Majority Leader Steny Hoyer predicted the measure would pass, Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi suggested they were unsure of the outcome.

- J.C. Flowers & Co. has raised $2.5 billion from investors for a buyout fund that will target banks and other financial firms crippled by the global credit contraction, two people with knowledge of the matter said. The fund may raise additional money, the people said. Flowers wants to ``take full advantage of the blood in the streets,'' said Michael Holland, chairman of Holland & Co. in New York, which manages $4 billion of assets. ``He had a coup in Japan and is going to visit similar opportunities in the U.S.'' Flowers was part of an investor group that bought Long-Term Credit Bank of Japan Ltd. for 121 billion yen ($1.1 billion) in 2000, renaming it Shinsei. The group sold two-thirds of the company in 2004 for 532 billion yen. David Rubenstein, co-founder of the Carlyle Group buyout firm, hailed it as perhaps the most successful private equity deal in history.

- Europe Stocks May Trail US as Valuations Mask Slower Profits. Even after plunging 34% from its 2007 peak, Europe’s Dow Jones Stoxx 600 Index may be a worse bet than the S&P 500, which declined 22%, some of the world’s biggest investors say. Earnings decreased at just 34% of companies in the S&P 500 that posted results since the start of July, compared with 46% in the European gauge. Analysts expect earnings in Europe to rebound 12.7% in 2009, about half the pace predicted in the US. Fortis Investments, Standard Life Investments and MFS Investment Management, which oversee about $765 billion, say those expectations for Europe are too optimistic because the region’s economy is heading into a recession. The reluctance by the European Central Bank to reduce interest rates may worsen the region’s economic downturn and curb profits, said James Swanson, who helps manage about $200 billion as the chief investment strategist at MFS. Europe’s economy contracted last quarter for the first time since the introduction of the euro almost a decade ago, yet the ECB held its benchmark interest rate at a seven-year high of 4.25% this month.

- The UN Security Council voted 15-0 today to adopt a resolution restating demands that Iran curb its nuclear work, a demonstration that Russia and China still share that goal with the U.S. and its European allies. The measure reiterates a strategy of offering Iran economic incentives to pare its nuclear program and threatening to impose sanctions for failure to cooperate. While not seeking new penalties, it ``reaffirms'' four prior United Nations resolutions and ``calls upon Iran to fully comply and without delay with its obligations.''

- China's central bank has indicated that it may slow the pace at which the Chinese currency is gaining against the U.S. dollar, according to David Hale, chairman of Hale Advisors. ``I had lunch with the People's Bank of China on Friday, where they told me they are going to slow down the appreciation of the currency here,'' Hale told a plenary session today at the World Economic Forum in eastern China's Tianjin city. Weakening export demand because of the U.S. housing slump and an international credit squeeze has stoked concern that China's GDP growth may slump, costing jobs and leading to bad loans and sinking profits.

- New York Attorney General Andrew Cuomo's investigation of short selling has been expanded to include trading in the $54.6 trillion credit-default swaps market, according to a person in his office. Cuomo is probing whether credit-default swaps were manipulated by short sellers to spread false rumors about financial companies such as bankrupt securities firm Lehman Brothers Holdings Inc. to drive down stock prices. Cuomo likely wants to know if the credit-default swaps are fueling the failures of financial institutions including Lehman Brothers and mortgage companies Fannie Mae and Freddie Mac, said Anthony J. Carfang, a partner at Treasury Strategies Inc., a Chicago-based consulting firm. ``You have a set of people doing this trade and they're targeting one company at a time,'' Carfang said yesterday in a phone interview. ``When Fannie Mae goes under, they move on to the next target, which was Lehman Brothers, and now you see them in Wachovia and Morgan Stanley.''

- The U.K. government will take control of Bradford & Bingley Plc, the U.K. mortgage lender whose shares have tumbled 93 percent this year, the British Broadcasting Corp. reported, without saying where it got the information. The Treasury and Financial Services Authority will negotiate with banks interested in buying parts of the Bingley, England- based bank, the BBC said today on its Web site. Possible buyers include Banco Santander SA, HSBC Holdings Plc and Barclays Plc, the report said.

- A growing number of currency traders and strategists are starting to speculate that finance ministers from the world’s biggest economies will join to support the dollar. Volatility in currencies is the highest since 2000, when the so-called Group of Seven nations last intervened in the foreign-exchange market. Morgan Stanley’s intervention watch index suggest an 18% chance that policy makers will step into the market to influence exchange rates. Any reading above 10% suggests the risk is ``meaningful,'' or elevated, according to the New York-based firm. The index, based on interest rates, trading patterns and investor positions, is accurate 78 percent of the time. The index is at the same level as when the G-7 intervened in 2000.

- India, Asia's biggest supplier of soybean meal, may harvest a record crop for a second year after higher prices and early rains boosted planting.

- Crude oil fell in New York in advance of a vote on a $700 billion U.S. bank-rescue plan amid concern the measures won't prevent an economic slowdown that would cut demand in the world's biggest energy-consuming nation. ``Even if the Troubled Asset Rescue Plan is passed, that doesn't necessarily mean there aren't any obstacles on the road to economic recovery,'' said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. ``There are worries about the outlook for the international economy.'' U.S. fuel demand averaged 19.5 million barrels a day during the past four weeks, the lowest since October 2003, the Energy Department said in a Sept. 24 report. Hedge-fund managers and other large speculators increased their net-long positions in New York crude futures in the week ended Sept. 23, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumber short positions by 41,728 contracts on the New York Mercantile Exchange, the Washington- based commission said in a report Sept. 26.

- Investors should sell call options granting the right to buy the euro against the dollar as the European currency heads for its first annual loss against the dollar since 2005 due to an economic slump, says Danske Bank A/S. The trade will also enable investors to take advantage of a surge in the single currency's volatility that has boosted derivative prices, said Sverre Holbek, a strategist at Denmark's biggest bank. The euro will fall back by Dec. 31 to a one-year low touched this month as an economic slowdown adds pressure on the European Central Bank to cut borrowing costs for the first time since 2003, Holbek said. ``Prospects are bearish for the euro as growth in the euro area is expected to be quite weak in the months to come,'' Copenhagen-based Holbek said in an interview.

- Russia and Venezuela agreed to create a joint oil company that will invest ``tens of billions of dollars'' to develop fields in Latin America and beyond, Russian Energy Minister Sergei Shmatko said.

- The Markit iTraxx Japan index Series 10 of credit-default swaps was quoted at 155 basis points at 9:31 a.m. in Tokyo, Barclays Capital prices show. The Series 9 benchmark fell 2.5 basis points to 156.5. The U.S. agreement over the weekend ``is not just positive for credit markets, it's extremely positive,'' said David Verschoor, a Hong Kong-based credit trader at BNP Paribas SA. ``The news is not such a big surprise, but people are very nervous. Now with passage of the plan in sight, investors are less skittish.'' The Markit iTraxx Australia was at 182 basis points for Series 10 at 10:35 a.m. in Sydney, BNP Paribas prices show. The country's Series 9 index, tied to the debt of 25 companies including Qantas Airways Ltd. and National Australia Bank Ltd., fell 8 basis points to 178.

Wall Street Journal:

- The Bush administration and congressional leaders agreed on a deal to authorize the biggest banking rescue in U.S. history. The $700 billion program would effectively nationalize an array of mortgages and securities backed by them -- instruments whose deteriorating value has clogged the nation's financial system.

- Apple Inc.(AAPL) is selling an unlocked iPhone in Hong Kong, which enables buyers to choose any wireless carrier for mobile service, media reports say.

- Market-beating market timers are more bullish than the laggards.

NY Times:

- As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers(LEH), a more dangerous threat emerged: American International Group(AIG), the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help. The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs(GS), Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern. Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said. Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion. Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

- China’s scandal over contaminated dairy products, which has made 53,000 children sick, exemplifies the weakness of the country’s authoritarian political system. The scandal, which stems from Chinese dairy producers selling baby formula laced with a harmful additive, raises questions about whether the ruling Communist party can create a transparent and accountable regulatory system. Chinese parents and journalists, who tried to raise awareness about the dairy problems, were thwarted by government bureaucracy and media bans set in place because of the Olympics.

- The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds. But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.’s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor’s downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody’s put one on a downgrade review.

- Citigroup(C) and Wells Fargo(WFC) were locked in a bidding war on Sunday over a possible emergency takeover of the Wachovia Corporation(WB), people involved in the talks said.

- Fastest-Growing US Industries.

Boston Globe:

- Barney Frank’s fingerprints are all over the financial fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing. Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he'll find one suspect in the nearest mirror.

USA Today:

- Monday, Sprint(S) will launch wireless WiMax services in Baltimore, marking the beginning of what could become a new era in mobile broadband.


- Iraq signed preliminary accords with General Electric(GE) and Siemens AG for equipment to double the country’s power generation capacity, citing Iraq’s Electricity Minister Karim Wahid Al-Hasan. The agreement with GE, Siemens and an unidentified company would total as much as $8 billion, Wahid Al-Hasan said.

- Hedge fund managers are reluctantly preparing to disclose their short positions to U.S. regulators on Monday, a move set to give a rare public glimpse into their secretive trading strategies two weeks later. For shareholders who have blamed short sellers for driving down company stocks, it will be a chance to see who is targeting their firm.

- President Hugo Chavez said on Sunday Venezuela will develop a nuclear reactor for peaceful purposes, in another challenge to Washington just days after Russia offered nuclear assistance to the socialist Latin American leader.

Financial Times:

- MKM Longboat is to liquidate its $1.5bn (£816m) flagship hedge fund after the London manager was hit by heavy client withdrawals and caught in the collapse of Lehman Brothers.

- Goldman Sachs (GS) is seeking to acquire up to $50bn in assets from ailing US banks as part of its push into commercial banking, Goldman executives say.

- The hunt begins to punish the culprits. Retribution and regulation are coming for bankers. Mintz said that, just as they did after the dotcom bubble burst and Enron collapsed, investigators will start with a broad investigation and then narrow their focus until they find cases that can be successfully prosecuted in court. “They need to know who knew what and when,” he said. The FBI is combing through documents and e-mails related to the collapse of AIG, Fannie Mae, Freddie Mac and Lehman Brothers looking for wrongdoing that may have contributed to the credit crisis. Some 500 prosecutions are under way against mortgage brokers and appraisers at the sharp end of the subprime scandal. The top US regulator, the Securities and Exchange Commission (SEC), has ordered more than two dozen hedge funds to hand over trading information as it seeks evidence that short-sellers spread rumours to undermine the companies they had targeted.

- Fears are growing that Dubai's once-buoyant property market will be hit by the global liquidity crisis, as lenders in the oil-rich region become more cautious and a $13.6billion (£7.39billion) cash injection by the Central Bank of the United Arab Emirates failed to ease worries of a housing market slowdown. The Gulf's property boom has succumbed to a reality check, according to analysts. Richard Rodriguez, the former chief executive of Emaar Properties in Dubai, said last week: “Either the pace will drop or the prices will. Both cannot be sustained in these market conditions.”

- Thousands of jobs are set to be lost in Britain's battered financial industries as their business levels, profitability and confidence plunge at the fastest pace in almost two decades, since the depths of the last recession, the CBI says today. The full scale of the mounting toll of the financial sector from the escalating credit crisis is laid bare by grim findings in the CBI's quarterly survey of its conditions, carried out with PricewaterhouseCoopers and covering leading banks, building societies, insurers, fund managers and securities houses.

Sunday Telegraph:

- House prices fell in almost half of Sydney’s suburbs. A Residex report found prices declined in 241 of 543 suburbs of Sydney, including its most expensive address of Point Piper. Overall, prices declined 1.74% in the three months to the end of August to a median of $471,000.

- Hedge funds around the world will this week pay investors hundreds of millions of pounds in the biggest round of redemptions on record. Funds will return 10% to 50% of assets under management to investors. One prime broker said: “Many funds will have to close. There were a flood of redemption notices at the beginning of the quarter but many investors said they wouldn’t actually withdraw the money if performance improved. It hasn’t.” One hedge fund said: “We’ve produced 15 per cent returns for 10 years. This year has been bad and our funds under management have been reduced from $2billion to just $300m. This is decimation.” Not a single hedge fund strategy has produced positive returns so far this month, with convertible arbitrage and distressed securities down an estimated 7.96 per cent and 7.34 per cent, respectively, according to Dow Jones Hedge Fund Indexes. Equity market-neutral funds, which often short a stock in one sector and go long on another in the same sector, are down 1.85 per cent.

International Herald Tribune:

- The end of a Wall Street era, even at Goldman Sachs(GS).

The Guardian:

- How short-selling profited the Tories. The Tories were accused last night of being bankrolled by a City 'wolf pack' after it emerged that the party was receiving hundreds of thousands of pounds from hedge fund managers who have been making vast sums of money from plunging bank shares.


- The German government will “clearly” lower its forecast for economic growth next year because of the effects of turmoil in financial markets, citing Economy Minister Michael Glos. “We will probably have to clearly revise down our forecast” of 1.2% growth for 2009.


- The Norwegian building market will shrink by $3.5 billion next year, hurt by the financial crisis and higher borrowing costs, citing the country’s Construction Association. Both residential and commercial construction will decline, eliminating as many as 15,000 jobs, the group said.


- Audi AG, Volkswagen AG’s luxury-car brand, wants to step up US spending to boost sales in the world’s largest automobile market. Audi wants to increase deliveries to almost 100,000 units in the region this year and double that number in the longer term, Audi sales chief Peter Schwarzenbauer said. The VW unit wants to more than double its marketing efforts and spend several hundreds of millions of euros in the US.

El Mercurio:

- Chilean export growth may decline as a result of the worst global financial crisis in decades, chairman of Banco Santander, the country’s biggest bank, said.

Folha de Sao Paulo:
- Brazil’s economic growth rate my slow to less than 4% next year, citing government aides close to President Luiz Inacio Lula da Silva.


- Toyota Motor Corp., Japan’s biggest carmaker, will cut production in China as sales slow in the country. The carmaker will reduce output of passenger cars by about 10% at its factory in Guangdong province. Sales may fall short of a forecast of 10 million this year as slowing economic growth and a slumping stock market undermine consumers’ purchasing power, according to the China Assoc. of Automobile Manufacturers.

Ming Pao Daily News:

- Luxury housing rents in Hong Kong may fall as much as 5% in the fourth quarter as demand from expatriate workers at international financial institutions falters. Luxury housing rents, which held firm in the third quarter, may decline between 3% to 5% in the fourth quarter and early next year as the global economy slows, citing Marcos Chan, head of Hong Kong and Macau research for Jones Lang LaSalle.

Weekend Recommendations
- Made positive comments on (MOT), (JAVA), (JPM), (TEL) and (PFE).


- Reiterated Buy on (TOL), raised target to $31.50.

Night Trading
Asian indices are -.50% to +.25% on avg.
S&P 500 futures -.71%.
NASDAQ 100 futures -.61%.

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
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Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Rasmussen Business/Economy Polling

Earnings of Note
- (SCS)/.22

- (WAG)/.45

- (CC)/-1.04

Upcoming Splits

- (DXPE) 2-for-1

Economic Releases

8:30 am EST

- Personal Income for August is estimated to rise .2% versus a -.7% decline in July.

- Personal Spending for August is estimated to rise .2% versus a .2% gain in July.

- The PCE Core for August is estimated to rise .2% versus a .3% gain in July.

Other Potential Market Movers
- The (AWI) Investor Meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and shipping shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

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