Sunday, December 14, 2008

Monday Watch

Weekend Headlines

- Mitsui O.S.K. Lines Ltd., Japan's largest operator of iron-ore ships, rose to the highest in two months in Tokyo and led domestic shippers higher, as rates for carrying commodities had their biggest daily gain on record. The shipping line advanced as much as 11 percent to 607 yen and traded at 597 yen as of 9:54 a.m. on the Tokyo Stock Exchange.

- The cost of protecting Japanese and Australian corporate bonds against default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 12.5 basis points to 332.5 at 10:13 a.m. in Tokyo, according to prices from BNP Paribas SA. The Markit iTraxx Australia index was quoted 20 basis points lower at 380, Citigroup Inc. data show.

- President George W. Bush said he is “not quite ready” to announce his decision on a rescue plan for U.S. automakers. The president, traveling on Air Force One from Iraq to Afghanistan, told reporters that “it won’t be a long process” because of the “fragility” of the industry. Asked if he is leaning toward using funding approved to rescue Wall Street firms, he said, “I signaled that’s a possibility.”

- While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department. “You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.” Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve. “This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said. Japan’s bond market suggests that low yields may remain for a sustained period. In an effort to revive sagging growth in the 1990s, the world’s second largest economy ran its national debt to 1.5 times of gross domestic product. Yields on Japanese bonds are near the lowest in three years, with the country’s benchmark 10-year bond paying 1.40 percent, compared with 2.57 percent in the U.S. The national debt in the U.S. is 72 percent of GDP.

- OPEC, which meets in Oran, Algeria, on Dec. 17 to consider output quotas amid falling prices, expects oil demand to shrink by about 500,000 barrels per day in 2009, OPEC President Chakib Khelil said.

- Russian Prime Minister Vladimir Putin’s pledge to avoid a “sharp” devaluation of the ruble and let the currency fall gradually has dissuaded citizens from storming banks to withdraw their savings as they did during the crisis of 1998. It also has prompted Russia’s first credit-rating downgrade in nine years and may prolong the decline of the nation’s manufacturing industry. A one-time, 20 percent devaluation is needed even though the ruble has fallen 15 percent against the dollar since August and the central bank widened its trading band five times in a month, said Anton Struchenvsky, an economist at Moscow brokerage Troika Dialog. “It’s like using a tourniquet: The blood doesn’t flow, the arm goes numb, but if you keep it tight for long the tissue will die,” Struchenvksy said. A devaluation is “the only way to let the blood, the money, back into the economy.”

- Arience Capital Management LP, a New York-based hedge-fund firm run by Caryn Seidman-Becker, is closing its sole fund because markets are “incompatible” with its investment style. Arience, which manages more than $1 billion, plans to shut down by Dec. 31 and return about 95 percent of investors’ money by the end of January, according to a letter sent to investors yesterday. The remaining assets will be paid after the firm’s 2008 audit has been completed.

- Citadel Investment Group LLC, enduring its biggest losses since starting in 1990, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, or 12 percent of assets. Withdrawals may resume as early as March 31 for the Kensington and Wellington funds, the Chicago-based firm said in a letter yesterday to clients. The funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5. “We have not made this decision lightly,” Citadel founder Kenneth Griffin, 40, wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”

- OM Holdings Ltd., an Australian supplier of manganese to China, will reduce output by about 30 percent next year because of the decline in demand for the metal.

- Antoin “Tony” Rezko, a one-time fundraiser for Rod Blagojevich and Barack Obama, may be a key witness in the criminal case against the Illinois governor accused of trying to sell the president-elect’s Senate seat. Rezko, who is awaiting sentencing after his June 4 conviction for taking part in a plot to get kickbacks from firms doing business with the state, has been talking to FBI officials according to an affidavit attached to the Blagojevich complaint. “Rezko has proffered with the government in hopes of receiving a recommendation from the government for a reduced sentence,” FBI Agent Daniel W. Cain said in that filing.

- Tennessee Senator Bob Corker said yesterday that a crisis like the U.S. automakers’ fight for survival can create opportunities by forcing people to look at things in new ways. The first-term Republican might just as well have been talking about his own career. Corker, a former mayor of Chattanooga who became a senator just two years ago and ranks last in seniority among the 10 Banking Committee Republicans, emerged from relative obscurity to become a key figure in the 11th-hour negotiations over a proposed $14 billion auto-industry loan package. While the effort ultimately collapsed in partisan discord over union wages, Corker, 56, stands as a rare winner in the debate. “I’m hard-pressed to think of another member who’s been here such a short period of time who’s made such an impression on colleagues of both sides of the aisle,” says Senate Republican Leader Mitch McConnell of Kentucky. Majority Leader Harry Reid seconded McConnell’s assessment. “I’ve been extremely impressed with Bob Corker,” says Reid, a Nevada Democrat. Illinois Senator Dick Durbin, the No. 2 Democrat, says Corker did a “magnificent job.” The sticking point, which ultimately killed prospects for an agreement, was a Republican demand to set a specific date for cutbacks in auto-worker wages and benefits. Corker says lawmakers were “three words” away from a deal. “Had we agreed on a date, any date that’s reasonable, I think it would have passed the Senate with 90 votes,” he says.

- Billionaire George Soros and hedge- fund founder David E. Shaw are among donors who have helped President-elect Barack Obama raise almost $10 million so far for inaugural celebrations next month in Washington.

- China’s industrial production grew at the weakest pace in almost a decade as export growth collapsed, increasing pressure on the government to do more to revive a slumping economy. Production rose 5.4 percent in November from a year earlier, the statistics bureau said today. None of 14 economists surveyed by Bloomberg News predicted such a small increase.

- Sentiment among Japan’s largest manufacturers fell the most in 34 years, signaling companies are likely to cancel spending plans and cut more jobs, pushing the economy further into recession. An index that measures confidence among large makers of cars and electronics dropped to minus 24 from minus 3, the Bank of Japan’s quarterly Tankan survey showed today, in line with economists’ estimates.

- Just when US companies are about to report their biggest writedowns, the losses may be the strongest signal yet that it’s time to buy stocks. Companies in the S&P 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46% higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began. The ballooning gap between net income net income and operating profit suggests companies are getting rid of their weakest businesses, setting the stage for a recovery in stocks next year. “Trough eaernings tend to coincide with a maximum level of writedowns,” said William Knapp, NY-based investments strategist at MainStay Investments, which manages $25 billion. “You will start to see profitability return one the economy turns, which will probably be in the second half of next year. The market is going to recognize that through price and activity six-plus months ahead of time.”

- Biotechnology companies with cash and promising products can spurn offers from drugmakers hunting for bargains during the global financial crisis and ultimately command higher premiums than their cash-starved peers.

- BYD Co., the Chinese automaker backed by Warren Buffett, will introduce the F3 DM plug-in hybrid today as the nation’s government encourages carmakers to invest in environmentally friendly technologies. The F3 DM, which can be recharged from a household powerpoint, can run for 100 kilometers (62 miles), only using its batteries, Shenzhen-based BYD said in a statement.

- Australia’s dollar may fall toward the 5 1/2-year low it touched in October at 60.1 U.S. cents as commodity prices come under pressure from a slowdown in China, its biggest trading partner, State Street Global Advisors said.

Wall Street Journal:

- President-elect Barack Obama’s economic advisers are considering a stimulus plan that may reach $1 trillion during a two-year period.

- How Bernie Madoff Made Smart Folks Look Dumb.

- Fannie Mae(FNM) is finalizing a national policy that will allow tenants to remain in their homes even if their landlord goes into foreclosure -- a landmark decision for tenants. The policy will be in effect Jan. 9, Fannie Mae said Sunday.

- New regulations in California for heavy-duty diesel trucks could force a sweeping overhaul of the state's trucking industry and pave the way for similar changes elsewhere. The California Air Resources Board voted Friday to require trucks after 2011 to gradually reduce emissions of soot and, eventually, nitrous oxides implicated in smog formation. Remedies range from installing diesel exhaust filters at a cost of $10,000 and higher, to buying new engines or replacing trucks altogether. Nearly all vehicles must be upgraded by 2014, and engines older than 2010 models will have to be replaced between 2012 and 2022. The goal: Reduce soot pollution 85% by 2022.

- After a nasty six-month war between Huntsman Corp. founder Jon Huntsman and Apollo Management LP boss Leon Black, a peace pact has been struck that averts a potentially disastrous outcome for the New York buyout firm. Huntsman, a Woodlands, Texas, chemicals maker, announced late Sunday that it has terminated its $6.5 billion agreement to be bought by Apollo-owned rival Hexion Specialty Chemicals and has settled all litigation against the New York buyout firm.
- Why the Fed may cut rates less than the market expects.

- Goldman Sachs'(GS) energy equity research team, which predicted a crude oil spike to $200 a barrel earlier this year, slashed on Friday its 2009 forecast to just $45 as demand deteriorates. In a separate report, Goldman's commodities research team also cut its 2009 forecast to an average $45 and predicted world oil demand would fall by 1.7 million barrels per day (bpd) and help drive oil prices down to $30 a barrel in the first quarter.

- Onyx Pharmaceuticals(ONXX): Biotech Firm Hoping For Wider Approval Of Drug For Liver Cancer.

Washington Post:

- Alaska Gov. Sarah Palin's home church was badly damaged by arson, leading the governor to apologize Saturday if the fire was connected to "undeserved negative attention" from her campaign as the Republican vice presidential nominee. Damage to the Wasilla Bible Church was estimated at $1 million, authorities said. No one was injured in the fire, which was set Friday night while a handful of people, including two children, were inside, according to James Steele, the Central Mat-Su fire chief.

NY Post:
- The beaten-down hedge-fund industry is ruing the day it ever heard the name Bernard Madoff, whose far-reaching, $50 billion Ponzi scheme will only exacerbate what's been an already difficult year. Beyond the shock that Madoff's investment strategy amounted to a house of cards, there's also the collateral damage that will arise from the scandal, especially among funds of hedge funds, which invest in pools of hedge funds on behalf of pensions, endowments and other investors.


- 22% of Greenwich Roundtable trim hedge funds. About two-thirds of respondents had recently increased the amount of cash in their portfolios, and 25% said hedge fund managers’ redemption restrictions and liquidity issues impacted their recent portfolio reconstruction.

Business Week:
- Tech Trends to Expect in 2009. Mark Anderson predicts the year’s coming developments, from expanded home entertainment to voice recognition to new, lightweight netbooks.

Chicago Tribune:

- Rahm Emanuel, President-elect Barack Obama's pick to be White House chief of staff, had conversations with Gov. Rod Blagojevich's administration about who would replace Obama in the U.S. Senate, the Tribune has learned. The revelation does not suggest Obama's new gatekeeper was involved in any talk of dealmaking involving the seat. But it does help fill in the gaps surrounding a question that Obama was unable or unwilling to answer this week: Did anyone on his staff have contact with Blagojevich about his choice for the Senate seat? Emanuel, who has long been close to both Blagojevich and Obama, has refused to respond to questions about any involvement he may have had with the Blagojevich camp over the Senate pick. A spokeswoman for Emanuel also declined to comment Friday. One source confirmed that communications between Emanuel and the Blagojevich administration were captured on court-approved wiretaps. Another source said that contact between the Obama camp and the governor's administration regarding the Senate seat began the Saturday before the Nov. 4 election, when Emanuel made a call to the cell phone of Harris. The conversation took place around the same time press reports surfaced about Emanuel being approached about taking the high-level White House post should Obama win. Emanuel delivered a list of candidates who would be "acceptable" to Obama, the source said. On the list were Obama adviser Valerie Jarrett, Illinois Veterans Affairs director Tammy Duckworth, state Comptroller Dan Hynes and U.S. Rep. Jan Schakowsky of Chicago, the source said. All are Democrats. Sometime after the election, Emanuel called Harris back to add the name of Democratic Atty. Gen. Lisa Madigan to the approved list, the source said. One alleged scheme outlined in the charges against Blagojevich involves the special election for Emanuel's seat. The government affidavit said Blagojevich and others were recorded talking about an unnamed "president-elect adviser" concerned about the election for Emanuel's congressional seat who might help the governor land a new job at a non-profit organization.

- The outlook for the once venerated investment banks Goldman Sachs(GS) and Morgan Stanley(MS) has turned increasingly bleak. Industry analysts have slashed their fourth-quarter expectations for the two Wall Street firms in recent weeks as the financial markets remain under severe strain.

- Apple challenges Sony and Nintendo. How does Apple plan to sell large quantities of iPods this holiday season in a depressed market already saturated with MP3 players? By repositioning them as high-end game machines.


- A revival in the U.S. real estate market, key to a recovery in the world economy, should begin by next spring, property mogul Sam Zell told an Israeli business conference on Sunday. "I believe that in a country that continues to grow and where the population continues to grow, we will see the first signs of equilibrium in the housing market in the spring of 2009 and I will expect by spring 2010 the housing market in the U.S. will look a lot better," Zell said.

- FACTBOX – Firms exposed to Madoff’s alleged fraud.

Financial Times:

- An intensified effort to exploit government control of Fannie Mae (FNM) and Freddie Mac to drive down US mortgage costs and cushion a decline in house prices could start soon. This might begin in the final weeks of the Bush presidency and is likely to continue under Barack Obama's administration. By the time it is over, the US taxpayer could own a large chunk of the US residential mortgage-backed securities market.

International Herald Tribune:

- For Bernard Madoff, the embattled hedge fund manager, the world came to an end when his funds were unable to meet $7 billion in withdrawals at a time when he was supposedly managing $17 billion. The number may sound staggering, but in fact it is typical of what has been going on at hedge funds - no matter how successful - when they offer investors the chance to withdraw their money rather that putting up a barrier, which is known as a gate. "We have become the ATM machines for people that need cash," said George Weiss, who heads a $3 billion multistrategy fund for both U.S. and foreign investors. Weiss, who has been a hedge fund manager for 20 years, said that his fund was down about 7.5 percent so far this year. Even so it has had 35 percent withdrawals.


- Lego A/S CEO Joergen Vig Knudstorp said sales growth at the toymaker this year will exceed the target of 12%, citing an interview.

Xinhua News:
- China’s energy consumption per unit of gross domestic product fell 3.46% in the first three quarters of the year, citing Zhang Ping, head of the National Development and Reform Commission. China needs a 4% average annual energy-intensity reduction to meet a government goal of decreasing the measure 20% in the five years through 2010.

China Daily:

- Recession risk ‘worse than expected’ China faces a worse-than-expected risk from global economic turmoil as growth threatens to slide this year and next, citing Zhang Ping, head of the top state planner. The economic slowdown and fall in profits have spread from coastal regions to central and western China, from export-led companies to other industries and from small and medium-sized enterprises to bigger companies, Zhang said. The country will be challenged by “sliding economic growth” this year and next amid slumping demand from overseas, citing a speech by Zhang to senior provincial officials yesterday. The global economy will experience a “relatively long” slump, citing Zhang.

Arabian Business:

- The 50 richest Arabs in the world lost a total of $25 billion this year as the global economic slump reduced the value of banking and property assets, citing its own survey.

Weekend Recommendations
- Made positive comments on (SBUX), (LUV), (BSX), (ASML) and (GET).


- Reiterated Buy on (STLD), target $18.

Morgan Stanley:

- Reiterated Overweight on (MON), target $170.

Night Trading
Asian indices are +.50% to +4.0% on avg.
S&P 500 futures +.28%.
NASDAQ 100 futures +.25%.

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
- (ABM)/.37

- (TITN)/.23

Upcoming Splits

- None of note

Economic Releases

8:30 am EST

- Empire Manufacturing for December is estimated to fall to -27.5 from -25.4 in November.

9:00 am EST

- Net Long-term TIC Flows for October are estimated to fall to $40.0 billion versus $66.2 billion in September.

9:15 am EST

- Industrial Production for November is estimated to fall to -.8% versus a 1.3% gain in October.

- Capacity Utilization for November is estimated to fall to 75.6% versus 76.4% in October.

1:00 pm EST

- The NAHB Housing Market Index for December is estimated to rise to 10 versus 9 in November.

Other Potential Market Movers

- The (SUN) Analyst meeting, (ARNA) R&D Day and (BEZ) Analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by automaker and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

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