Sunday, December 27, 2009

Monday Watch

Weekend Headlines

- The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance. The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under a new agreement announced yesterday, these limits can rise as needed to cover net worth losses through 2012. Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 percent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 percent a year. This means they won’t need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.

- Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr. are each eligible for compensation of as much as $6 million this year, the companies said today in regulatory filings. Pay at the mortgage-finance companies, which were seized by the U.S. in September 2008, added to debate over salaries for executives at companies dependent on government bailouts. The companies are “government agencies in all but name now,” making the pay excessive compared with that of federal officials, said Bert Ely, chief executive officer of Ely & Co. “It’s not clear to me what justifies the high salaries of the CEOs, but also the commensurately higher salaries for the lower-level folks” at the companies, Ely, a banking consultant in Alexandria, Virginia, said today in an interview. In addition to the CEO pay, 10 additional executives at the two companies are eligible collectively for $30.1 million in compensation for this year. The future role of the entities, which now serve both as public companies and instruments of government housing policy, has yet to be determined, Edward J. DeMarco, acting director of the FHFA, said in the agency’s statement. The agency “sought the guidance of” Kenneth Feinberg, President Barack Obama’s special master on executive pay, before approving the compensation packages, DeMarco said. Washington-based Fannie Mae, which has lost $120.5 billion over the last nine quarters, has requested $60.9 billion from the Treasury Department this year. McLean, Virginia-based Freddie Mac has tapped $50.7 billion in government capital since November 2008 and recorded $67.9 billion in cumulative losses over the last nine quarters amid a three-year housing slump. The government now holds almost 80 percent of the equity in each company.

- None of Iraq’s oil fields are under Iranian control, an Iraqi official said, one week after Iranian forces occupied a well in a disputed border area. “There are no other wells under Iranian control,” Ali Maarej, director of Iraq’s state-run Missan Oil Co. said today on a press visit of the al-Fakah site where last week’s standoff took place.

- China property market prices have risen too fast in some areas, Premier Wen Jiabao said today in an live interview with the official Xinhua News Agency broadcast online. The government should take measures to curb speculation in the property market and use taxation measures, lending rates and land property prices to control property investment, Wen said.

- The US dollar gained versus the euro and yen on speculation U.S. companies are bringing back earnings on overseas assets before the end of the year. The greenback strengthened against 13 of its 16 major counterparts on prospects U.S. reports tomorrow will show the world’s largest economy is recovering, backing the case for the Federal Reserve to withdraw emergency stimulus measures.

- Japanese manufacturers increased output at the fastest pace in six months in November, supporting the nation’s recovery from its deepest postwar recession. Factory production rose 2.6 percent last month after climbing 0.5 percent in October, the Trade Ministry said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a 2.5 percent gain.

Wall Street Journal:

- Investigators in the U.S., Europe, Africa and the Middle East are racing to determine how the son of a Nigerian banker became the first person in eight years to try to set off an explosive aboard a U.S. commercial airliner. President Barack Obama on Sunday ordered a review of government procedures for screening airline passengers and for tracking individuals suspected of terrorist ties. The administration also said it was heightening security procedures, which airlines and passengers say is already causing delays on international flights.

- Tens of thousands of Iranian protesters clashed with security forces nationwide, as a major religious holiday was convulsed by what appeared to be the worst street violence since antigovernment demonstrations broke out more than six months ago. In the capital of Tehran, security forces opened fire on crowds in the central neighborhood of College Square around 11:30 a.m., killing at least four protesters, according to opposition Web sites, eyewitness accounts and online videos. Opposition sites put the death toll as high as eight in Tehran by late Sunday. Iranian authorities confirmed four people had died in clashes, but denied they were killed by the security services. Among the protesters slain on Sunday was the nephew of Mir Hossein Mousavi, Iran's top opposition leader, according to Mr. Mousavi's official Web site. The nephew, Seyed Ali Mousavi, was participating in antigovernment protests in Tehran on Sunday, the site said.

- Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down. The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets. But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges. A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an "educational" process by dealers and customers that resulted in "a grudging recognition" that many uses of derivatives didn't fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital Hill. For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school. Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin. Dealers persuaded lawmakers to make exemptions to the clearing rules for some customers, including those covering foreign-exchange contracts, hedging by "end users" such as energy firms and airlines, and activities to offset "balance sheet risk," said Adam White, derivatives analyst at White Knight Research & Trading in Atlanta. Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements. Ohio Democrat Dennis Kucinich said in a statement he voted against the bill because it "contains a number of loopholes that sophisticated industry insiders will exploit with ease." A report Dec. 17 by Morgan Stanley analysts estimated that the volume of derivatives cleared could increase from a current 20% of the total to as much as 60% by 2012—a backdoor confirmation of critics' charge that 40% of the universe won't be covered.

- People should be prepared for change in China's macroeconomic policy as the country's economic situation shifts, an adviser to China's central bank said Saturday, signaling that Beijing will likely tighten monetary policy in 2010 as the world's third-largest economy further recovers. Despite the fact that China's economy is in recovery after bottoming in the first quarter, Beijing said earlier this month that it will continue its moderately loose monetary policy and active fiscal policy into 2010. However, economists widely believe Beijing has tightened its credit line and will begin to tighten monetary policy in the second half year. "Policy adopted amid the crisis can't last forever," Fan Gang, an adviser to the People's Bank of China, told a financial forum. "China's economic situation changes very quickly, including the condition of asset bubbles and hot money inflows. Certain flexibility of macroeconomic policy is an important factor in maintaining economic stability," Fan said. Policy makers should be vigilant for asset bubbles and hot money inflows in 2010, he said.

- Minnesota Gov. Tim Pawlenty, considered a possible 2012 Republican presidential candidate, is calling for strict spending limits as states and the federal government confront enormous deficits. Mr. Pawlenty has proposed an amendment to the Minnesota constitution that would limit spending during any two-year budget period to the amount of revenue collected during the previous budget cycle. At a Republican fund-raiser in New Hampshire on Dec. 16, the governor also pushed the idea of an amendment to the U.S. Constitution that would force Congress to pass, and the president to sign, a balanced budget. "Government spending in the country and in many states is progressing at an unsustainable, irresponsible and reckless pace," Mr. Pawlenty said in an interview this week. "The bathtub is overflowing onto the floor, and the first thing we need to do is shut off the faucet."

- Wall Street is trying to lure investors with investment vehicles designed to deliver hedge-fund-like returns without hedge-fund fees or hassles. But they have their own drawbacks. These hedge-fund clones, called replicators, typically aim to mimic returns of broad hedge-fund indexes using easily traded instruments like exchange-traded funds and futures contracts. Some are structured as mutual funds or ETFs, others as separate accounts and other vehicles. Investors, many weary of hedge funds' high fees and long lock-up periods, are diving into replicators. Goldman Sachs Group, which launched a clone in 2007, now has roughly $2 billion tracking its replicator.

- A U.S. government that has barred the phrase "war on terror" has nonetheless acknowledged that a failed Christmas day bomb attack on an airliner was a terrorist attempt. Can we all now drop the pretense that we stopped fighting a war once Dick Cheney and George W. Bush left the White House? The attempt by 23-year-old Nigerian Umar Farouk Abdulmutallab follows the alleged murders in Ft. Hood, Texas by Islamist-inspired Major Nidal Hasan in November. Brian Jenkins, who studies terrorism for the Rand Corporation, says there were more terror incidents (12), including thwarted plots, on U.S. soil in 2009 than in any year since 2001. The jihadists don't seem to like Americans any better because we're closing down Guantanamo. This increasing terror tempo makes the Obama Administration's reflexive impulse to treat terrorists like routine criminal suspects all the more worrisome. It immediately indicted Mr. Abdulmutallab on criminal charges of trying to destroy an aircraft, despite reports that he told officials he had ties to al Qaeda and had picked up his PETN explosive in Yemen. The charges mean the Nigerian can only be interrogated like any other defendant in a criminal case, subject to having a lawyer present and his Miranda rights read. Yet he is precisely the kind of illegal enemy combatant who should be interrogated first with the goal of preventing future attacks and learning more about terror networks rather than gaining a single conviction. We now have to hope he cooperates voluntarily.

- Investors' appetite for hedge-fund start-ups is slowly returning. But managers typically are raising relatively small amounts and some are granting concessions on key terms.


- America's Best Bang-For-The-Buck Cities.

- Governments and utilities are betting billions that a smarter grid will make our homes more efficient and nations more energy independent. Spanish company Telvent (TLVT) is helping educate those grids.

NY Times:

- Sewn into the underwear of Umar Farouk Abdulmutallab was a powerful plastic explosive, the authorities say. Had Mr. Abdulmutallab, sitting in seat 19A of Northwest Airlines Flight 253 on Friday from Amsterdam to Detroit, been able to set off the explosive, it might have blown a hole in the side of the airplane and caused it to crash, experts believe. Mr. Abdulmutallab, 23, a Nigerian citizen, was charged in a federal criminal complaint on Saturday with the willful attempt to destroy an aircraft with an explosive device. The complaint identified the explosive as pentaerythritol tetranitrate, or PETN. Introduced after World War I, PETN is in the same chemical family as nitroglycerin and among the most powerful of explosives.

- Secretive branches of the military’s Special Operations forces have increased counterterrorism missions against some of the most lethal groups in Afghanistan and, because of their success, plan an even bigger expansion next year, according to American commanders.

- Since the government’s announcement that Khalid Shaikh Mohammed would be tried with others in Manhattan in connection with the 9/11 attacks, some lawyers and others have expressed skepticism that such a trial will ever be held in the city. They are confident that defense lawyers will ask that the trial be moved, and believe that a judge might even consent. But a review of previous terrorism trials and interviews with lawyers involved in those cases and other legal experts show that such an outcome is hardly guaranteed.

- Newspapers, including this one, are weighing whether to ask online readers to pay for at least some of what they offer, as a handful of papers, like The Wall Street Journal and The Financial Times, already do. Indeed, in the next several weeks, industry executives and analysts expect some publications to take the plunge.

The Business Insider:
- The amazing thing about the apparent property bubble in Shanghai is literally bears all the markings of our last bubble. This is not just in terms of price, but in terms human mentality and behavior. Families are worried they "must buy now" or they'll "miss the boat" forever, even as shoddy developments go up empty in some parts. Here's another little story that should sound familiar. Property developers are being accused of hoarding land -- holding onto it, rather than building on it -- on the belief that if they wait some period of time it will be more valuable when they do develop it.

- Warren Buffett is a lovable, avuncular chap, not one of those axe-wielding CEOs who are feared by employees and idolized by the kind of red-claw capitalists who think that firing lots of people is a major leadership skill. Yet somehow he seems to have fired 21,000 people — 8.6% of his workforce — over the past year. And the cuts are being felt hardest by Berkshire’s poorest employees: some 3,000 textile workers have lost their jobs at Fruit of the Loom in El Salvador. Alice Schroeder, Buffett’s biographer, explains that Buffett is expert at hiring “bad cops” to fire employees and to insulate himself from any blowback:

NY Post:

- Top 10 for ten. It’s been a decade of booms and busts — and while it’s ending on a bust for many, a few are sitting as pretty as can be in multi-billionaire status. In reflecting on the fortunes of the past 10 years, The Post took a look at who Wall Street’s biggest winners were.

The Detroit News:

- Experts say auto sales will accelerate in '10 -- slowly.

- The wisest quote of 2009 came from President Barack Obama, who cut off belligerent Republicans with the reminder: "Elections have consequences." They surely do. And Americans are paying the consequences of the 2008 election. The most tangible fallout of the electorate installing single-party rule in Washington is that policy-making has become an ideological exercise, rather than a pragmatic one. Republicans still represent the views of roughly half of the America people -- on health care, it's more like 60 percent -- and yet the minority party has had no moderating effect on the health care reform packages moving swiftly to passage. It's a bill written by Democrats and passed by Democrats, with all of the give-and-take taking place between Democrats. The horse-trading is between the middle and the left, instead of between the right and the left. So instead of a bill that falls close to the middle, Congress will produce one that is well left of center. The old saw, "power tends to corrupt and absolute power corrupts absolutely," applies perfectly to the process we're witnessing in Washington.

- Church donations stay high despite recession.

The American:

- Let’s look at some of our recent cost overruns in government-driven medical spending. Congress is telling us that the different healthcare bills it is considering will cost roughly $900 billion over ten years and will somehow end up saving taxpayers’ money in the long run. If history is our guide, this claim will not be correct as massive cost overruns are common in government. Take Medicare, for instance. In 1967, long-run forecasts estimated that Medicare would cost about $12 billion by 1990. In reality, it cost $110 billion that year. Today, it costs $500 billion.


- Growing evidence that the Nigerian man charged with trying to blow up a commercial airliner as it landed in Detroit Friday spent time in Yemen and may have been fitted with customized, explosive-laden clothing there could complicate the U.S. government’s efforts to send home more than 80 Yemeni prisoners currently at Guantanamo Bay. Since Yemenis represent almost half of the roughly 200 remaining prisoners at Gitmo, new hurdles to their resettlement could spell more trouble for President Barack Obama’s plan to close the island prison while transferring a limited number of detainees to a prison in the U.S. Six Yemeni nationals were returned home earlier this month, and officials hoped more transfers would follow.

- Bruised by the health care debate and worried about what 2010 will bring, moderate Senate Democrats are urging the White House to give up now on any effort to pass a cap-and-trade bill next year. “I am communicating that in every way I know how,” says Sen. Mary Landrieu (D-La.), one of at least half a dozen Democrats who've told the White House or their own leaders that it's time to jettison the centerpiece of their party's plan to curb global warming. The creation of an economy-wide market for greenhouse gas emissions is as the heart of the climate bill that cleared the House earlier this year. But with the health care fight still raging and the economy still hurting, moderate Democrats have little appetite for another sweeping initiative — especially another one likely to pass with little or no Republican support. “We need to deal with the phenomena of global warming, but I think it’s very difficult in the kind of economic circumstances we have right now,” said Indiana Democratic Sen. Evan Bayh, who called passage of any economy-wide cap and trade “unlikely.”

- Michigan Rep. Peter Hoekstra, the ranking Republican on the House Intelligence Committee, said on Sunday the Obama administration has understated the threat Islamic terrorists pose to our nation’s security. Hoekstra added that the White House holds some accountability for the security breakdown that allowed a suspected terrorist to board a US-bound airliner on Christmas Day. “This is an international movement of radicalization. The Obama administration came in and said we’re not going to use the word terrorism anymore, we’re going to call it man-made disasters, I think downplay the threat from terrorism,” Hoekstra said on "FOX News Sunday". “In reality, it’s getting much more complex," he added. "Radicalization is alive, it’s well. They want to attack the United States, that threat is here in the United States…Homegrown terrorism, the threat to the United States is real, I think the administration has downplayed it. They need to recognize it, and identify it, and realize you have to defeat it.

Rasmussen Reports:

- The Rasmussen Reports daily Presidential Tracking Poll, released Thursday, shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (43%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -16 (see trends).

- A new Rasmussen Reports national telephone survey finds that 30% of voters nationwide believe the $787-billion economic stimulus plan has helped the economy. However, 38% believe that the stimulus plan has hurt the economy. This is the first time since the legislation passed that a plurality has held a negative view of its impact.

LA Times:

- Japanese Firms Investing in California Biotechs. At a time when major biotech companies in California are eager for investors, Japanese pharmaceutical companies are increasingly becoming a go-to place for money to develop and sell new drugs.

The Oregonian:

- Another Oregon gold rush? Some miners say high prices, unemployment could lure prospectors.


- Top Picks for 2010: Amdocs(DOX).

24/7 Wall St:

- The Kindle has become the most purchased item given as a gift in the history of the powerful e-commerce site, And, Amazon announced that ”On Christmas Day, for the first time ever, customers purchased more Kindle books than physical books.” Amazon said during the holiday rush from November 15 to December 16, the Kindle Wireless Reading Device, Apple(AAPL) iPod touch 8 GB; and Garmin nuvi 260W 4.3-inch GPS were the best selling electronics devices.


- What Technology Will Bring to the Next Decade.


- Shoppers appear to have given the nation's stores a needed last-minute sales surge. Early readings from Toys R Us, Sears Holdings and several mall operators show packed stores on Christmas Eve following a busy week fueled by shoppers who delayed buying, waiting for bigger discounts that never came or slowed by last weekend's big East Coast snowstorm.


- Chinese Premier Wen Jiabao on Sunday struck a defiant note about the country's controversial exchange rate policy, saying the government would not give into foreign demands to let the yuan rise.

- A GROUP of leading economists has attacked the UK government for its “irresponsible” failure to set out “even the rudiments” of a convincing plan to reduce Britain’s £178 billion budget deficit and warns of “alarming complacency” in the face of the country’s fiscal challenges. In a letter to The Sunday Times, the economists, including Tim Congdon, Patrick Minford and Gordon Pepper, warn of “heightened risk” of a downgrade of Britain’s sovereign debt rating. The signatories, several of whom are on the “shadow” monetary policy committee, say that the integrity of UK fiscal and monetary policy is at stake because of the huge budget deficit.

- How Google(GOOG) stole mighty Microsoft's(MSFT) thunder.


- Apple(AAPL) poised to start new year with launch of tablet computer. The device, likely to be called the iSlate, has no keyboard and allows users to watch TV shows and read online magazines. Speculation is rife that the Californian technology group will unveil the device, which has no keyboard and resembles a large iPhone, at an event on 26 January in San Francisco. Some technology bloggers have already christened the touchscreen device the iSlate after it emerged that Apple has registered the internet domain name.

NZZ am Sonntag:

- The US economy will growth by 2.5% next year and 3.5% in 2011, citing Kurt Karl, chief US economist at Swiss Reinsurance Co. "The development of the labor market in November was very encouraging," Karl said. The Federal Reserve is likely to increase interest rates in December 2010 to .5% and then raise them "in rapid steps" to 4% in 2011, citing Karl.

Bild am Sonntag:

- European Central Bank President Jean-Claude Trichet said budget deficits in the euro region need to be pared back by 2011 at the latest. Some countries may have to do it as early as next year, he said.

Globe and Mail:

- Canada's dirty subprime secret.

O Estado de S. Paulo:

- Brazil faces the "threat" of asset and currency bubbles, citing Angel Gurria, secretary general of the OECD.

El Nacional:
- Instituto Venezolano de Analisis de Datos, a public opinion polling company, found that half of the public plans to vote for legislative candidates opposed to President Hugo Chavez in elections scheduled for September of next year.


- The global economy is headed for "stable and sustained" growth next year as countries recover from the financial crisis, former Bank of Japan Governor Toshihiko Fukui said.

- Toyota Motor Corp. plans to raise global vehicle production to about 7.5 million units in 2010, 1.1 million more than the previous year, citing people close to the matter.

Yonhap News:

- North Korea may detonate a third nuclear device and provoke border clashes, citing a report by a South Korean government defense-research agency. North Korea may test another nuclear device to show the world that it has no plans to give up its weapons program, citing the Korea Institute for Defense Analyses.

Emirates Business 24/7:

- Some real-estate developers in Dubai, who withheld properties from the market after prices fell as much as 50%, are now selling at levels last seen in 2006.

Weekend Recommendations
- Made positive comments on (BUCY), (VAR), (PETS), (IBM), (PAR), (GS), (WMT) and (BKE).

- Made negative comments on (AAPL).

Night Trading
Asian indices are unch. to +1.25% on avg.

Asia Ex-Japan Inv Grade CDS Index 95.0 -1.0 basis point.
S&P 500 futures +.01%.
NASDAQ 100 futures +.15%.

Morning Preview
BNO Breaking Global News of Note

Google Top Stories

Bloomberg Breaking News

Yahoo Most Popular Biz Stories

MarketWatch News Viewer

Asian Financial News

European Financial News

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MarketWatch Pre-market Commentary

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TradeTheNews Morning Report In Play

SeekingAlpha Market Currents Bond Ticker

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Conference Calendar

Who’s Speaking?

Politico Headlines
Rasmussen Reports Polling

Earnings of Note
- (CALM)/.72

Upcoming Splits

- None of note

Economic Releases

10:30 am EST

- Dallas Fed Manufacturing Activity for December is estimated to rise +2.0% versus a +.3% gain in November.

Other Potential Market Movers
- The Treasury's 2-Year Note auction
could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by engineering and automaker stocks 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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