Friday, March 26, 2010

Friday Watch

Evening Headlines

  • Trichet Welcomes Greek Pact, Reversing Earlier IMF Criticism. European Central Bank President Jean-Claude Trichet welcomed a European Union agreement on an aid plan for Greece, toning down his earlier criticism that the International Monetary Fund was involved in the package. “It was a complex situation,” Trichet told reporters in Brussels late yesterday. “I am extraordinarily happy that the governments of the euro area found out a workable solution.” Earlier, he said that an IMF role in the funding of a rescue framework for Greece would be “very, very bad.” Trichet is concerned that turning to the IMF to help Greece cope with the EU’s largest budget deficit would show that Europe can’t fix its own problems and earlier this month dismissed such a move as “inappropriate.” The EU has struggled to produce an in-house rescue plan for Greece, contributing to the euro’s 12 percent slide against the dollar since November. Before the decision was reached, Trichet told France’s Public Senat television that “if the IMF or any other authority exercises any responsibility instead of the euro group, instead of the governments, this would clearly be very, very bad.” EU President Herman Van Rompuy said that the “lion’s share” of funding for Greece would come from the EU, with the rest from the IMF.
  • Bullard Says Fed Must Start Planning Now for Future Asset Sales. The Federal Reserve must start making plans now for asset sales to meet its goal of returning a record $2.32 trillion balance sheet to its pre-crisis size and makeup, St. Louis Fed President James Bullard said. “We want to someday get back to a pre-crisis balance sheet -- both the size of it and the fact that it would be an all- Treasuries balance sheet,” Bullard said today in a telephone interview. “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future.”
  • U.S. Said to Widen Homeowner Aid, Subsidize Mortgage Reductions. The Obama administration plans to announce programs to help homeowners avoid foreclosure, including subsidies for borrowers who owe more than their home is worth. The plan, to be unveiled tomorrow, would expand Treasury Department and Federal Housing Administration programs and use funds from the $700 billion Troubled Asset Relief Program, according to two administration officials. Foreclosures are expected to climb to 4.5 million this year from 2.8 million in 2009, according to RealtyTrac Inc., an Irvine, California-based research firm. The administration of President Barack Obama and banks including Wells Fargo & Co. and Bank of America Corp. have so far fallen short of meeting goals of the government’s foreclosure-prevention program, according to a report by Neil Barofsky, the TARP special inspector general. “As long as the administration continues to sidestep the larger issues such as job creation and how they intend to deal with Fannie and Freddie, subsequent misadventures into the mortgage market will continue to be an exercise in futility,” said Representative Darrell Issa of California.
  • Man Group Said to Talk With SAC, GLG in Search for U.S. Deals. Man Group Plc, the biggest publicly traded hedge-fund manager, is scouting investments, acquisitions and distribution deals in the U.S. and has spoken with firms including SAC Capital Advisors LLP and GLG Partners Inc., according to two people with knowledge of the discussions.
  • Half of U.S. Home Loan Modifications Default Again. More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report. The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months. U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors. Modifications are “clearly not working well and it’s not a surprise,” said Sam Khater, a senior economist at First American CoreLogic in Tysons Corner, Virginia. “It’s pointless to rewrite these loans because they’re underwater.”
  • JPMorgan(JPM), Lehman, UBS(UBS) Named as Conspirators in Muni Bid-Rigging. JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case. A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.
  • Swap Spreads Stay Negative as Investors Focus on Sovereign Risk. The decline of U.S. interest rate swap spreads to the lowest levels on record reflects a shift in investor focus from the plight of financial institutions to the ability of nations to finance rising fiscal deficits. The rate to exchange floating- for fixed-interest payments for 10 years this week fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points today before reaching negative 7.63 basis points. “Sovereign debt worries have replaced the banking crisis as the main worry for investors,” said Moorad Choudhry, an economics professor at London Metropolitan University and the author of “Structured Credit Products: Credit Derivatives and Synthetic Securitization.” “Even though the main focus isn’t U.S. sovereign debt worries, the U.S. budget deficit is an issue and it is going to be growing as the recently signed health-care bill will add to it.”
  • Debt-Burdened Dubai May Need Years to Rebuild Creditors' Trust. Dubai may be seeing light at the end of the tunnel after markets welcomed its offer to repay around $25 billion in debt by 2018. The recovery still risks taking years as the sheikhdom rebuilds creditors’ trust.
  • 'Green Fund' for Climate Change Proposed by IMF Staff. A “Green Fund” designed to help nations meet climate-change pledges would sell bonds in global markets and use the proceeds to help poor countries deal with the effects of global warming, International Monetary Fund staff proposed in a report. The report released today expands upon an idea mentioned by IMF Managing Director Dominique Strauss-Kahn earlier this month as a way to raise $100 billion a year by 2020. The plan offers a mechanism for rich nations to honor their agreement from last year’s Copenhagen climate summit to provide that amount of money to developing countries to confront drought, flooding, food shortages and disease exacerbated by global warming. Governments could inject reserve assets in the fund, including those disbursed by the IMF last year, it said. The IMF staff plan also calls for wealthy nations to provide separate subsidies to help finance grants, according to the report. Raising $1 trillion in bonds over 30 years would require an equity endowment of about $120 billion, the report said. On top of injecting assets in the Green Fund’s capital, rich countries would need to provide money from their budgets to finance grants. Anticipating it may be hard at first, the IMF report suggested the fund could run “deficits” initially. Countries that contributed to the capital could also forgo dividends temporarily. Another option is for the international community to seek an early agreement on carbon pricing and to dedicate a portion of the proceeds to the Green Fund.
  • FSA Insider Probe Said to Focus on Block Trade Front-Running. Britain’s financial regulator is examining whether some of the seven people arrested in an insider-trading probe engaged in the front-running of block trades, a person with direct knowledge of the case said.
  • China's Credit-Card Curbs Said to Be Weighed by U.S. Visa Inc.(V), American Express Co.(AXP) and MasterCard Inc.(MA) have talked with U.S. trade officials about taking action against China for shutting the companies out of its $723 billion payment-processing market, people briefed on the issue said. The U.S. Trade Representative’s Office has discussed a possible complaint at the World Trade Organization with lawyers for the three companies, as well as Discover Financial Services and First Data Corp., said the people, who declined to be identified because the U.S. hasn’t announced a complaint. The case highlights rising tensions between the world’s largest and third-biggest economies, adding to disputes ranging from currency policy to import duties to Internet censorship.
Wall Street Journal:
  • Personal Income Drops Across the Country. Personal income in 42 states fell in 2009, the Commerce Department said Thursday. Nevada's 4.8% plunge was the steepest, as construction and tourism industries took a beating. Also hit hard: Wyoming, where incomes fell 3.9%.
  • Juarez Violence Puts Factories on Defensive. U.S. companies flocked to the border city of Ju├írez because it was one of Mexico's most business-friendly cities. Now, an entire industry is adjusting to doing business in Mexico's deadliest town.
  • TV Chief Critical of Chavez Is Arrested. Intelligence agents arrested the president of Venezuela's only remaining independent television station on Thursday, leading to concerns that freedom of speech is ending in this oil-rich nation.
  • The Government Pay Boom. America's most privileged class are public union workers. It turns out there really is growing inequality in America. It's the 45% premium in pay and benefits that government workers receive over the poor saps who create wealth in the private economy. And the gap is growing. According to the U.S. Bureau of Labor Statistics (BLS), from 1998 to 2008 public employee compensation grew by 28.6%, compared with 19.3% for private workers. In the recession year of 2009, with almost no inflation and record budget deficits, more than half the states awarded pay raises to their employees. Even as deficits in state capitals widen and are forcing cuts in services, few politicians are willing to eliminate these pay inequities that enrich the few who wield political power.
  • ICBC's $161 Billion Jump in Loans Drives Jiang to Boost Capital. Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing moved to bolster capital after expanding lending by $161 billion last year, almost equivalent to the gross domestic product of the Philippines. ICBC, the world’s largest bank by market value, will sell as much as 25 billion yuan ($3.7 billion) of convertible bonds and will seek shareholder approval to issue stock equivalent of up to 20 percent of equity capital in Hong Kong, according to a statement yesterday from the Beijing-based company. The fundraising plan comes even after ICBC defended its position as the world’s most profitable bank in 2009 and capital stayed above the regulatory minimum. Additional money will serve as a buffer should regulators further tighten capital rules. Citigroup Inc. economists said this week China may be on track for an “asset boom, bubble and bust.” “This is surprising given that ICBC is in a strong financial position to support its growth for the next few years,” said Sheng Nan, a Shanghai-based analyst at UOB-Kayhian Investment Co. “It may be preparing for a rainy day when the regulator imposes even tougher rules on capital.”
  • Closing for Business? Western companies are finding themselves shut out as Beijing promotes homegrown rivals. Not so long ago in China, Western business executives traveling to the provinces could expect a hearty welcome and a banquet with endless toasts of maotai liquor. In February, however, representatives of General Electric (GE) and a dozen other U.S. companies got a taste of the way commercial relations have been changing. They were in Wuhan, a city of 9 million on the Yangtze River, for a seminar on water-treatment technology organized by the U.S. embassy. At a dinner after the meeting they were supposed to have a chance to mingle with top local officials. But at the last minute, Wuhan's mayor canceled his keynote speech and backed out of the gathering. That same day the provincial party secretary and governor begged off a separate event for American Ambassador Jon M. Huntsman Jr. One attendee, who won't be quoted by name, speculates that the Wuhan officials were responding to direct orders from the central government in Beijing not to meet the Americans.
Fox News:
  • Makeover Puts Cosmetics Superstores On Growth Path. Since late last year, Ulta Salon, Cosmetics & Fragrance(ULTA) has been making its own contribution to the genre. In a series of TV spots, a makeup artist shows how to use Ulta's cosmetics to create a face for whatever mood you're in — flirty, sophisticated or punk.
NY Times:
  • S.E.C. Reviews Derivative Use by Some Funds. The Securities and Exchange Commission announced Thursday that it was reviewing the use of swaps and other derivatives by mutual funds, exchange-traded funds and other investment products that are often marketed to individual investors, Edward Wyatt of The New York Times reports.
  • Shelby Criticizes Reform Bill, Saying It Won't End 'Too Big to Fail' Problem. The Democratic bill to overhaul the nation’s financial system would not end the “too big to fail” phenomenon or adequately protect taxpayers from having to bail out large companies, a leading Republican senator said on Thursday.
Business Insider:
L.A. Times:
  • Chinese Firm Buys Marriott in Downtown L.A. Shenzhen New World Group Co. buys the 469-room hotel out of foreclosure for an estimated $60 million, about half of what it sold for in 2007. Shenzhen plans to invest $13 million in upgrades.
Appaloosa Management:
  • Eric Cantor: Republicans Threatened, Too. House Minority Whip Eric Cantor blamed top Democrats for “fanning the flames” regarding threats to members of Congress — and says his office in Richmond was shot at earlier this week. Cantor, a Virginia Republican, said the heads of the Democratic National Committee and the Democratic Congressional Campaign Committee are using allegations of harassment and threats to Democrats nationwide for political purposes. Cantor said he doesn’t release information about the incidents of threats against himself to the media because it would only ratchet up violence. But he did say a bullet shot through the window in his campaign office in Richmond on Monday evening, and he has received threats because he is Jewish.
Real Clear Politics:
  • Bond Markets Reflect the True Cost of Obamacare. Not many people noticed amid the Democrats' struggle to jam their health care bill through the House, but in recent weeks U.S. Treasury bonds have lost their status as the world's safest investment. The numbers are pretty clear. In February, Bloomberg News reports, Berkshire Hathaway sold two-year bonds with an interest rate lower than that on two-year Treasuries. A company run by a 79-year-old investor is a better credit risk, the markets are telling us, than the U.S. government.
  • North Korea Vows 'Nuclear Strikes' in Latest Threat. North Korea's military warned South Korea and the United States on Friday of "unprecedented nuclear strikes" over a report the two countries plan to prepare for possible instability in the totalitarian country. The North routinely issues such warnings and officials in Seoul and Washington react calmly. Diplomats in South Korea and the U.S. instead have repeatedly called on Pyongyang to return to international negotiations aimed at ending its nuclear programs. "Those who seek to bring down the system in the (North), whether they play a main role or a passive role, will fall victim to the unprecedented nuclear strikes of the invincible army," North Korea's military said in comments carried by the official Korean Central News Agency. The North, believed have enough weaponized plutonium for at least half a dozen atomic bombs, conducted its second atomic test last year, drawing tighter U.N. sanctions.
Financial Times:
  • A Euro Exit is the Only Way Out for Greece. Greece faces the threat of state bankruptcy. No longer is there any illusion that membership of Europe’s economic and monetary union provides protection from harsh realities. Since it entered the euro area in 2001, Greece has sacrificed competitiveness and amassed enormous trade deficits. Theoretically, to make up the economic ground lost in less than a decade, the Greeks would need to devalue by 40 per cent. But in a monetary union, that is impossible. There is no shortage of proposals to help the Greeks, including assistance from other eurozone governments – a move that would contravene the “no bail-out” rule enshrined in the treaty setting up monetary union. There is, sadly, only one way to escape this vicious circle. The Greeks will have to leave the euro, recreate the drachma and re-enter the still-existing exchange rate mechanism of the European Monetary System, the so-called ERM-II, which they departed in 2001.
  • Pressure Rises for Formal Bank Fees Inquiry. Political pressure for a formal inquiry into investment banking fees mounted on Thursday as Lord Myners, City minister, said there was clear evidence of restricted competition in the market. “Certain aspects of investment banking in equity underwriting exhibit features of a semi-oligopolistic market,” Lord Myners told the Financial Times. His comments come less than a week after the Office of Fair Trading revealed it was looking at the fees charged by investment banks to decide whether to launch a formal probe.
  • China may resume a "managed float" of the yuan to allow the currency to gain modestly against the U.S. dollar, said Fan Gang, an adviser to the country's central bank, in an opinion piece published today. An abrupt revaluation would hurt the competitiveness of the nation's exporters, Fan Gang wrote.
China Securities Journal:
  • China's central bank may "soon" raise its reserve ratio requirement for the third time this year to further drain liquidity, citing analysts. The central bank may raise the ratio to stem excess cash driven by increased foreign direct investment, a growing trade surplus and speculation about a stronger yuan.
  • Toyota Motor Corp. will next month reduce its daily domestic production by 7% to 12,500 vehicles. The company expects sales to remain stagnant, the newspaper said.
Evening Recommendations
  • Reiterated Buy on (AMZN), target $180.
  • Reiterated Buy on (QCOM), raised estimates, target $50.
Night Trading
  • Asian indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 97.0 +1.0 basis point.
  • S&P 500 futures +.08%
  • NASDAQ 100 futures +.04%
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
8:30 AM EST
  • Final 4Q GDP is estimated to rise +5.9% versus a prior estimate of a +5.9% gain.
  • Final 4Q Personal Consumption is estimated to rise +1.7% versus a prior estimate of a +1.7% gain.
  • Final 4Q GDP Price Index is estimated to rise +.4% versus a prior estimate of a +.4% gain.
  • Final 4Q Core PCE is estimated to rise +1.6% versus a prior estimate of a +1.6% increase.
9:55 AM EST
  • Final March Univ. of Mich. Consumer Confidence is estimated to rise to 73.0 versus a prior estimate of 72.5.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The EU Summit, Fed's Warsh speaking, Fed's Bullard speaking, ECB's Papademos speaking, Fed's Tarullo speaking, (EAT) analyst meeting and the (HS) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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