Friday, March 12, 2010

Friday Watch

Evening Headlines

  • House Democrats Seek 18-Month Extension of Build America Bonds. House Democrats will seek to extend interest-subsidized Build America Bonds in negotiations with the Senate over a jobs bill, acting House Ways and Means Committee Chairman Sander Levin said. “Build America Bonds have proven a vital and effective tool for job creation during the recovery,” said Levin, a Michigan Democrat. “Members of the Ways and Means Committee want very much to build off of this success and expand the program to help spur job growth and improve our communities.” A four-page document in which Levin outlines the panel’s position said the extension of Build America Bonds may cost the government as much as $10 billion in foregone revenue. Committee spokesman Matthew Beck said the House was seeking an 18-month renewal of the program, due to expire Dec. 31. House Democrats may also seek to continue exempting interest on private-activity bonds from the alternative-minimum tax, the document said. Such bonds are used to fund projects such as airport runways and housing projects. The program has been criticized by Iowa Senator Charles Grassley, the top Republican on the tax-writing Finance Committee, for steering billions in underwriting fees to firms such as Goldman Sachs Group Inc(GS). “Now a temporary program is becoming bigger, and Wall Street is seeking to make it permanent,” Grassley said yesterday. “Wall Street is profiting and cheering the expansion.”
  • Yellen Said to Be Obama's Pick for Fed Vice Chairman. Federal Reserve Bank of San Francisco President Janet Yellen is President Barack Obama’s pick for vice chairman of the central bank in Washington, two people with knowledge of the selection process said. The nomination is pending completion of vetting by the Obama administration, one person said. The vice chairman gets a four-year term, subject to Senate approval, and a separate term on the Fed Board of Governors. Yellen, who served as President Bill Clinton’s chief economist in the 1990s, said last month that the U.S. economy “still needs the support of extraordinarily low” interest rates. She would gain a permanent vote on monetary policy, instead of having a vote one year out of every three as a regional Fed chief. Gregory Hess, a former Fed economist who’s now faculty dean at Claremont McKenna College in Claremont, California, said Yellen’s views on inflation may be “worrisome” to investors and could result in higher bond yields. Yellen spent most of her career teaching economics and researching labor markets, joining the University of California at Berkeley in 1980. She was last a voting member of the Fed’s policy-setting Open Market Committee in 2009 and won’t have a vote until 2012. Yellen called Bush’s tax cuts “economically reckless” in 2003 and went on to support Senator John F. Kerry’s unsuccessful 2004 presidential campaign against Bush.
  • Retail LBOs are Back as Credit Freeze Abates, Buyout Firms Say. Private-equity firms looking to buy retail and consumer companies said they’re now able to finance deals and pay reasonable prices after the credit crisis and global recession triggered a buyout slump. “It feels like it’s a little bit of Goldilocks now,” Alex Pellegrini, a New York-based partner with Apax Partners LLP, said today. “It feels just right.” “The last couple months would suggest that people are getting active again,” said John Howard, chief executive officer of New York-based Irving Place Capital Management LP, noting his firm hasn’t made a retail investment in four years. “We’re seeing more real opportunities.”
  • Agrium(AGU) Ends Yearlong Attempt to Acquire CF Industries(CF).
  • Pandit 'Wouldn't Be 'Surprised' If Treasury Weighs Stake Sale. Citigroup Inc. Chief Executive Officer Vikram Pandit said the U.S. Treasury Department will be free to sell its 27 percent stake in the bank starting next week and that he “wouldn’t be surprised” if the government were considering a sale. “They’re free to do what they want to do,” Pandit said yesterday at an investor conference in New York. “I wouldn’t be surprised if they would actively think about something,” given where the stock is trading, he said.
  • Yen to Drop to 100 as Deflation Spurs BOJ to Add Cash, CIB Says. The yen is likely to weaken to 100 per dollar, a level last seen in April, as the Bank of Japan pumps money into the financial system to combat deflation, according to Credit Agricole Corporate and Investment Bank.
Wall Street Journal:
  • Soybeans Sink on Canceled Orders. Soybean futures tumbled to one-month lows, dragged lower in part by disappointing U.S. government export-sales data that showed China had canceled orders. Concerns about tightening monetary policy in China and potentially record soybean crops in South America also contributed to the declines. The nearby March soybeans contract fell 26.5 cents, or 2.8%, to $9.255 a bushel on the Chicago Board of Trade. Soybean export sales for the week ended March 4 were a net reduction of 115,800 metric tons, the U.S. Department of Agriculture reported on Thursday. China canceled 192,400 tons of previous purchases for the current 2009-2010 crop year.
  • Hearst Jumps Into the Apps Business. Media Giant Plans to Crank Out Scores of iPhone Applications, Hoping 99-Cent Sales Add. At Hearst Corp., a handful of employees are cranking out what the media company hopes will add up to the next big thing. Hearst, best known as a publisher of magazines and newspapers, is jumping into the business of developing software applications, or "apps," for use on Apple Inc.'s(AAPL) iPhone. Hearst is focusing its apps on what it knows best: information, mainly in the realms of sports teams, players and celebrities, but also hobbies and topics, like coffee, Barbie and cupcakes.
  • Democrats Block Massa - Probe Bid. House Democrats blocked a GOP effort Thursday to force an investigation into the Democratic leadership's handling of allegations of sexual misconduct by former Rep. Eric Massa, but the issue appeared unlikely to fade anytime soon. A resolution offered by House Republican leader John Boehner of Ohio said there were "serious and legitimate questions" about what Speaker Nancy Pelosi (D., Calif.) and other Democratic leaders and their aides knew about Mr. Massa and how they responded to the allegations. The resolution called for an inquiry by the House ethics committee.
  • JPMorgan(JPM), Citigroup(C) Helped Cause Lehman's Collapse. JPMorgan Chase & Co. and Citigroup Inc. helped cause the collapse of Lehman Brothers Holding Inc. by demanding more collateral and changing guarantee agreements, a bankruptcy examiner said today in a report. “The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity pool,” said Anton Valukas, the U.S. Trustee-appointed examiner, in a 2,200-page report filed in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.” Former Lehman Chief Executive Officer Richard Fuld, former Chief Financial Officer Erin Callan, former executive vice president Ian Lowitt and former managing director Christopher O’Meara certified misleading statements, the report said. Fuld was “at least grossly negligent,” the report said. Lehman collapsed in September 2008 with $639 billion in assets, the biggest bankruptcy in U.S. history. Commenting on Barclays Plc’s(BCS) purchase of Lehman’s North American brokerage, Valukas said a “limited amount of assets” belonging to Lehman were “improperly transferred to Barclays.” “The Examiner has determined that there are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank,” Valukas said in the report. Valukas defined a colorable claim in the report as sufficient credible evidence to persuade a jury to award damages at trial.
  • A Food Fight for Hugo Chavez. With his popularity sagging, Venezuela's fiery President is seizing supermarkets from owners. But can he keep stores stocked?
  • China Struggling to Strike Monetary Policy Balance. China will find it tough to strike the right balance between cooling lending while sustaining growth in the world's third-largest economy, a senior central bank official said in remarks published on Friday. "Excessive liquidity and lending are detrimental to the balanced, healthy and sustainable development of the national economy, but there are complex balances and challenges in timing, rhythm and intensity and in the choice of policy tools," Guo Qingping, an assistant governor of the People's Bank of China, told the Financial News. "In the course of slowing monetary and credit growth, it will be very difficult to hold the right focus," Guo told the Chinese-language newspaper, which is published by the central bank.
Fox Business News:
  • Fannie Mae, Freddie Mac Will Clear Their Swaps. An official at the Federal Housing Finance Agency said Thursday that Fannie Mae and Freddie Mac will clear a large portion of the swaps on their books "in months" even if Congress fails to pass a bill to mandate central clearing. "If there is no legislation, Fannie Mae and Freddie Mac are still going to go to central clearing," said Martha Tirinnanzi, the head of a clearing workgroup in the FHFA's office of market risk. "We see that as the outcome of 2008. It is the responsible thing to do and the right thing to do. It is the right thing to do for our country and it is the right thing to do for Fannie Mae and Freddie Mac," she added during a conference held by the Futures Industry Association.
  • Health-Care Reform's 'Back-Door' Tax. The big talk on Capitol Hill may be about health-care reform, but as part of this massive undertaking, the Democrats are quietly reshaping the tax system too. Tucked inside President Obama's latest health-care proposal is a major change to the Medicare tax.
Business Insider:
  • Wrong Bill At The Wrong Time. ObamaCare and the downfall of the Democratic Party. Even if Democrats extract the votes to put ObamaCare over the top, it will at best be a Pyrrhic victory for them. Regardless of the outcome, this monstrosity might cost the Democrats the Congress this November, ruin the party for a long time and prematurely render Barack Obama a lame duck president for the rest of his term. So why didn't the Democrats pull back when they still had the chance? The reason is that both the Democratic Party and President Obama have mutually reinforcing blind spots that have rendered them incapable of seeing what's crystal clear to every other sentient being in the country: This was the wrong bill at the wrong time.
Chicago Tribune:
  • Obama's Approval: New Low in Gallup. The Gallup Poll, which has been taking the daily temperature of the Obama administration, reported a new low today in its gauge of public approval for the job that the president is performing. Just 46 percent of those surveyed over the past three days voiced approval for the job that President Barack Obama is performing. This president, who started his term with a 69-percent approval rating in the Gallup track, has confronted more than a year of tough economic times and equally challenging politics -- the economy is turning around, by the measure of the Gross Domestic Product, though unemployment still hovers near 10 percent, and now, after more than a year of pressing for healthcare reform, the president is pressing for an "up or down vote'' on legislation that the public appears largely wary about.
  • Pelosi: 'The Choice Has to be Made'. Congressional Democrats embarked on the final push for an historic health care bill on Thursday with no guarantee that they have the votes to pass it. And they made their task even more difficult by moving toward writing off anti-abortion members who voted for the bill the first time in the House. House leaders now believe they can’t change the abortion language in the Senate bill under the reconciliation process, which is only supposed to be used on budgetary matters. But that would likely mean several House members who think the Senate language doesn’t go far enough in banning federal funding of abortions would likely change from “yes” votes to “no.” Democratic leaders were nonetheless gearing up for a pair of committee hearings next week that will start the clock on a final, down-to-the-wire vote, which will require House Democrats to swallow their significant distaste for the Senate bill and to vote on faith that Senate leaders can muster the support to change it. “I don’t like the Senate bill,” said Nevada Rep. Shelley Berkley, who voted for the House bill — a point she quickly reiterated to a White House aide sitting nearby. House Democrats worry the Senate won’t be able to incorporate changes to their bill that have been brokered over months of intense negotiations between party leaders in the two chambers. Berkley and her colleagues don’t want to cast votes for a bill they don’t like on the faith that her home-state colleague, Senate Majority Leader Harry Reid, will be able to do something he’s struggled to do all year: win tough votes. “What happens if Sen. Reid throws up his hands and says, ‘I don’t have the votes’?” Berkley asked. “I will vote ‘no’ if the language isn’t changed,” said Illinois Rep. Daniel Lipinski, an abortion-rights opponent who voted for the House bill after tougher restrictions were added at the last minute. “They need to pick up votes, and obviously the abortion issue a big stumbling block right now. I’m hopeful that something can get resolved.” Lipinski is part of a group of abortion opponents, led by Stupak, who want to include the House restrictions, which would prevent anyone receiving subsidies from purchasing coverage for elective abortions through the newly created exchanges. Their push has set off a fight that has roiled the party for months. “There is no way in this legislation to satisfy [Stupak’s] demands,” said Illinois Rep. Jan Schakowsky, a leading advocate for abortion rights. “It doesn’t fit into reconciliation. The question now is whether Stupak has the votes to force a change and how leaders would incorporate that change outside the bill. Some members who were on the fence last time remain undecided. “Some say it is better, some say it’s worse,” said Indiana Rep. Brad Ellsworth, who voted for the House bill but has since announced a Senate bid in his conservative state. “Some say it covers [abortion]. Some say it doesn’t. Now, I’m just trying to debate that with my folks on does it or does it not.” Of course, other issues are popping up left and right. On Thursday, it appeared that the Senate was moving back toward a plan to include a student-loan reform favored by Obama into the reconciliation bill, despite the concerns of some senators who say banks in their states would be hurt by the change. In addition, Democrats from states that already subsidize people who make 133 percent of poverty want more money for Medicaid than the Senate provides. “Massachusetts should not be punished for doing the right thing,” said Rep. Michael Capuano, who hails from one of those states. Members of the Congressional Hispanic Caucus also raised concerns with Obama on Thursday about Senate language barring illegal immigrants from purchasing insurance coverage through the exchange.
  • Regulator Faults Wall Street Banks on Derivatives. Wall Street banks are seeking exemptions to proposed new financial derivatives rules that could shield more than half the trades that should be subject to disclosure, a federal regulator said Thursday.The chairman of the Commodity Futures Trading Commission, Gary Gensler, criticized Wall Street's stance on proposed new oversight for the shadowy $600 trillion derivatives market. His comments came as the leaders of France, Germany and Greece called for a clampdown on the kind of speculative trading in derivatives blamed for worsening Greece's debt crisis and undermining the European currency recently. Gensler, in several speeches in recent days, has been renewing his call for new regulation aimed at bringing transparency to, and prevent manipulation in, the sprawling global derivatives market. At his address Thursday to the meeting of the Futures Industry Association in Boca Raton, Fla., he also got in some mild barbs at Wall Street. Billions in trading profits for the big investment banks could be threatened by new rules for derivatives, which passed the House in December as part of the overhaul of financial regulation and is now before the Senate. Many in the financial industry have indicated support for requiring derivatives trades to go through clearinghouses, "that is, as long as it only applies sometimes," Gensler said. "Wall Street appears to be aligning themselves with corporate end users in an effort to exempt customer transactions from central clearing," he said. Though only about 9 percent of derivatives trades involve companies that use them to hedge against risk, "Wall Street seems to be making the case" that banks using them in financial transactions also should be exempt, Gensler said. Such an exception, he warns, could leave 60 percent of the derivatives trades that rightfully should go through clearinghouses without price transparency.
  • SEC Head Urges Congress to Act on Derivatives. The government's top securities regulator called Thursday for Congress to impose new oversight on financial derivatives, warning that allowing risky instruments like credit default swaps to continue unfettered could bring further economic damage. The chairman of the Securities and Exchange Commission, Mary Schapiro, said banks that deal in the swaps must be subject to rigorous requirements for holding capital. They must also conduct their business in accordance with rules and their price information must be transparent, she said. "If we continue to allow these risky financial products to operate in the dark we should not be surprised at the damage we find when the lights come on," Schapiro said in the statement. "That's why it is so important for Congress to bring ... derivatives under the regulatory umbrella." In addition to capital requirements that are needed for dealers in the swaps, regulators and market players "must have access to information to know what is being traded, at what price and in what volume," Schapiro said. "And regulators must have the tools to police the markets, including monitoring trends and writing rules to address abuses." While more than 1,000 U.S. banks trade derivatives, five big Wall Street institutions — JPMorgan Chase & Co.(JPM), Goldman Sachs Group Inc.(GS), Bank of America Corp.(BAC), Citigroup Inc.(C) and Wells Fargo & Co.(WFC) — account for about 97 percent of the total reported to be held by U.S. banks.
USA Today:
  • Geo-Location Apps to Star at South by Southwest. What's likely to be the hottest tech trend at this weekend's trendy South by Southwest Interactive in Austin, the powwow that has become a launch pad for the coolest, hippest new technology? Location, location, location. The conference is shaping up to be a coming-out party for Foursquare, an application that lets people flag where they are — and for the entire category of fledgling geo-location services. A bumper crop of services, notably Gowalla, Brightkite, Loopt and, are being embraced by smartphone owners to socialize and play games.
  • U.S. Bank Reform Talks Fail, Overhaul Hopes Dim. Chances of a broad overhaul of U.S. financial regulation dimmed on Thursday after bipartisan Senate talks collapsed, jeopardizing a top Obama administration priority and boosting bank share prices. Senate Banking Committee Chairman Christopher Dodd warned that time was running out to pass legislation this year. He said he would unveil his own bill on Monday and aim to get it to the Senate floor by Easter. Some analysts now question whether Congress can complete work on reforms this year. Dodd, a Connecticut Democrat who is not seeking reelection in November, will likely have to pick up some Republican support to move a bill. "The real problem I am facing is the clock," Dodd said at a news conference.
  • Northern Trust(NTRS) Eyes Possible Acquisition Targets. Financial services company Northern Trust Corp is interested in buying a fund administrator or asset manager, its chief executive said on Thursday, not long after rivals revealed a string of takeovers. At a time many banks are still eager to sell off some divisions and as several of Northern's rivals have expanded their footprints abroad, Chairman and Chief Executive Officer Frederick Waddell said the company is keeping its eyes open for suitable targets. "If we could get a fund administrator or asset manager, that would be of interest to us," Waddell said at the Citigroup Financial Services Conference in New York.
  • What's the Instability Risk of CDS Markets? Kevin Drum has a couple of good questions about credit default swaps, and the final link in his post literally made me laugh out loud, so I’ll do my best to answer him.
  • Potash Corp.(POT) Raises Earnings Forecast; Shares Jump. The world's largest fertilizer maker Potash Corp of Saskatchewan (POT.TO) sharply raised its first-quarter forecast on Thursday, citing a sharp rebound in demand for potash -- a key crop nutrient. The announcement sent its shares, which had closed Thursday at $116.93 on the New York Stock Exchange, soaring 7.5 percent to $125.72 in trade after the evening bell. The news also boosted the shares of other North American potash producers like Mosaic Co (MOS), Agrium Inc (AGU) and Intrepid Potash (IPI).
Financial Times:
  • France and UK Seek Hedge Fund Deal. Gordon Brown and Nicolas Sarkozy will on Friday try to hammer out a compromise deal over European Union reforms that the US and UK believe could damage the hedge fund and private equity industries. The British prime minister shares the concerns of Tim Geithner, US treasury secretary, that a draft EU directive to introduce tighter regulatory controls could impose new barriers to business. Mr Geithner, in a letter to Michel Barnier, Europe’s internal market commissioner, voiced concern about “various proposals that would discriminate against US firms”. The US has stopped short of threatening retaliatory action. However, if the directive becomes law in its current form, Europe-based fund managers could face reprisals in the US Congress for what is being seen as an attempt to dictate the global regulatory landscape. Senior EU officials hit back on Thursday at the US criticism. A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system.
  • Why Europe's Monetary Union Faces its Biggest Crisis by German Finance Minister Wolfgang Schauble.
  • US Takeover Defences Come Tumbling Down. US companies are finding themselves increasingly exposed to unwanted takeover attention after a dismantling of companies’ poison pills prompted by pressure from corporate governance activists. Poison pills are designed to stave off unwanted attention by threatening to dilute the value and voting power of a potential acquirer once its stake in the company crosses a certain threshold. Meanwhile, other defensive steps include staggered executive boards, where only part of the board of directors is replaced at any one time. Groups that represent the interests of institutional shareholders, such as RiskMetrics, have found increasing success in setting such provisions removed, arguing that most anti-takeover provisions do not uphold shareholder interests. Only 28 per cent of S&P 1,500 companies had a poison pill in place last year, down from 43 per cent in the previous two years, according to data from RiskMetrics. Staggered boards are also becoming rarer. “Defensive barriers have come down dramatically. As staggered boards go away, poison pills fall and as the role of activist shareholders increases we would expect to see a meaningful trend towards more unsolicited and hostile deals,” says Paul Parker, head of global M&A at Barclays Capital. Such a change in the US, well-known for the discretion granted to boards of directors in fending off bids, might increasingly be felt as the economic recovery takes hold.
  • Europe's Banks Brace for UK Debt Crisis. UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece. The Italian-German group, Europe's second largest bank, said Britain's tax structure will make it hard to raise fresh revenue quickly enough to restore confidence in UK public finances. "I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors," said Kornelius Purps, Unicredit 's fixed income director and a leading analyst in Germany. Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance. "Britain's AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that," he told The Daily Telegraph. "Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points."
Nikkei English News:
  • The People's Bank of China will target bubbles in asset prices this year, citing a written statement from Assistant Governor Guo Qingping. Guo said it was necessary to increase the accuracy and flexibility of monetary policy, the report said.
Shanghai Securities News:
  • China may further increase deposit requirements for land auctions, citing Liao Yonglin, head of the Ministry of Land and Resource's land utilization department. The ministry this week increased the deposit requirement to 20% of the minimum price of the land on auction and did so to curb increases in the prices of land, Liao said.
  • The Japanese government will raise its economic assessment for the first time in eight months in a report to be released next week, citing a person familiar with the plan. The government will say that the economy is showing stronger signs of recovery as corporate earnings and personal consumption improve. Even so, the monthly report will maintain its view that the situation still remains "severe."
Evening Recommendations
  • Reiterated Buy on (ETN), target $82.
Piper Jaffray:
  • Rated (GILD) Overweight, target $60.
  • Rated (CELG) Overweight, target $77.
  • Rated (RIGL) Overweight, target $13.
  • Rated (AFFY) Overweight, target $30.
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 93.50 +.5 basis point.
  • S&P 500 futures -.05%
  • NASDAQ 100 futures -.08%
Earnings of Note
  • (ANN)/-.01
  • (CTRN)/.75
  • (HIBB)/.31
Economic Releases
8:30 am EST
  • Advance Retail Sales for February are estimated to fall -.2% versus a +.5% gain in January.
  • Retail Sales Less Autos for February are estimated to rise +.1% versus a +.6% gain in January.
9:55 am EST
  • Preliminary Univ. of Mich. Consumer Confidence for March is estimated to rise to 74.0 versus a reading of 73.6 in February.
10:00 am EST
  • Business Inventories for January are estimated to rise +.1% versus a -.2% decline in December.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The ECB's Trichet speaking, (INT) analyst day, (UTX) analyst meeting and the (PETD) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and technology stocks in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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