Friday, March 19, 2010

Friday Watch

Evening Headlines

  • The global financial crisis and recession have triggered a deterioration in the credit profiles of AAA-rated countries, which includes the U.S. and U.K., Fitch Ratings said. The U.S. and the U.K. have moved "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose, Moody's Investors Service said this week.
  • Papandreou Racing to Cut Greek Interest Rates With Aid Pledge. Greek Prime Minister George Papandreou is racing to secure an explicit pledge of European aid and cut his country’s borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. With investors still demanding Greece pay three percentage points more than Germany on its 10-year debt, Papandreou says Greece can’t afford to hold out much longer at current market rates. His government still needs to raise another 10 billion euros to repay bonds maturing on April 20 and May 19. “Greece wants to bring down its funding costs fast,” said Holger Schmieding, chief European economist at Bank of America- Merrill Lynch in London, in a note to investors. If the spread doesn’t narrow in the next month, “Greece may ask for financial support.”
  • Health Bill Would Add 3.8% Tax on Investment Income. Democratic congressional leaders would raise to 3.8 percent the Obama administration’s proposed new Medicare tax on investment income to generate an estimated $210 billion to help fund a health-care overhaul plan. The rate is higher than the 2.9 percent President Barack Obama proposed in February. The new tax would apply to income from interest, dividends, annuities, royalties, capital gains and rents for individuals who earn more than $200,000 annually and joint filers reporting more than $250,000, according to the legislation. “It’s a big deal,” said Clint Stretch, a tax analyst for the consulting firm Deloitte Tax LLC. “It extends dramatically the reach of the Medicare hospital insurance tax.” The first-time Medicare tax on investment income would start in 2013. It would push tax rates on capital gains and dividends that year to 23.8 percent for high-income people if Congress goes along with Obama’s proposal to let those rates rise to 20 percent in 2011 from the current 15 percent. Overall tax rates on income from interest, annuities and royalties would rise to as much as 43.4 percent. The final plan announced today delays the proposed 40 percent tax on high-value insurance plans until 2018, from 2013 in earlier proposals. It also increases the cost threshold affected by the tax, applying it to the portions of plans worth more than $10,200 for individuals and $27,500 for families. In further years, the tax on high-cost plans would affect more insurance plans than earlier proposed, as the plan would reduce the inflation index for that provision. Today’s proposals are “a radical change from U.S. tax policy without much debate at a time when we should shift the fundamental core of U.S. tax policy in a more pro-saving and investment” direction, said Mark Bloomfield, president of the American Council for Capital Formation, a Washington group that lobbies for lower taxes on capital.
  • Rio Tinto Case Mixed Politics, Law in China's 'Scary' Courts. Foreign companies that do business in China will be tracking the criminal trial next week of Rio Tinto Group iron-ore chief Stern Hu and three colleagues to see if politics plays as big a role in any conviction as the evidence, lawyers said. The detentions of Hu, Liu Caikui, Ge Minqiang and Wang Yong for allegedly stealing state secrets -- later downgraded to taking bribes and infringing company secrets -- sharpened the focus on a judicial system largely avoided by foreign parties because of its lack of transparency, the lawyers said. Chinese judges openly say Communist Party politics influence their decisions, with Supreme People’s Court President Wang Shengjun encouraging jurists in December to prioritize the “causes of the party,” the “interests of the people” and “the constitution and laws.”
  • Fed May Raise Discount Rate Before Next Meeting, Economists Say. The Federal Reserve may raise the discount rate, charged on direct loans to banks, before the next meeting of the Federal Open Market Committee on April 28, economists said. “It’s going to happen at some point,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Whether it’s today, whether it’s next week or next month is hard to say.”
  • Greenspan Says Banks May Need to Raise Reserve Capital by 40%. Former Federal Reserve Chairman Alan Greenspan said regulators may need to compel banks to raise capital levels by as much as 40 percent, saying that’s a more effective way to ensure stability than new regulatory rules targeting risk. “The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.” Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said. The largest U.S. banks may also need to hold extra debt that can be converted automatically into equity capital if their capital levels dwindle, Greenspan said. “Should contingent capital bonds prove insufficient, we should allow large institutions to fail, and if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility,” he said. Bank capital cushions should be large enough to prevent failures similar to that of Lehman Brothers Holdings Inc., which went bankrupt, and Bear Stearns Cos., acquired by JPMorgan Chase & Co. with help from the Fed, Greenspan said. “Capital and liquidity, in my experience, address almost all of the financial-regulatory structure shortcomings exposed by the onset of crisis,” he said. “Moreover, capital has the regulatory advantage of not having to forecast which particular financial products are about to turn toxic.” Bolstering capital rules also has the benefit of not hindering economic growth, Greenspan said. “The notion of an effective ‘systemic regulator’ as part of a regulatory reform package is ill-advised,” he said. “The current sad state of economic forecasting should give governments pause on the issue.” “Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible,” Greenspan said. “Assuaging their aftermath seems the best we can hope for.”
  • SEC Warns on Pay-to-Play After JPMorgan(JPM) Investigation. The U.S. Securities and Exchange Commission warned banks that a ban on using political donations to win municipal bond business applies to top executives after faulting a JPMorgan Chase & Co. vice chairman for fundraising for former California Treasurer Phil Angelides. The advisory from the SEC comes after an investigation of $9,000 of donations in 2002 to Angelides, now the head of a panel investigating the financial crisis, from JPMorgan, a vice chairman who oversaw the investment bank and three other senior officials from the New York-based company. Within two years, the bank was involved in more than 50 bond sales involving Angelides, earning about $37 million in fees, the SEC said. The case is meant to warn bank’s underwriting subsidiaries that they must monitor political donations to officials with influence over them. Securities rules bar banks from underwriting bond offerings within two years of donating to an elected official handling the debt issue.
  • Euro Set for Worst Week Since Start of February on Greece Woes. The euro was set for its biggest weekly loss since the start of February on concern Greece will fail to secure financial assistance from the European Union. The euro slid this week versus 15 of its 16 major counterparts as Greece’s prime minister set a one-week deadline for the European Union to craft a financial aid mechanism for the nation, challenging Germany and damping appetite for the 16-nation currency. The Swiss franc traded near its strongest level in 17 months against the euro as an official said policy makers can’t prevent the currency’s advance indefinitely. “Reports on inter-governmental relations between Greece and Germany will be the major driver of the euro, and they’re likely to keep bickering,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “We can see euro falling down to the low $1.30s” within a week.
  • Powell Says New Sanctions on Iran Won't Stop Nuclear Program. Former U.S. Secretary of State Colin Powell said new sanctions on Iran to persuade it to stop enriching uranium won’t work because the Islamic republic is “determined to have a nuclear program.” “I don’t see a set of sanctions coming along that would be so detrimental to the Iranians that they are going to stop that program,” Powell said in an interview with Bloomberg special contributor Judy Woodruff.
Wall Street Journal:
  • There's No 'I' in 'Deem'. Dems pushing ObamaCare look increasingly desperate and creepy. Democrats trying to force through ObamaCare over the will of the voters are transforming the House of Representatives into a procedural funhouse hall of mirrors. "House Republicans announced a plan Tuesday that would force Democrats to vote on whether they should have a vote," the Washington Post reports. Let's try to explain.
  • History's Case Against Naked CDS.
  • $1.5 Billion CDO Auction To Test Market For Distressed Debt. A public auction of nearly $1.5 billion of collateralized debt obligations in New York next week will test whether a long-anticipated recovery of the distressed-debt market is taking hold. The liquidation sale encompasses five portfolios of assets from Grenadier Funding, a Citigroup (C) affiliate, issued in July 2003. The CDOs, managed by ACA Management LLC, contain 46% subprime residential mortgage securities, 22% prime residential mortgage securities, 14% CDOs, 13% asset-backed securities and 0.2% commercial mortgage securities, according to Fitch Ratings. Bank of New York Mellon, as trustee, filed a notice of default on the CDO on Dec. 28, 2009, and the trustees decided to liquidate the assets shortly afterward, according to public documents. This liquidation brings sales of distressed debt back into the forefront after a period of quiet that started toward the end of 2009. "As the world gets better, many of the controlling parties of these deals are taking the option to liquidate," said one person who closely follows CDO deals but spoke only on condition of anonymity. "The thought is, if one can get out now, the rate of recovery will be much higher.".
  • Germany Open to Joint Europe-IMF Bailout for Greece. Germany signaled it is open to supporting a joint bailout of Greece by European governments and the International Monetary Fund should the country need assistance, as Greece pressed Europe for concrete help by next week. The German finance ministry had as recently as last week raised objections to an IMF program for Greece.
  • Yale Sticks With Investment Model. Anyone expecting a mea culpa from Yale University's investment chief can forget it. Despite criticism of the "Yale model" of investing amid the financial crisis, the school stood by Chief Investment Officer David Swensen's methods in its 2009 endowment report, released Thursday. "Some observers questioned the University's investment philosophy, which rests on the principles of diversification and equity orientation," the report said. But it maintained that Yale's approach still lowered risks and diversified returns. The endowment in fact increased its allocations to illiquid, or hard to sell, assets that caused some funds trouble when markets cratered, such as private equity and real estate, according to the report, which wasn't signed by any single individual. Mr. Swensen, Yale's CIO since 1987, gained followers after he began investing heavily in non-traditional assets, which he said could produce higher returns than stocks and bonds with the right managers. Yale's endowment declined by 24.6% for the fiscal year that ended June 30, and many other schools with similar approaches, like Harvard University, also faced double-digit declines. That caused some observers to question Mr. Swensen's philosophy; some, like Harvard, are now reducing their exposure to real estate and are trying to increase liquidity.
  • Shortcomings Exposed in Oil Data. DOE Documents, Consultants' Report Cite Outdated Methodology, Errors in EIA's Weekly Survey. Problems with EIA data underscore the hazards of depending on companies or other firms to self-report data. Internal emails and a report from a consulting firm prepared in September describe a process at the EIA that served the oil world well in 1983, the first year that oil futures traded, but hasn't kept up as the inventory data have become more influential and the nation's oil infrastructure has become more complex. The EIA, the statistical arm of the Department of Energy, didn't find most of SAIC's findings a surprise, said Stephen Harvey, director of the EIA's office of oil and gas, which puts out the weekly data. "Should you be concerned? Yes. Is it as good as we'd like it to be? No. Is it better or worse than some other countries where we'd like to know this information? It's probably a whole lot better," Mr. Harvey said. The internal documents obtained by Dow Jones Newswires cataloged several instances in the past three years in which companies misreported the amount of oil they had in storage, sometimes by over two million barrels in each weekly survey over the course of a year, a significant error considering that amount can account for the entire change in inventories from week to week. On Sept. 16, the EIA released data showing almost four million barrels of oil had vanished from the Cushing storage hub in Oklahoma during a single week. The market paid particular attention because Cushing is the nation's most important commercial storage facility. Its oil is used to fill orders from buyers on the New York Mercantile Exchange. Oil futures jumped 2.2% after the report. But out of the sizable drop at Cushing, 1.7 million barrels represented a correction made after the EIA discovered a previous error in one company's reporting, according to the emails. A second company's Cushing inventories also were off by a wide margin earlier in 2009, the emails indicate. None of the documents assert that the companies were deliberately reporting incorrect oil-inventory data, and the EIA was alerted to many of the errors by the firms themselves. The Federal Trade Commission last year implemented regulations punishing companies that put out intentionally misleading inventory data. Mr. Harvey of the EIA said a number of measures are being implemented to cut down on the number of errors, even in the absence of new funding. After a series of budget cuts in the mid-1990s, calls in recent years from the agency for additional funding largely have fallen on deaf ears. The study noted that some statistical methods used in the EIA report haven't been evaluated or tested since their inception three decades ago. The security of the weekly report also has become a bigger issue as the oil market has begun to treat the data's release as a major event. SAIC consultants also said security surrounding the data was too lax. EIA staff should be put on "lock down" prior to release, the SAIC said, to prevent information from leaking.
  • The Dodd Status Quo. Too big to fail is alive and well in the Senate's financial reform. Once ObamaCare becomes law, the next big legislative rush is going to be for financial reform, but as we look at Senate Banking Chairman Chris Dodd's latest draft we can't help but wonder: Why the hurry? On the crucial issues of regulation and too big to fail, his bill is largely the current system, only more so. Much like the version that passed the House last year, Mr. Dodd's bill clings to the illusion that regulators in the future will know a financial mania when they see it.
  • Nemazee, Political Fundraiser, Pleads Guilty to Fraud. Hassan Nemazee, a top political fundraiser for U.S. President Barack Obama and Secretary of State Hillary Clinton, admitted he defrauded banks of millions of dollars. Nemazee pleaded guilty today to federal charges of defrauding Citigroup Inc., HSBC Holdings Plc and Bank of America Corp. After he was arrested in August, prosecutors said he cheated the banks out of $292 million. “I’m deeply ashamed of my conduct,” Nemazee told U.S. District Judge Sidney Stein in Manhattan federal court today. Nemazee was one of the leading fundraisers for the Democratic Party. In the 2008 presidential campaign, he raised at least $100,000 for Clinton, according to the Washington watchdog group Public Citizen. Nemazee brought in at least $500,000 for Obama after he defeated Clinton in the primary campaign, according to Public Citizen.
  • Why Bank Stocks Could Vault Even Higher. Investing pros tell Bloomberg BusinessWeek where they're finding opportunities in the sector now.
  • Verizon(VZ), AT&T(T), Google(GOOG) Partake of Broadband Speed Race. Plans by Google and others to provide ultrafast broadband may push Verizon, AT&T, and Comcast to accelerate their own deployments.
  • S&P Announces Changes to U.S. Indices. S&P MidCap 400 constituent Cerner Corp. (NASD: CERN) will replace BJ Services Co. (NYSE: BJS) in the S&P 500 index, S&P SmallCap 600 constituent MEDNAX Inc. (NYSE: MD) will replace Cerner in the S&P MidCap 400, and MicroStrategy Inc. (NASD: MSTR) will replace MEDNAX in the S&P SmallCap 600 index after the close of trading on a date to be announced.
Business Insider:
cnet news:
  • Google's Fast Pipe to Asia Almost Ready. Google(GOOG) and a group of telecommunications companies are about ready to turn on a fast Internet cable running under the Pacific Ocean from the U.S. to Japan, increasing bandwidth by about 20 percent and giving Google its own connection to Asia. The Unity Consortium, which consists of Google, Bharti Airtel, Global Transit, KDDI, Pacnet, and SingTel, has nearly completed the testing of the $300 million project. Internet users in Asia will start seeing faster Internet speeds over the next several months from the new cable, which has the potential to create a 7.68Tbps (terabits per second) connection under the Pacific.
Real Clear Politics:
  • Why the SEIU Wants Health Reform. The largest health care labor union in the United States, the Service Employees International, is using its 2.2 million members' hard-earned dues to finance an intense, expensive lobbying campaign in support of the pending health-insurance bill - in order to prop up its failing pension plans. It spent a significant fraction of its 2009 lobbying budget of $2.7 million on health, purchasing costly ads in major newspapers and on TV, such as one telling Indiana Representative Brad Ellsworth, a Democrat, "to keep standing up for us, not the insurance companies. Pass health insurance reform now." The union's president, Andy Stern, who is desperately committed to enactment of the bill, is reported to have been the most frequent visitor to the White House over the past year. The union's Web home page features "The Final Push for Health Care" and urges union members to phone their members of Congress in support of health "reform." The Web site coaches union members on what to tell Congressional staff and even offers a telephone number that will connect union members to their representatives in Congress. In contrast, the Labor Department's Web site lists pension plans that are in financial difficulty. Several SEIU pension plans are in critical status, meaning they have less than 65% of assets needed to fund financial obligations to future and current retirees, or in endangered status, with less than 80% of needed assets. What's the connection? The SEIU needs more new dues-paying members to pay for the retirement of current members if it is to rescue its pension plans from subpar performance. It's a Ponzi scheme that would make Bernie Madoff proud. With many of its members employed in health care, the union believes - not illogically - that if more Americans have health insurance, the demand for health care will expand and so will employment in the health sector.
Politics Daily:
  • Obama's Job Approval Rating Reaches Lowest Point of His Presidency. President Obama is suffering the lowest job approval rating since he was elected, with more disapproving of his performance than approving, while the public regard for Congress has also worsened, according to a Gallup poll conducted March 15-17. Forty-eight percent disapprove of the job Obama is doing while 46 percent approved. This is also the first time the percentage of those disapproving was higher than those who approved. Congress still fares far worse with 80 percent disapproving of its performance and 16 percent approving. "Public support for President Obama and Congress -- both of which were running near their low points prior to the beginning of this month -- continues to slip," Gallup said. "That is an ominous sign heading into this year's midterm elections."
Financial Times:
  • JPMorgan(JPM) Also Used Accounting Gimmick. JPMorgan Chase recorded some repurchase trades as sales, the same accounting gimmick that spawned Lehman Brothers’ now-infamous “Repo 105s”, suggesting that the failed bank was not alone in its interpretation of a new accounting rule. Unlike Lehman, which never disclosed the effects of its repo deals on the firm’s balance sheet, JPMorgan detailed the year-end values of its repo sales and purchases in annual reports beginning in 2001, after a new accounting rule was introduced.
Economic Daily News:
  • Broadcom Corp.(BRCM) may increase orders to Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. on optimism on the outlook for chip demand, citing Broadcom President and CEO Scott McGregor.
Evening Recommendations
  • Downgraded (TEG) to Sell, target $42
  • Rated (WFT) Outperform, target $23.
  • Rated (SLB) Outperform, target $83.
  • Reiterated Outperform on (PWR), target $24.
  • Reiterated Outperform on (OI), raised target to $40.
Night Trading
  • Asian indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 94.0 +4.0 basis points.
  • S&P 500 futures +.01%
  • NASDAQ 100 futures -.05%
Morning Preview Links

Earnings of Note
  • (PERY)/.59
Economic Releases
  • None of note
Upcoming Splits
  • (NETL) 2-for-1
Other Potential Market Movers
  • Quadruple witching option expiration, former Fed Chairman Greenspan speaking and the Baird Utility & Infrastructure Symposium 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 lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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