Thursday, March 11, 2010

Thursday Watch

Evening Headlines

  • Naked Swaps Crackdown in Europe Rings Hollow Without Washington. European politicians and regulators could initiate a continent-wide ban on speculative trading of sovereign credit-default swaps tomorrow. Making it stick without the Americans won’t work. “You need to get the U.S. on board, otherwise the effect will be minimal because trading will simply move elsewhere,” said Jan Hagen, head of the financial services group at the European School of Management and Technology in Berlin. “A ban would allow European politicians to tell voters at least they’re doing something.” “My own sense is that banning naked swaps is not necessary and wouldn’t help fundamentally,” Geithner told lawmakers on March 26, 2009. “It’s too hard to distinguish what is a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome.” While the U.S. Congress is discussing legislation that would require some derivatives be backed by clearinghouses and traded on regulated platforms, talk about banning naked credit- default swaps has fizzled.
  • Greeks Brace for Protests, National Strike Over Budget Cuts. Greece’s unions will shut down hospitals, airports and schools today in the country’s second general strike this year to protest Prime Minister George Papandreou’s latest round of budget cuts to curb the European Union’s biggest deficit. An air-traffic controllers’ walkout will force the cancellation of flights, including 479 from Athens International Airport, the country’s largest. Bus and subway drivers, doctors, power workers, journalists and teachers will stop work to protest 4.8 billion euros ($6.5 billion) of wage cuts and tax increases that have been praised by investors and the European Union. Policemen and firemen will don their uniforms to join a march to parliament.
  • U.S. Governors Urge Congress to Stop EPA Carbon Rules. A group of mostly Republican U.S. governors today urged federal lawmakers to stop the Obama administration from regulating greenhouse gases under an existing law. The U.S. Environmental Protection Agency “is not equipped to consider the very real potential for economic harm when regulating emissions,” the 20 governors, including Republican Haley Barbour of Mississippi and Democrat Joe Manchin of West Virginia, said in a letter to House and Senate leaders. Instead of EPA regulations, Congress should “pass comprehensive legislation that balances the role of conservation and climate security with the production of abundant and affordable American energy,” the governors said in the letter. In 2007, the Supreme Court ruled that the EPA has the authority to regulate carbon dioxide and other greenhouse gases that scientists have linked to climate change. Legislation that would replace direct EPA regulation with a cap-and-trade system allowing companies to buy and sell the right to pollute is stalled in Congress. While the Obama administration supports the cap-and-trade legislation, it plans to regulate cars, trucks, power plants, oil refineries and other industrial sources of pollution under the existing Clean Air Act if the carbon trading bill doesn’t pass Congress this year. Republicans and some Democrats in Congress are trying to delay the EPA’s proposed carbon regulations or strip the agency of its authority over greenhouse gases. EPA regulation “will be costly to consumers and could be devastating to the economy and jobs,” the governors said in the letter, which doesn’t endorse the cap-and-trade legislation.
  • Connecticut Sues Moody's(MCO), S&P Over Subprime Ratings. Connecticut Attorney General Richard Blumenthal said he is suing Moody’s Corp. and Standard & Poor’s because they were “catering to the investment banks and other issuers” of structured debt securities. “The rating agencies said they were objective and independent, knowing that they were heavily influenced by their bank clients,” Blumenthal said in a Bloomberg Television interview today.
  • World Currency Trade Rises 17% to $2.7 Trillion a Day. Global currency trading rose to $2.7 trillion a day between April and October, the first growth since the six months to April 2008, the Reserve Bank of Australia said, citing data from five markets. Transactions increased by 17 percent from the previous six months, the RBA said in a report based on figures from Australia, the U.S., U.K., Canada and Singapore. These markets account for more than 60 percent of world currency trading, the RBA said.
  • BP(BP) Said to Be in Talks for Devon(DVN) Assets in $5 Billion Deal. BP Plc, Europe’s largest oil and gas company, is in talks to buy Devon Energy Corp.’s Brazilian and Gulf of Mexico oil assets in a transaction valued at more than $5 billion, according to a person familiar with the deal.
  • China Inflation, Industrial Production Accelerate. China’s inflation reached a 16- month high, industrial output climbed and new loans exceeded forecasts, adding to the case for the government to pare back stimulus measures.
Wall Street Journal:
  • Pelosi's Office Knew of Massa Concerns in October. Former Rep. Eric Massa's chief of staff informed an aide to House Speaker Nancy Pelosi in October about concerns relating to Mr. Massa's conduct toward his staff, a senior Democratic leadership aide said Wednesday. Mr. Massa's top aide said the former congressman was living with some of his congressional aides and that he had used "strong" language that made them feel uncomfortable, the leadership aide said. Last week, Mrs. Pelosi indicated her staff had learned of concerns about Mr. Massa only in February, when more detailed allegations of sexual harassment were brought to the office of House Majority Leader Steny Hoyer (D., Md.).
  • Wall Street Mobilizes to Shape Look of CDS Rules. Investors expressed frustration and anger Wednesday after reports that U.S. and European governments were eager to place new curbs on the use of credit-default swaps. But some on Wall Street acknowledged that changes to the arcane trading area are inevitable, with some suggesting remedies that might increase transparency while forestalling greater government intervention. Wednesday, European officials appeared to soften some of their previous statements calling for rules on the swaps, including a possible ban on using them for "speculative" trading.
  • Can Nancy Pelosi Get the Votes? The Senate bill's abortion language is not the House Speaker's only problem. Are there enough votes in the House to pass the Senate's health-care bill? As of today, it's clear there aren't. House Democratic leaders have brushed aside White House calls to bring the bill forward by March 18, when President Barack Obama heads to Asia. Nevertheless, analysts close to the Democratic leadership tell me they're confident the leadership will find some way to squeeze out the 216 votes needed for a majority. Speaker Nancy Pelosi has indeed shown mastery at amassing majorities. But it's hard to see how she'll do so on this one. The arithmetic as I see it doesn't add up.
  • Are Hedge Funds Bailing Out of Gold? Hedge funds were buyers of Citi when the stock was at a buck. So what is the smart money doing now? For insights we turned to Anthony Scaramucci, managing partner at Skybridge Capital. Scaramucci says the play right now is short gold. You read that right – short gold. Here’s his thesis: "I don’t think inflation will hit the nation without real wage growth," explains Scaramucci. And we're not seeing wage growth." "Also we’ve got excess global capacity in manufacturing," he adds. Ultimately, I expect gold to disappoint.
  • Senate Passes $149 Billion Bill for Jobless Aid, Tax Breaks. The U.S. Senate Wednesday approved a $149 billion package of jobless aid and tax breaks as Democrats continued efforts to bring down the 9.7 percent unemployment rate before the November congressional elections.
NY Times:
  • Goldman(GS) Deal-Maker Now Advocates Regulation. For 18 years, Gary G. Gensler worked on Wall Street, striking merger deals at the venerable Goldman Sachs. Then in the late 1990s, he moved to the Treasury Department, joining a Washington establishment that celebrated the power of markets and fought off regulation at almost every turn. Today, he is emerging as one of the nation’s archreformers, pushing to impose some of the most stringent new financial regulations in history. And as the head of the Commodity Futures Trading Commission, the leading contender to oversee the complex derivatives contracts that played a central role in the financial crisis and, in turn, the Great Recession, he is in a position to influence the outcome.
Business Insider:
Pensions & Investments:
  • Hedge Fund Closings Surpass Debuts for 2nd Straight Year. For the second straight year, more hedge funds closed than were launched in 2009, according to data released today by Hedge Fund Research. Last year, 1,023 hedge funds closed, compared to 784 that started. In 2008, 1,471 funds closed while 659 were launched, according to HFR’s March hedge fund report, which provided analysis of the hedge fund researcher’s year-end 2009 data. HFR’s analysis also showed that the average single manager’s hedge fund performance fee fell to 19.2% as of Dec. 31, compared to 19.31% as of March 31, 2008, before the financial crisis started. The average hedge fund-of-funds manager’s performance fee fell to 6.9% as of year-end 2009, compared to 8.05% in the first quarter 2008. Further, HFR reported that the average incentive fee for hedge funds started in 2009 was 17.6%, 1.6 percentage points below the average.
Rasmussen Reports:
  • 25% Say U.S. Heading In Right Direction. For the second straight week, just 25% of U.S. voters say the country is heading in the right direction, according to the latest Rasmussen Reports national telephone survey. Last week’s finding marked the lowest level of voter confidence since just before President Obama took office in January 2009. A sizable majority (71%) believe the nation is heading down the wrong track, the highest level of pessimism measured in 14 months.
  • Holder Under Fire For Padilla Brief. Conservative critics of Attorney General Eric Holder’s handling of accused terrorists found a new issue on which to criticize him Wednesday – an amicus brief Holder signed on to urging the Supreme Court in 2004 to reject the Bush administration’s attempt to try Jose Padilla as an enemy combatant. Two former Bush administration officials said the brief’s acknowledgement that accused terrorists could go free if their cases were heard through the normal judicial process contradicted Holder’s public statements justifying the FBI’s reading Umar Farouk Abdulmutallab, the alleged underwear bomber, his Miranda rights. They also pointed out that Holder had not called the brief to the attention of the Senate Judiciary Committee during his confirmation hearings.
  • Nancy Pelosi: 'We're going to get started'. House Speaker Nancy Pelosi (D-Calif.) will start walking her members through major components of the final health care package Thursday as Democrats inch ever closer to a climatic vote on the landmark legislation. “We’re going to get started,” Pelosi said as she left the Capitol Wednesday night. "We have some questions ... but we're hoping that we'll get those answered over the course of the reading. It's not much."
  • GOP Backs Broad Earmarks Ban. Republican leaders in the House officially backed a one-year moratorium on earmarks, upstaging Democrats who instituted a more limited ban today. It is also a clear signal that the Republican Conference is likely to not request earmarks in 2011 spending bills. A joint statement from Republican leaders Wednesday evening said that “the earmark process in Congress has become a symbol of a broken Washington. We believe the time has come for House Republicans to adopt an immediate, unilateral moratorium on all earmarks.”
USA Today:
  • Unemployment Rises in 30 States in January. Unemployment rose in 30 states in January, the Labor Department said Wednesday, evidence that jobs remain scarce in most regions of the country. Five states reported record-high joblessness in January: California, at 12.5%; South Carolina, 12.6%; Florida, 11.9%; North Carolina, 11.1%; and Georgia, 10.4%. Michigan's unemployment rate is still the nation's highest, at 14.3%, followed by Nevada, with 13% and Rhode Island at 12.7%. South Carolina and California round out the top five.
  • Film Futures Markets to Launch Soon. If start-up Media Derivatives and broker dealer Cantor Fitzgerald have their way, investors may soon be able to place bets on the box office showing of summer blockbuster "Iron Man 2." Media Derivatives, a division of Veriana Networks, and Cantor are racing to set up the first U.S. exchanges to offer futures on movie box office receipts.
  • U.S. Oil Industry Braces for Carbon Rules. As oil and natural gas prices settle into an equilibrium for now, a new variable is emerging as the most worrisome for Big Oil: the cost of carbon. Major international oil companies say they are factoring carbon prices into their long-term planning calculations, but assessing that cost is a challenge as U.S. policymakers struggle to come together on how to combat climate change. The legislation could recast the playing field for energy producers and place a premium on low-carbon energy sources like wind and solar. "Climate change regulations must be treated like business risk on par with other risks in this business," said Helge Lund, chief executive of Norway's Statoil, speaking at the CERA Week conference. "The pressure in this industry only will increase."
  • Shale Gas Could Supply 100 Years of Consumption. The natural gas shale boom in North America has more than doubled discovered gas resources and can supply more than a century of consumption at current rates, an IHS CERA study released Wednesday said. As recently as 2007, it was widely thought that natural gas was in tight supply and the U.S. would need to import gas, said Daniel Yergin, chairman of IHS CERA. But a long-lasting "shale gale" has squashed that outlook, he said at the annual CERAWeek conference in Houston.
Financial Times:
  • Geithner Warns of Rift Over Regulation. Tim Geithner, US Treasury secretary, has delivered a blunt warning to the European Commission that its plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups. A letter sent by Mr Geithner this month to Michel Barnier, Europe’s internal market commissioner, makes it clear that the European Union is heading for a clash with Washington if it pushes ahead with what the US – and Britain – fear could be a protectionist law. The debate over the shape of future financial regulation has reached a critical point in Brussels. Diplomats were on Wednesday night moving closer to a compromise on the sweeping overhaul that has angered the industry and worried institutional investors. The draft EU directive would impose tighter restrictions on hedge funds, private equity and other alternative investment funds. It has caused alarm in the City of London, where some in the industry say it is a thinly veiled attempt by France and Germany to undermine the UK’s dominance of financial services. If European diplomats reach agreement at a meeting on Thursday, the directive will be put to EU finance ministers when they convene on Tuesday. The proposed rules will require approval by EU lawmakers.
  • How to Handle the Sovereign Debt Explosion by Mohamed El-Erian. Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognized, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.
  • Pandit Sees Revival of Citi's(C) Fortunes. Vikram Pandit, Citigroup’s chief executive, will on Thursday raise the prospect of the US bank earning as much as $20bn from its core business within a few years, a big increase from current levels that would mark a sharp revival in Citi’s fortunes. Mr Pandit’s move – to be made as he details Citi’s strategy to investors – is a bold attempt to shift financial markets’ attention away from Citi’s huge losses and repeated government bail-outs during the crisis. But it will also raise the stakes over Mr Pandit’s tenure at the helm of the financial group by linking his future to the success of the strategy and financial performance. People close to the situation said Mr Pandit would not give a specific profit target for Citicorp, the wholesale and retail banking operations that will remain part of the company once it sheds some $500bn-plus in unwanted assets and businesses. However, the Citi chief is expected to walk investors through Citicorp’s earnings potential as the company focuses on its unrivalled reach across the global economy. Mr Pandit will estimate that Citicorp could earn a yearly return of 1.25 per cent or more on its assets. The unit had assets of more than $1,300bn at the end of 2009, but Citi executives estimate the assets will increase by about 5 per cent a year. On that basis, Citicorp could earn about $20bn by the end of 2012. Citicorp, which includes the commercial, investment and retail banks and the cash management business, had net income of $14.7bn in 2009, although Citigroup recorded a loss of $8.7bn due to its struggling non-core businesses. Mr Pandit told the Financial Times he wanted Citi to harness its presence in more than 100 countries to serve clients ranging from large companies and governments to wealthy savers. “Clients look to us as being the financial conduit to the world,” he said. “We want to be a global bank for institutions and individuals.” Citi’s international focus may upset some US politicians because the government bailed out the company and still owns a 27 per cent stake, but Mr Pandit regards it as the bank’s biggest competitive advantage. Mr Pandit did not comment on the government’s stake ahead of next week’s expiry of a lock-up period but officials have indicated that they will try to sell it over the next few months.
  • Fears of China Property Bubble Grow.
  • France Vows Retaliation Against US in Air Tanker Dispute. France has vowed to retaliate against the United States for allegedly shutting Europe's aviation giant EADS out of a $50bn (£33.4bn) defence contract, warning of potential damage to the Atlantic alliance. "This is a serious affair," said France's Europe minister Pierre Lellouche. "I can assure you that there will be consequences." "You cannot expect Europeans to contribute to global defence if you deny their industries the right to work on both sides of the Atlantic," he said, adding that French president Nicolas Sarkozy would take action "at the appropriate time".
  • Google(GOOG) Looks at Clouds from Both Sides Now. Google is broadening its assault on Microsoft’s(MSFT) dominance of business software by launching an online marketplace for other companies’ products. The internet search giant wants companies to use applications piped over the internet, posing a direct challenge to Microsoft’s model of selling licences for its Windows operating system and software programs such as Office, Google began to offer a free online suite of e-mail, word processing, spreadsheet and calendar applications in 2006. It has been selling a more sophisticated package of online services for $50 (£33) per user for the past three years. It says that about 25 million people working for more than two million businesses, government agencies and schools use Google’s online applications. About 500 million people use Microsoft’s Office. Google is offering to sell the programs of other software makers in an effort to fill its own product gaps and to persuade more companies to convert to “cloud computing” — the idea of running applications in web browsers instead of installing them on individual hard drives. More than 50 software makers have agreed to sell their programmes through Google, which will keep 20 per cent of the sales. The prices are expected to range from $50 annually to several hundred dollars annually per user.
La Tribune:
  • France, Germany, Greece and Eurogroup President Jean-Claude Juncker wrote a joint letter to the European Commission calling for a probe into recent credit default swaps activity. The governments want European Commission President Jose Manuel Barroso to investigate trading in recent months related to Greek debt in particular and to impose tougher regulation if there are any indications of market manipulation.
Evening Recommendations
  • Upgraded (AYR) to Buy, target $12.
  • Reiterated Buy on (PLCE), target $50.
  • Reiterated Buy on (AEO), target $22.
  • Reiterated Buy on (VECO), raised estimates, boosted target to $52.
Night Trading
  • Asian indices are -.50% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 93.0 -6.0 basis points.
  • S&P 500 futures -.45%
  • NASDAQ 100 futures -.40%
Morning Preview
Earnings of Note
  • (BKE)/.84
  • (JW/A)/.74
  • (PNY)/1.11
  • (JTX)/.48
  • (SFD)/.19
  • (ZQK)/-.13
  • (NSM)/.18
  • (PSUN)/-.29
  • (PLL)/.47
  • (ARO)/.95
Economic Releases
8:30 am EST
  • The Trade Deficit for January is estimated to widen to -$41.0B versus -$40.2B in December.
  • Initial Jobless Claims for last week are estimated to fall to 460K versus 469K the prior week.
  • Continuing Claims are estimated at 4500K versus 4500K prior.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Dudley speaking, Treasury's $13B 30-Year Note Auction, weekly EIA natural gas inventory report, (XOM) analyst meeting, (IT) investor day, (V) investor day, (CERN) investor meeting, BofA/Merrill Consumer Conference, UBS Engineering/Construction Conference, Morgan Stanley Utilities Conference, CSFB Communication/Networking Equipment Conference, Cowen Healthcare Conference and the Citi Financial Services Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and shipping 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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