Tuesday, March 16, 2010

Tuesday Watch

Evening Headlines

  • EU Lays Groundwork for Greek Lifeline to Shore Up Scarred Euro. European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro. Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster. “We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels. With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November. The meetings continue at 9 a.m. today with all 27 EU finance ministers. Also on the agenda are proposals to clamp down on hedge funds and credit-default swaps.
  • Dodd Eases Exclusion of Swaps Set to Be Cleared. Senator Christopher Dodd’s draft legislation to regulate the $605 trillion private swaps market makes it easier to exclude trades from being processed by clearinghouses, compared with his plan released in November. Dodd’s bill no longer requires federal regulators to agree that excluding a swap from being cleared “is necessary and appropriate for the reduction of systemic risk.” That stricter requirement was in the draft bill Dodd, a Democrat from Connecticut and chairman of the Senate Banking Committee, released in November.
  • Israel Will Build in All of Jerusalem, Netanyahu Says. Israeli Prime Minister Benjamin Netanyahu defended construction of Jewish neighborhoods in east Jerusalem, escalating a clash with the Obama administration that threatens to derail renewal of Middle East peace talks. “Over the past 40 years, no Israeli government has agreed to limit building in Jerusalem,” Netanyahu said today in a speech to Parliament, ticking off five sections of the city that were captured from Jordan in the 1967 war and now house tens of thousands of Israelis.
  • Mexico Killings Point to Risks of U.S. Cooperation in Drug War. The killing of three people connected with the U.S. consulate in Ciudad Juarez over the weekend shows that U.S. cooperation in Mexico’s fight against drug cartels has made U.S. government employees targets of the traffickers, said a senior policy director of the Council of the Americas. U.S. diplomats may negotiate a greater presence for their own law enforcement officials in Mexico to protect government employees after the March 13 deaths, said Christopher Sabatini of the council. While it’s unclear whether the shootings imply a greater risk for U.S. civilians, the violence does put another dent in Mexico’s tourism industry, he said.
  • Brokers Press Regulators to End Big Banks' Dominance in Swaps. MF Global Holdings Ltd.(MF), Hexagon Securities LLC and at least 19 other financial firms are pressing regulators to force swaps clearinghouses to lower entry barriers in order to improve competition in a $605 trillion derivatives market dominated by the world’s biggest banks. Brokers formed an association last month that hired a Washington-based law firm to pursue the issue with lawmakers and regulators, said Mike Hisler, a partner at New York-based Hexagon. They also seek tougher conflict-of-interest laws to ensure that a bank’s derivatives desk doesn’t influence clearinghouse decisions that could shut out new competitors.
  • Rio Olympics at Risk From Oil Bill, Committee Says. A proposed cut in Rio de Janeiro’s share of Brazil’s oil royalties will leave the state unable to carry out infrastructure projects tied to the 2016 Olympics, the president of Rio’s organizing committee said in a statement. Brazil’s Lower House approved a bill March 10 that would give cities and states that don’t produce oil a bigger stake of the revenue from crude production. Oil-rich states such as Rio de Janeiro and Espirito Santo would receive lower royalties. The measure now goes to the Senate for a committee vote.
  • Dolby(DLB) Cuts Price of 3-D Glasses to $17 From $27.50. Dolby Laboratories Inc., aiming to entice more movie theaters to use its 3-D video technology, cut the price of its 3-D glasses to $17 from $27.50. Theaters can start buying glasses at the new price starting today, San Francisco-based Dolby said in a statement. The company also began offering cheaper prices for bundles of as many as 1,000 pairs.
  • Golf's Masters Tournament to Be Broadcast in 3-D TV.
  • CLOs to End 12-Month Drought in Citigroup(C) Deal: Credit Markets. The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to reopen in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities. Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering, who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent. The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions.
  • Saudi Oil Minister Sees No Need to Alter OPEC Production Now. Saudi Arabia, the biggest and most influential member of the Organization of Petroleum Exporting Countries, said oil prices are in the right range and there’s no need to change production policy. “We are extremely happy with the market, the economy is doing well, it will do better down the road, so I don’t see any reason to disturb this happy situation,” Saudi Oil Minister Ali Al-Naimi said late yesterday in Vienna, where OPEC meets tomorrow. “The price has stayed very well in the range of $70 to $80. It is in a very happy situation.”
Wall Street Journal:
  • Wal-Mart(WMT) to Expand Its Financial Services. Wal-Mart Stores Inc., years after a failed effort to obtain a bank charter, plans a 50% increase this year in the number of the company's stores offering bank-like services. The expansion would push the number of Wal-Marts with "Money Centers" to 1,500, or a little less than one for every two Wal-Marts in the U.S., giving the nation's biggest retailer a financial presence that only a handful of banks have. Wal-Mart plans to open its 1,000th money center Tuesday. The money centers cater to millions of the retailer's lower-income customers who don't have a bank account or significant relationships with a bank. The federal government estimates that the category accounts for one in four U.S. households.
  • Pioneering Fund Stages Second Act. The founder of Renaissance Technologies LLC, one of the most successful hedge-fund companies ever, is trying to pull off a feat few other investment impresarios have managed: passing the torch. James Simons, the secretive mathematician and Cold War code breaker who founded the firm in 1982, stepped down as chief executive in January. A pioneer in utilizing powerful computers to comb markets for trading opportunities, Mr. Simons has long received credit for the firm's hefty returns. Now Peter Brown and Bob Mercer, two lieutenants of Mr. Simons all but unknown to the investing world, must steer the firm through challenging waters. The firm's main funds open to outside investors have posted mediocre results, and Messrs. Brown and Mercer, who are co-CEOs, say they are mulling whether to shut them down.
  • Slaughter House Rules. How Democrats may 'deem' ObamaCare into law, without voting. We're not sure American schools teach civics any more, but once upon a time they taught that under the U.S. Constitution a bill had to pass both the House and Senate to become law. Until this week, that is, when Speaker Nancy Pelosi is moving to merely "deem" that the House has passed the Senate health-care bill and then send it to President Obama to sign anyway. Under the "reconciliation" process that began yesterday afternoon, the House is supposed to approve the Senate's Christmas Eve bill and then use "sidecar" amendments to fix the things it doesn't like. Those amendments would then go to the Senate under rules that would let Democrats pass them while avoiding the ordinary 60-vote threshold for passing major legislation. This alone is an abuse of traditional Senate process. But Mrs. Pelosi & Co. fear they lack the votes in the House to pass an identical Senate bill, even with the promise of these reconciliation fixes. House Members hate the thought of going on record voting for the Cornhusker kickback and other special-interest bribes that were added to get this mess through the Senate, as well as the new tax on high-cost insurance plans that Big Labor hates. So at the Speaker's command, New York Democrat Louise Slaughter, who chairs the House Rules Committee, may insert what's known as a "self-executing rule," also known as a "hereby rule." Under this amazing procedural ruse, the House would then vote only once on the reconciliation corrections, but not on the underlying Senate bill. If those reconciliation corrections pass, the self-executing rule would say that the Senate bill is presumptively approved by the House—even without a formal up-or-down vote on the actual words of the Senate bill. Democrats would thus send the Senate bill to President Obama for his signature even as they claimed to oppose the same Senate bill. They would be declaring themselves to be for and against the Senate bill in the same vote.
  • Trichet Says 'Recurrent' Problem With Greek Data 'Not Tolerable'. European Central Bank President Jean-Claude Trichet said the problem with Greek economic statistics are “not tolerable,” according to the transcript of an interview with Euronews. “There has been a recurrent problem — to be sure that we have the right figures,’’ Trichet told Euronews, according to the transcript posted on its Web site. “This is not tolerable. This should not be tolerated for one second more.”
  • Dollar May Gain on 'Resistance Zone' Break: Technical Analysis. The US dollar may advance to this year's high against the yen if it breaks through a "zone of resistance" near its 200-day moving average, JPMorgan Chase(JPM) said.
  • No Room for Error on U.S. Debt. The United States isn't in jeopardy of losing its gold-plated credit rating, though by one measure America is closer to the ratings-downgrade danger zone than Spain. That's according to credit rating agency Moody's. In a quarterly report about sovereign debt, Moody's analysts wrote that despite market worries about rising government debt levels, there is "no imminent rating pressure" for the United States and other big governments carrying its highest triple-A rating. But the report added that these governments' margin for error "has in all cases substantially diminished," thanks to a weak outlook for economic growth and enormous debt loads taken on to quell the financial meltdown of 2008-2009.
Business Insider:
Crain's New York:
  • Citi(C), JPMorgan(JPM) Eye Inventment in Chicago Bank. The big banks hold talks with ailing ShoreBank, a politically-connected financial institution that focuses on low-income neighborhoods. Chicago's ShoreBank is talking with a group of the nation's largest banks, including J. P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., about a financial rescue package for the troubled, high-profile lender to the poor. ShoreBank management met last Thursday with representatives of the big banks and the Chicago-based John D. and Catherine T. MacArthur Foundation to discuss an equity infusion of $200 million or more, Crain's has learned. Much of the money would come from banks and foundations, some of which already hold stakes in ShoreBank. A sufficient injection of private-equity capital would enable the bank to qualify for $70 million in federal bailout funds. The potential rescue of ShoreBank by giant institutions that normally wouldn't concern themselves with a struggling community lender underscores the bank's wide renown for lending in neighborhoods other banks often shun, a reputation that gives it influence with national political leaders. In addition to Chase, B of A and Citigroup, sources say there have been efforts to include Goldman Sachs Group Inc.(GS) in the rescue. But it's not clear whether New York-based Goldman will participate.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-two percent (42%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -16 (see trends).
  • Left Warns Dems on Health Care Vote. Labor and progressive leaders are threatening House Democrats who oppose health care legislation with potentially destructive third party challenges in November. The discussions have already taken concrete form in New York State, where a handful of votes hang in the balance. They’re part threat, part an early attempt to channel what liberal leaders expect to be a wave of anger if Congress fails to pass health care. New York and a handful of other states have “fusion” rules that allow candidates to run on multiple ballot lines, giving minor parties like the Working Families a great deal of political leverage. For wavering Upstate New York moderates like Reps. Michael Arcuri, Scott Murphy, and Bill Owens, the line could mean the margin between victory and defeat. The first target, however, seems to be Rep. Michael McMahon, a New York City Democrat who has indicated he opposes the bill. The left has already sponsored a serious primary challenge to Senator Blanche Lincoln in Arkansas, but backing third-party candidates – who could easily split the vote and hand a seat to the Republicans – would mark a new level of disgust with Democrats opposed to health care.
  • Lawmakers Spend 1K/Month on Taxpayer-Funded Cars. The economy is still limping along, but some members of Congress are nevertheless riding in style: At least 10 House members are spending more than $1,000 a month in taxpayer money to lease cars. Rep. Emanuel Cleaver appears to be the biggest spender. In the last quarter of 2009, the Missouri Democrat doled out $2,900 a month to lease a WiFi-equipped, handicap-accessible mobile office that runs on used cooking oil. Some lawmakers blame their high lease costs on a policy, enacted in a 2007 energy bill, requiring that the vehicles they choose be fuel efficient. Others say their two-year terms in office prevent them from taking advantage of lower-cost, longer-term leases. A spokesman for House Intelligence Committee Chairman Silvestre Reyes (D-Texas), who is paying $1,628 to lease a GMC Yukon, cited those reasons — and others.
  • Google(GOOG) Sees Mobile Ad Rates Passing PC Rates. Google Inc (GOOG) said that it expects the rates that companies pay for search ads on mobile phones could surpass the rates of its existing PC-based ad business thanks to the growing popularity of powerful smartphones. Google Engineering Vice President Vic Gundotra did not say when he expected the crossover in the so-called cost per click of its search ads to occur, during a webcast to analysts about the company's mobile business on Monday. But he said that mobile ad rates have increased "dramatically" in recent years.And he noted that the number of Google searches on mobile phones have increased five-fold in the last two years. He cited the availability of technology, such as the GPS data that can tell Google a phone user's physical whereabouts, as helping the company create more "relevant" online ads. "We hope and believe that there's even a chance that we could exceed desktop in the future," Gundotra said in reference to the cost per click of mobile ads.
  • Microchip(MCHP) Raised Q4 Outlook. Microchip Technology Inc (MCHP) modestly raised its fourth-quarter outlook, citing strong bookings and sales activities. The chipmaker now expects fourth-quarter earnings of 42 cents a share, excluding items, on revenue that is 8 percent higher on a sequential basis. For the third quarter, revenue was $250.1 million. Analysts were looking for 36 cents a share, including options expense, on revenue of $264 million, according to Thomson Reuters I/B/E/S.
Financial Times:
  • Hopes Rise of Deal on Hedge Fund Rules. Pressure was mounting for a compromise deal on Tuesday on the European Union’s draft rules on hedge funds and private equity which would reduce British opposition to the regulation. Finance ministry officials from around the 27-member bloc were locked in last-minute talks with Spanish diplomats before Tuesday’s meeting of EU finance ministers.Spain, which holds the rotating EU presidency, said it was optimistic that an agreement would be reached. Mr Garrido said the deal would include a provision for “some kind of European passport”, allowing approved funds to market across the bloc rather than be subject to country-by-country rules but did not elaborate further. UK officials insisted that – in spite of numerous changes made to the European Commission’s original draft proposals – they still had concerns about implementation of the planned rules and how these could affect EU competitiveness.
  • Lehman Report Raises Derivatives Clearing Fears. Details which have emerged about the scramble at CME(CME), the world’s biggest futures exchange, after the collapse of Lehman Brothers, have raised questions over how effectively clearing houses can process the growing volume of derivatives. A court-appointed examiner’s report into Lehman’s final hours released last week says CME convened an emergency committee that conducted a forced transfer of the bank’s positions, the only time this has been done by the exchange operator. Lehman, a clearing house member, had $4bn in margin accounts to back-stop commitments for customers as well as big proprietary bets on energy, interest rate and stock-index futures. CME’s clearing house withstood Lehman’s collapse, but observers say the events of September 2008, detailed in the 2,200-page report by Anton Valukas, show the risks of clearing less liquid contracts. “They handled it in the end, but it does demonstrate that somebody is on the hook for the implosion of a clearing member,” said Craig Pirrong, finance professor at Houston University. The blow-by-blow details of the challenges CME faced to ensure all Lehman’s cleared contracts were honoured comes amid growing pressure from regulators for more derivatives contracts to be shifted to centralised clearing as a way of spreading the risk of counterparties defaulting. CME officials also worried that JPMorgan might stop acting as Lehman’s settlement bank. “Although it was technically possible to conduct transactions with the CME without a settlement bank, no CME clearing member had ever done so,” the report said. An exchange risk manager warned this “presented an unprecedented situation and additional risk to the CME”, says the report. CME twice sought to find bidders for Lehman’s positions, leading to a forced sale of a clearing member’s positions for “the first and only time”, and leading to substantial losses for the bank.
  • Germany Rebuffs Lagarde Criticism. German politicians and industry leaders on Monday closed ranks in the face of criticism from France that years of moderate wage rises had raised the competitiveness of Europe’s largest economy at the expense of its neighbours. A representative of Chancellor Angela Merkel said Germany’s success was based on strong companies, which was why the question “How can other states do this, too?” was more relevant than asking Germany “to somehow stop” its export-driven economy. Werner Schnappauf, BDI general-secretary, said Germany’s success at exporting was not the result of “some planned model”, but reflected “the competitiveness of German companies on global markets”. Instead of falsely accusing Germany of “wage dumping” or following “a beggar-thy-neighbour policy”, countries that had trouble competing should “improve their competitiveness through tough reforms and wage policy founded on productivity”. In order to save German manufacturing from losing its markets to cheaper Asian and eastern European rivals, the country’s companies and employers spent the opening years of the century agreeing moderate pay deals in order to raise productivity. The policy – encouraged by the government – led to a revival of Germany as an exporting economy, but also to years of consumer torpor as the nation’s workers saved for a rainy day.
  • Britain Warns China Against Protectionism. Britain has warned China against protectionist behaviour, as British businesses complain of being forced out of the Chinese market. The mood among foreign businesses operating in China has soured dramatically, with many complaining that they are facing the worst conditions for decades. Across a wide range of sectors, China has implemented protectionist measures in order to boost its domestic firms and lock out foreign competitors. Mr Miliband warned that the ability of Western governments to keep their markets open depended on the public perception that China was doing the same. "It is worrying that we are seeing more reports of foreign investors in emerging economies encountering new barriers to investment," he said. "This not only increases protectionist pressures in Europe and the United States, it also deprives China and other emerging economies of cutting-edge technologies which in turn raises their own competitiveness," he said, in a speech to Shanghai's Institute of International Studies. The Foreign secretary also warned that without active cooperation from the Chinese, the global economy could continue to suffer from "harmful, persistent imbalances between countries".
Evening Recommendations
  • Rated (VRUS) Buy, target $34.
  • Reiterated Buy on (VPRT), target $64.
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 93.0 +3.0 basis points.
  • S&P 500 futures +.08%
  • NASDAQ 100 futures +.09%
Morning Preview Links

Earnings of Note
  • (FDS)/.74
  • (DSW)/.31
  • (DFS)/.02
  • (APP)/.04
  • (RUE)/.30
Economic Releases
8:30 am EST
  • The Import Price Index for February is estimated to fall -.2% versus a +1.4% gain in January.
  • Housing Starts for February are estimated to fall to 570K versus 591K in January.
  • Building Permits for February are estimated to fall to 601K versus 621K in January.
2:15 pm EST
  • The FOMC is expected to leave the benchmark fed funds rate at .25%.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The BoJ rate decision, weekly retail sales reports, weekly API energy inventory report, Roth Growth Stock Conference, Goldman Sachs Industrials Conference, (CMI) analyst meeting, (PCL) analyst meeting, (STN) Investor Day, Jefferies Cleantech Conference and the ABC Consumer Confidence reading could also impact trading today.
BOTTOM LINE: Asian indices are slightly higher, boosted by financial and consumer shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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