Tuesday, March 30, 2010

Tuesday Watch

Evening Headlines

  • California Treasurer Asks Six Banks for Swap Details. California’s treasurer asked six investment banks that underwrite the state’s bonds to explain why they also market credit-default swaps on them, saying such contracts may cost taxpayers by exaggerating credit risk. Treasurer Bill Lockyer asked JPMorgan Chase & Co.(JPM), Bank of America(BAC) Merrill Lynch, Barclays Plc(BCS), Citigroup Inc.(C), Goldman Sachs Group Inc.(GS) and Morgan Stanley(MS) to detail the extent to which they market the insurance contracts and to explain how trading in them affects the interest cost on the state’s general-obligation bonds, according to letters he released today. The cost of California 5-year credit-default swaps has risen 28 percent since Oct. 26 to $204,000 to protect $10 million of bonds, according to data compiled by Bloomberg. California sold $5.9 billion of taxable and tax-exempt general- obligation bonds this month. “Lockyer’s concerned about the general effect on our bond prices,” said Tom Dresslar, a spokesman for Lockyer. “It’s taxpayer money at stake. They have a right to know.”
  • China Missed Chance for Open Rio Trial, Rudd Says. executives in secret, Australian Prime Minister China “missed an opportunity” to be transparent and give companies more confidence by hearing charges of industrial espionage against four Rio Tinto GroupKevin Rudd said. China had the chance “to demonstrate to the world at large transparency that would be consistent with its emerging global role,” Rudd said in Melbourne today. There are “serious unanswered questions” about the conviction of Stern Hu, the Australian executive who led Rio’s iron ore unit in China.
  • Ford(F) Credit Risk Drops to Almost Three-Year Low on Volvo Deal. An indicator of Ford Motor Co.’s credit risk fell to the lowest in almost three years as the automaker agreed to sell its Volvo Cars unit to China’s Zhejiang Geely Holding Co. for $1.8 billion. Credit-default swaps on Dearborn, Michigan-based Ford dropped 23 basis points to 515 basis points, the lowest since June 2007, according to CMA DataVision.
  • Japan's Factory Output Falls for First Time in a Year. Japan’s industrial production retreated in February, snapping an 11-month winning streak that helped to secure a recovery from the country’s worst postwar recession. Factory output declined 0.9 percent from January, when it rose 2.7 percent, the most in eight months, the Trade Ministry said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a 0.5 percent drop.
  • Moscow Metro Attacks Saddle Medvedev With Putin's War on Terror. The Moscow metro terror attacks that killed at least 38 people yesterday show Russian President Dmitry Medvedev is no closer to uprooting homegrown terrorism than his predecessor, Prime Minister Vladimir Putin. The dual bombings linked to Islamist terrorists in the North Caucasus region were the deadliest in the capital since 2004, when Russia grappled with the aftermath of two wars in Chechnya. “This is perhaps more serious for Putin than for Medvedev, as Putin gained popularity by fighting terrorism,” said Nikolai Petrov, an analyst at the Carnegie Moscow Center. “The terrorists understand that the closer we get to the 2014 winter Olympics, the more painful this is for the government.”
  • Danaher(DHR) Boosts First-Quarter Forecast; Shares Rise. Danaher Corp., the maker of Craftsman tools, increased its first-quarter profit forecast, pushing shares higher in after-hours trading in New York. Profit will be 90 cents or more, the Washington-based company said today in a statement. The company previously anticipated earnings at or above the high end of a range of 77 cents to 82 cents. The average estimate of 15 analysts surveyed by Bloomberg was 83 cents. Chief Executive Officer Lawrence Culp said Dec. 16 that “modest sequential end-market improvements across Danaher” were encouraging. Danaher rose $2.88, or 3.7 percent, to $80.25 at 4:49 p.m.
  • SEC Quizzes Wall Street About Lehman-Like Accounting. The U.S. Securities and Exchange Commission is questioning Wall Street firms about whether they employed accounting strategies like those Lehman Brothers Holdings Inc. was accused of using to hide leverage. The SEC wants finance chiefs at about two dozen firms to say whether they used repurchase agreements to move assets off their balance sheets in the past three years and how they accounted for them, according to a letter released today. The letter also asks if dealings are concentrated with specific counterparties or countries. The SEC intends to make the responses public after the review, spokesman John Nester said. “We are looking at the Lehman activities very, very carefully,” SEC Chairman Mary Schapiro said today in a CNBC interview. The agency plans to review “every major financial institution very thoroughly” in coming weeks, she said.
  • Saudi Arabia's Al-Naimi Awaits Recovery Before Boosting Output. Saudi Arabian oil Minister Ali Al- Naimi said the nation could boost output by as much as 4.5 million barrels-a day once demand recovers from recession. The world’s largest oil producer is “waiting” for usage to rise after increasing capacity to 12 million barrels a day, Al-Naimi told reporters today in Cancun, Mexico, where he’s attending an oil conference. Prices in the $70-a-barrel to $80- a-barrel range are “as close to perfect as possible,” he said. OPEC plans to add 12 million barrels to its daily production capacity by 2015, equal to Saudi Arabia’s capacity. The gains would exceed the expected growth in demand, according to the International Energy Agency.
  • OPEC, IEA, IEF To Unveil Measure to Combat Oil-Price Volatility. OPEC, the International Energy Agency and the International Energy Forum will announce a “joint action plan” this week to combat oil-market volatility, IEA Executive Director Nobuo Tanaka said. The plan will tackle “volatility of the price and other issues like the outlook of the energy market,” he told reporters today before the biennial IEF ministerial meeting that starts tomorrow in Cancun, Mexico. “We’ll have closer dialogue with our organizations and we’ll see what we can do.” The accord involves pooling expertise and sharing data to improve transparency, two people with direct knowledge of the plan said.
Wall Street Journal:
  • New iPhone Could End AT&T's(T) U.S. Monopoly. Apple Inc.(AAPL) is developing a new iPhone to debut this summer and also appears to be working on a model for U.S. mobile phone operator Verizon Wireless, say people briefed on the matter. While Apple has unveiled a new iPhone every June or July since launching the product in 2007, the new model with CDMA capability, the cellular technology used by Verizon, is notable because Apple and AT&T Inc. have long had an exclusive relationship with the iPhone. That has given AT&T a competitive edge over other carriers including Verizon for the last three years. The people briefed on the matter said one of the new iPhones is being manufactured by Taiwanese contract manufacturer Hon Hai Precision Industry Co., which produced Apple's previous iPhones. The model that has CDMA capability, used by Verizon Wireless, is being manufactured by Pegatron Technology Corp., the contract manufacturing subsidiary of Taiwan's ASUSTeK Computer Inc., said these people. One person familiar with the situation said Pegatron is scheduled to start mass producing the CDMA iPhones in September, but it was unclear when Apple might make the model available.
  • GE(GE) Faces Hurdles in the Oil Patch. General Electric Co. aims to double the revenue of its oil-services business to $15 billion in the next four years, but its ambitions for the growing unit face hurdles. GE, which has long prided itself on being No. 1 or No. 2 in its markets, is a middleweight in the oil patch. Industry leaders, such as Schlumberger Ltd.(SLB) and Baker Hughes Inc.(BHI), are rapidly consolidating, signing multibillion-dollar acquisition deals to gain scale and land large contracts. By contrast, GE executives, including Chief Executive Jeffrey Immelt, say they think GE Oil & Gas can grow from within by focusing on niche products and markets where its larger rivals aren't a factor. On its Web site, the unit says it provides equipment and services "across all segments of the global oil and gas industry." But what GE has assembled so far, through a series of small acquisitions over the past 15 years, is a loosely related collection of specialties in growth areas such as drilling equipment and compressors. Analysts are doubtful GE Oil & Gas can achieve enough heft without acquisitions to be a major player in the industry.
  • The Tax Police and the Health-Care Mandate. Americans of modest means may soon get a lesson in the power of the IRS.
  • Moody's, S&P Win Dismissal of Investors' Fraud Suit. Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings won dismissal of a negligence and fraud lawsuit by two California investors who lost money on highly rated bonds. U.S. Magistrate Judge Dale A. Drozd in Sacramento threw out the case in a ruling filed today, saying the investors’ complaint wasn’t specific enough about the alleged fraud. He said they could refile the lawsuit within 30 days if they can include more detail, such as misleading statements by the companies.
  • Half of Commercial Mortgages to Be Underwater. By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, in a wide-ranging interview on Monday. “They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending."
NY Times:
  • CNN Fails to Stop Fall in Ratings. CNN continued what has become a precipitous decline in ratings for its prime-time programs in the first quarter of 2010, with its main hosts losing almost half their viewers in a year. The trend in news ratings for the first three months of this year is all up for one network, the Fox News Channel, which enjoyed its best quarter ever in ratings, and down for both MSNBC and CNN. CNN had a slightly worse quarter in the fourth quarter of 2009, but the last three months have included compelling news events, like the earthquake in Haiti and the battle over health care, and CNN, which emphasizes its hard news coverage, was apparently unable to benefit. The losses at CNN continued a pattern in place for much of the last year, as the network trailed its competitors in every prime-time hour. (CNN still easily beats MSNBC in the daytime hours, but those are less lucrative in advertising money, and both networks are far behind Fox News at all hours.) Fox News, which had its biggest year in 2009, continues to add viewers. Greta Van Susteren’s show was up 25 percent from a year earlier. Bill O’Reilly, whose show commands the biggest audience in prime time with 3.65 million viewers, was up 28 percent, and Glenn Beck was up 50 percent from a year earlier.
  • Companies Push to Repeal Provision of Health Law. An association representing 300 large corporations urged President Obama and Congress on Monday to repeal a provision of the health care overhaul that prompted AT&T, Caterpillar and other companies to announce substantial charges for the current quarter. The association, the American Benefits Council, said the provision — which reduces the tax deductions for companies with drug coverage for their retired employees — would deal a significant blow to corporate profits and would discourage companies from hiring more workers. AT&T announced last week that it was taking a $1 billion charge because of the provision. Deere & Company announced a $150 million charge, Caterpillar a $100 million charge, and 3M a $90 million charge. Many companies said they were taking these charges now, before the current quarter ended, to comply with accounting rules. James A. Klein, the president of the American Benefits Council, called the provision “a serious mistake that is having negative and unintended consequences.” In a telephone news conference on Monday, Mr. Klein cited a study by Towers Watson, a consulting firm, saying the loss of the deduction would cost companies $14 billion in future years. “Particularly in this economic environment, it makes no sense to impose this type of a hit on companies’ financial statements,” Mr. Klein said. The provision takes effect in 2013, but accounting rules require companies to take immediate charges equal to the current value of any known hit to future profits. About 6.3 million retirees — an estimated two-thirds of them from the private sector — are covered by employer drug plans. Mr. Klein cited a study by the Moran Company, a health care consulting group, estimating that as a result of the legislation, drug coverage would be altered for 1.5 million to 2 million retirees. Many companies, he said, will stop providing drug coverage to retirees and will instead push them into Medicare Part D, causing the government to pay for their coverage. Henry A. Waxman, a California Democrat who is chairman of the House Energy and Commerce Committee, criticized the charges by the companies, asserting that the health reform would save companies more money than it cost them. Mr. Waxman sent AT&T, Caterpillar and Deere a sharp letter, questioning the charges and saying he wanted top officials from those companies to testify at an April 21 hearing he has scheduled on the issue. Responding to such criticism, Mr. Klein said: “These announcements are required under accounting rules, and we should all expect more of such announcements in coming days and weeks. We’re very troubled that these announcements have been challenged by officials in Obama administration and Congress.” Gerry Shea, the A.F.L.-C.I.O.’s chief strategist on health care, stopped short of calling for a repeal of the provision. “We’re very concerned about the disruption that could be caused because of this, with people being pushed out of employer plans,” he said. “With all the changes we’re looking at because of the new health legislation, we feel you don’t need this.” Mr. Klein argued that the provision would undercut Mr. Obama’s job creation plans. “If companies are going to take a hit like this on their financial statements that will certainly hurt their ability to borrow in the marketplace and make the type of investments that will retain and create jobs,” he said.
  • State Debt Woes Grow Too Big to Camouflage. California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis.
  • Spurt of Home Buying as End of Tax Credit Looms. After several disastrous months for home sales across the country, when volume dropped by 23 percent, the pace appears to be picking up again.
Mobile Business Briefing:
  • US Hedge Fund to Build Wholesale LTE Network. US hedge fund Harbinger Capital Partners has announced plans to build a new nationwide LTE network using terrestrial spectrum owned by satellite networks. The New York-based firm filed its plans with US regulators on Friday after earlier being given approval to acquire SkyTerra, a leading North American satellite network operator. The new network will be an open access platform but current regulations restrict usage by large incumbent operators, which means the network could emerge as a serious competitor to LTE networks from the likes of AT&T and Verizon Wireless. “The company intends to be a wholesale only, data only network operator, providing a competitively-priced 4G option, including network, operations and spectrum,” Harbinger said in its filing.
LA Times:
  • California Lawmakers Are the Highest Paid in the Nation, Survey Finds. California state lawmakers remain the highest paid in the nation by far, according to a survey by a state panel that is considering a 10% reduction in their salary. Despite an 18% pay cut last year, the $95,291 salary of California lawmakers is still higher than the $79,650 paid to their counterparts in Michigan, the $79,500 that goes to legislators in New York and the $78,315 salary in Pennsylvania, according to the survey conducted by the California Citizens Compensation Commission.
  • Q Poll: 4% Favor Tax Hikes to Slash Deficit. Quinnipiac is out with a new poll on voter preferences to attack the deficit and reports — surprise, surprise — that very few people want to have their taxes hiked. Four percent (!) favor income tax increases as the sole way of plugging the gap, estimated well north of $1 trillion this year. But 42 percent would tolerate some hikes if they were coupled with spending cuts; 49 percent favor spending cuts only. An overwhelming majority believe the middle class will get fleeced either way. The conventional wisdom on the deficit is that it's fodder for C-SPAN but a nonissue in November. The sheer magnitude of the debt now could alter that logic.
  • Barack Obama Struggles to Capitalize in Polls. Democrats who held out hopes that President Barack Obama’s health reform win would mean a quick boost to the party’s political fortunes are getting a reality check – a reminder that it takes more than one good week to shake up a year of sliding polls. Obama and his health reform plan did get a bump in several surveys immediately after the House vote eight days ago – but the numbers in some of those polls flattened out, showing how difficult it will be for Obama to capitalize on reform, even after his top legislative goal cleared Congress. “It helped a little bit, but I think it’s within the margin of error,” said Peter Brown of the Quinnipiac Poll, which recorded a slight drop in disapproval of Obama after the bill passed. “The Democrats said the American people will grow to love this. We’ll find out. At this point, they’re not exactly jumping up and down.” The most prominent political prognosticator who predicted a post-reform bump for Obama was President Bill Clinton – who told reporters last year that Obama would add 10 points to his approval rating “the minute health reform passed.” But Obama’s approval in the Gallup daily tracking poll stands at 48 percent – near his all-time low of 46 percent in the three-day rolling average.
USA Today:
  • Gov't to Give $600 Million in Housing Aid to 5 States. The Obama administration unveiled Monday $600 million in financial aid for five more states with high unemployment that have been slammed by the housing bust.The funding is for North Carolina, Ohio, Oregon, South Carolina and Rhode Island.
  • KKR, CVC Teamed Up for Interactive Data - Sources. Private equity firms Kohlberg Kravis Roberts & Co (KKR.AS) and CVC have teamed up to bid for Interactive Data Corp (IDC.N), adding to other private equity teams that have formed in recent weeks as an auction for the financial market data provider progresses, two sources familiar with the matter said.
  • Obama: Healthcare Will Need Adjustments to Cut Costs. President Barack Obama said on Monday that a U.S. healthcare overhaul is a "critical first step" but that adjustments will be needed in the new law to further reduce costs. Critics of the ten-year, $940 billion overhaul have complained the revamp does not go far enough in reducing healthcare costs. Obama, in an NBC News interview to air on Tuesday on the "Today" show, said adjustments will be needed to the law. "I think it is a critical first step in making a healthcare system that works for all Americans. It is not going to be the only thing. We are still going to have adjustments that have to be made to further reduce costs," he said.
Financial Times:
  • Business Chiefs Fear Impact of Debt Crisis. European business leaders are becoming worried that the debt problems of countries such as Greece and Portugal will weaken already sluggish growth, putting Europe further behind Asia and the US. Greece and Portugal are insignificant markets for most large European groups in terms of sales but, in a series of interviews with the Financial Times, some of Europe’s leading executives expressed worries about the broader economic impact. Bodo Uebber, chief financial officer of Daimler, the German carmaker, is one of the most pessimistic: “Is there a direct risk [to Daimler]? No . . . It is the European financial system that feels the impact. That is the biggest risk when you look at the revenues and profits of Daimler.” Perhaps the biggest worry centres on the consequences of most countries suffering from large budget deficits, with cuts in public spending looking inevitable across the continent. Larry Rosen, finance director of Deutsche Post, said: “One of the biggest problems is that in Europe there will be more austerity measures that will depress growth.” Rupert Stadler, chief executive of Audi, the German carmaker, agreed: “The budget figures show that many countries in Europe, and the US, are completely over-indebted. It is clear that this will have consequences for the economy.” He added: “The potential for economic setbacks is still existing. We can see what is happening in Greece and we don’t know what this will mean for the future of the euro.”
21 Century Business Herald:
  • China's finance ministry may require banks to set aside more of their risk-weighted assets as reserves. The Ministry of Finance is soliciting banks' feedback on raising the general reserve requirement to 1.5% of their new risk-weighted assets, up from the current 1%, the report said.
  • The Industrial & Commercial Bank Ltd. and China Construction Bank Co. reduced their discounts on mortgage rates, forcing borrowers to pay more in down payments for their home loans.
Evening Recommendations
  • Reiterated Buy on (AVT), target $37.
  • Reiterated Buy on (CELG), raised target to $72.
  • Rated (BF/B) Buy, target $67.
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 96.0 unch.
  • S&P 500 futures -.03%
  • NASDAQ 100 futures +.06%
Morning Preview Links

Earnings of Note
  • (FUL)/.28
  • (CHRS)/-.13
  • (LDK)/.12
Economic Releases
9:00 AM EST
  • The S&P/CaseShiller Home Price Index for January is estimated to fall to 145.0 versus a reading of 145.9 in December.
10:00 AM EST
  • Consumer Confidence for March is estimated to rise to 51.0 versus a reading of 446.0 in February.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Evans speaking, Fed's Fisher speaking, (AMAT) analyst day, (F) analyst meeting, (GRS) analyst day, ABC Consumer Confidence reading, weekly retail sales reports and the weekly API energy inventory report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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