Wednesday, March 31, 2010

Wednesday Watch

Evening Headlines

  • Fed's Fisher Says U.S. Can't Ignore Effect of Deficit on Yields. Federal Reserve Bank of Dallas President Richard Fisher said the U.S. can’t ignore the effect of the growing federal deficit on Treasury yields and the outlook of investors. “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said in the text of a speech today in Tucson, Arizona. “The markets, fearing the consequences of runaway deficit financing, have bid up longer-term nominal rates, resulting in a yield curve that is now historically steep.” Still, “we cannot turn a blind eye to the effect that growing government indebtedness has on investors’ confidence and Treasury yields,” said the bank president, 61, who has led the Dallas Fed since 2005 and doesn’t vote on the Federal Open Market Committee again until 2011. The Fed shouldn’t step in to buy Treasuries just to hold longer-term rates down, which would create the perception that policy makers are “monetizing the debt,” he said. “The good news is that we are beginning to see some rays of sunshine emerge from the leftover clouds of the frightful storm we have just experienced,” Fisher said. Even so, “the skies are far from clear,” with too many unemployed workers and a “precarious” housing situation, he said. The budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. The Obama administration in February projected the shortfall would widen to $1.6 trillion this year.
  • Britain's soaring interest bill is forecast to exceed 10% of revenue in four years, the most since Margaret thatcher was prime minister, an analysis of Treasury documents by the Institute for Fiscal Studies shows. Moody's Investors Service said this month that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceed the bounds of "debt affordability." The IFS says Treasury figures indicate the ratio will reach 10.6% by March 2015. The projections underline the pressure on whichever party wins this year's election to reduce the budget deficit.
  • G-8 Has 'Serious Doubts' About Iran Nuclear Program. Group of Eight foreign ministers said actions by Iran have deepened “serious doubts” about the peaceful nature of the country’s nuclear program, and they are prepared to take “strong steps” to show resolve on the issue. The G-8 foreign ministers, in a statement released today following a meeting in Gatineau, Quebec, urged Iran “in the strongest possible terms” to cooperate fully with relevant resolutions of the United Nations Security Council and the International Atomic Energy Agency. “Ministers agreed to remain open to dialogue, and also reaffirmed the need to take appropriate and strong steps to demonstrate international resolve to uphold the international nuclear non-proliferation regime and persuade Iran to build greater international confidence in the peaceful nature of its nuclear program,” according to the statement. The statement fell short of calling for sanctions against Iran.
  • China May Shun US Treasuries, Sending Yields to 4.5%, SocGen Says. China may curb purchases of U.S. Treasuries this year as its first trade deficit in 17 years leaves it with fewer dollars to invest, causing yields to climb, according to Societe Generale SA. Maguire’s call clashes with the view of JPMorgan Chase & Co. and Barclays Capital analysts, who say it’s too early to conclude that China will run a sustained trade deficit. The debate highlights the potential vulnerability of U.S. borrowing costs to any shift in trade patterns for China, the biggest foreign holder of American government debt.
  • Ford(F) Said to Plan Hybrid Lincoln to Bolster Last Luxury Line. Ford Motor Co. plans to expand the Lincoln luxury line by adding a hybrid model based on its top- selling Fusion sedan, two people familiar with the matter said. The hybrid Lincoln MKZ will be unveiled tomorrow at the New York auto show, said the people, who asked not to be identified because Dearborn, Michigan-based Ford hasn’t announced the details.
  • Chavez Cash Crunch Looms on Oil, Morgan Stanley Says. Venezuela’s government may face a cash crunch as early as this year as oil production slumps amid stable prices, Morgan Stanley said today in a report. The country, which depends on crude for 94 percent of export revenue, has seen output plunge to 2.2 million barrels a day from 3.7 million in 1997, according to Morgan Stanley. Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said. “Venezuela may be hard pressed to avoid its day of reckoning,” analysts Giuliana Pardelli and Daniel Volberg said. “If we assume that oil prices remain in the $80-$85 per barrel range, such a level is likely to be insufficient to offset the decline in production.” Investors bet that oil prices will stay close to $90 a barrel through 2015, according to data compiled by Bloomberg. Venezuela’s international reserves fell to a 10-month low March 29 after the central bank transferred $5 billion to President Hugo Chavez’s off-budget development fund. Cash is also being used up as investors pull out of the country and a drop in manufacturing increases reliance on imports bought with dollars, Morgan Stanley said.
  • Obama's Health Beast Squashes State Experiments: Amity Shlaes. State attorneys general are filing lawsuits seeking to prove President Barack Obama’s health-care plan is unconstitutional. The litigation takes the spotlight away from something else about the states that matters. It is that states can be laboratories where the country experiments to ascertain which mix of taxes, incentives and public administration works best when it comes to health care. Obamacare threatens such experiments by superseding them. In doing so, the new federal program deprives the country not only of the experiments themselves but also of evidence that might cast doubt on the promises of the new legislation. In few states is the change as dramatic as in Indiana.
Wall Street Journal:
  • Year's First CMBS Deal Arrives. The first commercial-mortgage-bond deal of the year is expected to be marketed to investors this week, according to sources familiar with the transaction. The offer is seen as a sign of investors' willingness to tolerate risk, despite the deteriorating fundamentals of commercial real estate, as long as a deal is accompanied by adequate protection and conservative underwriting. Royal Bank of Scotland Group, through its real-estate advisory business, will offer a $500 million security backed by existing loans that were refinanced and underwritten to stricter guidelines, the sources said.
  • Trader's 'Nice Little Kiss' Tests Reach of Regulators. A series of phone calls between a Deutsche Bank AG bond salesman and a hedge-fund trader has landed the two men at the center of a courtroom test of how far federal regulators can go in pursuing insider trading.
  • BP(BP) Begins Big Push to Revive Iraq's Oil. BP PLC Tuesday awarded $500 million in contracts to drill wells in Iraq's giant Rumaila oil field, the first step in a mammoth initiative by foreign oil companies to revive the country's energy industry. If successful, the effort at Rumaila and several other fields near Basra could be one of the largest expansions of crude-oil production ever achieved anywhere. Increased Iraq production could be the difference between a well-supplied global market with oil steadily trading below today's $82 a barrel and a tight oil market with triple-digit prices, struggling to meet rising Asian demand. "It could change the map of oil," says Paolo Scaroni, chief executive of Italy's Eni SpA, which is preparing to begin work on the giant Zubair field. The new drilling contracts are the beginning of a long effort by a dozen of the world's largest oil companies to revive Iraq's decrepit oil infrastructure and turn it into a rival of Saudi Arabia for world's biggest crude exporter, industry officials say. Iraqi officials say they plan to add 10 million barrels a day of oil production capacity by 2017. Iraq has an estimated 115 billion barrels of crude-oil reserves. At current prices, that is valued at $9.5 trillion. The bottom line is that the lure of working in Iraq—with its plentiful oil—is too great for most big oil companies to ignore. "It makes commercial sense for us to increase production as quickly as we can," said Toby Odone, a BP spokesman. BP and the South Oil Co. let contracts to drill 49 wells to Weatherford International Ltd.; a partnership between Schlumberger Ltd. and the state-run Iraqi Drilling Co.; and China's Daqing Oil Field Company Ltd., said Abdul Mahdy al-Ameedi, a senior official in the oil ministry. He said BP plans to increase production at Rumaila from 1.07 million barrels a day to 1.23 million barrels within 12 months. These contracts are the first of what is expected to be a wave of oil-field-service related work let by BP, Exxon, Royal Dutch Shell PLC, Eni, Lukoil OAO and China National Petroleum Corp. over the next few months. The companies have been awarded contracts to increase production at separate fields. Energy analysts at Sanford C. Bernstein recently wrote that developing seven major Iraq fields, including Rumaila and Zubair, would require $102 billion in investment. The development of so many enormous projects—most clustered within 50 miles of each other—will create an enormous demand for workers, engineers and drilling rigs. It will also require the construction of a giant infrastructure build out, including roads, ports, oil export facilities and water plants. Even a few million barrels a day of crude oil production capacity could have an enormous impact. The growth of Iraqi oil production and exports will play a "decisive role in shaping global oil markets," says Fatih Birol, chief economist of the Paris-based International Energy Agency, a watchdog for industrialized nations.
  • Russia Boosts Security as Capital Mourns. Prime Minister Vladimir Putin vowed to "drag out of the sewer" those behind twin bombings that killed 39 people Monday in Moscow's subway, as officials pledged to stiffen penalties for terrorists and tighten security.
  • U.K. Climate Science 'Damaged' by Leaked E-Mails, Lawmakers Say. Britain’s global warming scientists damaged their reputation by “unacceptable” withholding of data in response to freedom of information requests, said a panel of lawmakers who probed the so-called climategate scandal. Parliament’s Science and Technology Committee said the University of East Anglia’s “culture of non-disclosure” in relation to its climate research may have broken freedom of information laws by failing to publish data sought by critics of global warming theory. “What was reprehensible is that this area of science is of such global importance economically and politically that there was not a culture of releasing all the data and methodology as a matter of course,” panel Chairman Phil Willis said in London before the report was released today. “That is how things should be in the future.” The e-mails from the university’s Climatic Research Unit allowed global warming skeptics, including U.S. Senator James Inhofe, a Republican from Oklahoma, to question data making the case that humans are causing worldwide increases in the temperature. “The disclosure of CRU e-mails has damaged the reputation of U.K. climate science and, as views on global warming have become polarized, any deviation from the highest scientific standards will be pounced on,” the committee wrote. The lawmakers also said that because a general election is due by June, they didn’t have enough time to hold an in-depth enquiry. They cleared Phil Jones, head of the school’s Climatic Research Unit, of wrongdoing, saying he acted “in line with common practice,” in not publishing all his methods and computer codes. Jones stepped aside from his post in December pending completion of an investigation. In one e-mail, he wrote of deleting files rather than handing data to skeptics. The lawmakers cleared Jones of dishonesty in one of the most widely-cited e-mails, in which he discussed a “trick” to hide the decline in one temperature record. Graham Stringer, one of the four members of the panel who attended the hearings and a lawmaker from the ruling Labour Party, voted against that conclusion. He argued that not enough evidence had been heard. The school said it welcomed the lawmakers’ “largely positive” report.
  • Nissan Prices U.S. Leaf Battery Car to Challenge Prius Hybrid. Nissan Motor Co., aiming to be the biggest seller of electric cars, said its battery-powered Leaf will cost $25,280.
Business Insider:
  • Because Companies Said Obamacare Will Hit Them, Henry Waxman Is Launching A War On Accounting. Accounting basics: when a company experiences what accountants call "a material adverse impact" on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact--"to take the charge against earnings"--as soon as it knows that the change is reasonably likely to occur. This makes good accounting sense. The asset on the balance sheet is now less valuable, so you should record a charge. Otherwise, you'd be misleading investors. Obviously, Waxman is incensed because this seems to put the lie to the promise that if you like your current plan, nothing will change. But this was never true. Medicare Advantage beneficiaries are basically going to see their generous benefits slashed, retiree drug benefits suddenly cost more and may now be discontinued, and ultimately, more than a few employers will almost certainly find it cheaper to shut down their plans. If Congress didn't want those things to happen, it should have passed a different law. If Congress thinks that it made the right tradeoffs--or at least, justifiable choices--then our Congressmen should step up and accept responsibility for what they've done. At the very least, I think we can ask that they refrain from trying to force companies to join them in denying reality by threatening congressional investigation of any company who dares to notify investors that this thing is going to cost them money.
Chicago Tribune:
  • Taking a Hatchet to Moderate Government. Go ahead, attack promoters of moderate government. Paint them as flakes, kooks and goons. Call them unhinged and unglued. Toxic, mean-spirited, shrill and dangerous. othing would please us more than your persisting in mislabeling or misunderstanding — the effect is the same — what angers the majority of Americans. Convince yourself that dissenters to your engorgement of government are doing it because they are racists and bigots. Don't give anyone credit for objecting to where you're leading the country because your path is misdirected. Please, please, continue your crusade to alienate more and more honest and worried Americans who see great danger in the extreme expansion that government has undergone in the last few years. You've already done a great job of dividing the country, but don't stop now. Seventy-eight percent, including 82 percent of independents, think government spending is out of control. Eighty-one percent are fed up with the growing deficit and 73 percent with government spending. Sure, deride the poll because it came from Fox News; ignore the clarity of American anger.
  • Now the Real Healthcare Fight Begins. Many liberals are euphoric about Congress passing health care reform. When President Barack Obama signed the most ambitious social legislation since President Lyndon B. Johnson's Great Society, the tide seemed to have turned for the Democrats. But this is not the end of the political struggle. Just the start of a new chapter. While outright repeal of health care reform — as many conservatives demand — seems unlikely, there is no guarantee this reform will stick. Future Congresses could erode or undercut the law. For there is a long history of major social legislation coming under attack post-enactment. New legislation, whether misunderstood or poorly designed, often can take several years to gain solid public support. Political sustainability is not automatic. One of the Democrats’ most embarrassing moments involved the Medicare Catastrophic Coverage Act of 1988, which Congress repealed 16 months after adoption. The reform was the biggest expansion of Medicare since its creation in 1965. It earned some of the same praise we hear today for Obama's health care reform.
  • CME(CME) Working With Fannie, Freddie on Swaps. CME Group Inc. is working with mortgage lending giants Fannie Mae (FNM) and Freddie Mac (FRE) to design a clearing facility for the $414 trillion global market for interest-rate swaps. "We have been working with them to help structure our cleared interest rate swap offering," CME CEO Craig Donohue said on Tuesday at the Reuters Global Exchanges and Trading Summit in New York. Fannie Mae and Freddie Mac, which were seized by the U.S. government in September 2008, will start moving their swaps to centralized clearing within months, their regulator said earlier in March. Their combined $3 trillion portfolio makes them the biggest swaps holders in the U.S. "That's a big opportunity for us," said Donohue said, who added the exchange operator is also working with a broad range of other market participants.
Financial Times:
  • Climate for Flotations Continues to Improve. International equity issuance in the first quarter rose to the highest level in two years as the market for stock market flotations continued to thaw and investor and corporate sentiment was soothed by improving economic data. While deals in the US raised the largest amount globally ($27.4bn), a series of big deals from Asia reiterated the region’s recent prominence in both initial public offerings and secondary issuance. Chinese exchanges led the way for initial public offerings. Shenzhen stock market listings raised $6.7bn while Shanghai came in second for the quarter, raising $6bn, meaning China won a 47 per cent market share of the global IPO market.
Chosun Ilbo:
  • U.S. and South Korean intelligence officials have detected the return of North Korean submarines near the site where a South Korean naval ship sank last week. The submarines had moved elsewhere before the incident and are now back at their usual location close to where the 1,200-ton Cheonan sank, citing a South Korean intelligence official.
Yonhap News Agency:
  • Pentagon Remains Cautious on S. Korean Warship's Sinking. The United States Tuesday remained cautious about the cause of the sinking of a South Korean warship in waters near North Korea last week. "I don't think there's a way to determine that at this point, given that the boat in question, I think, is submerged," Geoff Morrell, Pentagon spokesman, told reporters. "I think they have some more work to do to determine that."
Evening Recommendations
  • Reiterated Sell on (LRCX), target $27.
  • Reiterated Buy on (AAPL), target $300. Our checks suggest that iPhone will become available on Verizon's(VZ) network in either 4CQ10 or 1CQ11. Assuming we are correct about a Verizon iPhone during this time period, our CY11 iPhone unit estimates of 40M seems conservative. In fact, our CY11 estimate is below the current CY10 iPhone build plan. Net, net, we see potential for FY11 earnings estimates to move meaningfully higher.
Night Trading
  • Asian indices are -.25% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 96.5 +.5 basis point.
  • S&P 500 futures -.05%
  • NASDAQ 100 futures -.11%
Morning Preview Links

Earnings of Note
  • (MOS)/.60
  • (RECN)/.02
  • (GPN)/.53
  • (BLUD)/.27
  • (RAD)/-.19
  • (AYI)/.39
  • (MU)/.24
  • (RIMM)/1.28
Economic Releases
8:15 AM EST
  • The ADP Employment Change for March is estimated at +40K versus -20K in February.
9:45 AM EST
  • Chicago Purchasing Manager for March is estimated to fall to 61.0 versus a reading of 62.6 in February.
10:00 AM EST
  • Factory Orders for February are estimated to rise +.5% versus a +1.7% gain in January.
10:30 AM EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,500,000 barrels versus a +7,245,000 barrel increase the prior week. Gasoline inventories are expected to fall by -1,850,000 barrels versus a -2,715,000 barrel decline the prior week. Distillate supplies are estimated to fall by -1,375,000 barrels versus a -2,422,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise +.2% versus a +.56% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, Fed's Duke speaking, weekly MBA mortgage applications report, Bloomberg FCI Monthly and the NAPM-Milwaukee report could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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