Friday, April 30, 2010

Friday Watch


Evening Headlines

Bloomberg:
  • Greece May See 'Multi-Notch' Moody's Cut Depending on Aid Pact. Greece’s credit rating may be hit by a “multi-notch” downgrade by Moody’s Investors Service if the government doesn’t cut the budget deficit enough or the European Union fails to agree a united response to its crisis. Moody’s, which has an A3 rating on Greece, will make a decision after the government announces the budget steps agreed on with the International Monetary Fund and the EU. An accord may be announced in coming days. “‘Should, however, the mobilization of external support continue to be fractious and/or should the Greek government and people fail to fully deliver on and acquiesce to ambitious policy adjustments, Moody’s indicates that this would inflict significant damage to Greece’s creditworthiness,” the rating company said in a statement. The country’s largest union has already denounced some measures, which may include three-year wage freezes, as “unjust.” Greece’s NET Radio said cuts may amount to 10 percentage points of gross domestic product, equivalent to around 24 billion euros. The deficit was 13.6 percent of GDP in 2009.
  • Goldman(GS) Scrutinized by U.S. Prosecutors Examining SEC Case. Federal prosecutors in New York are investigating transactions by Goldman Sachs Group Inc., accused of misleading investors by U.S. securities regulators, to determine whether to pursue a criminal fraud case, according to two people familiar with the matter. The federal review, which lawyers say is common in such a high-profile case, is being done by the U.S. attorney in Manhattan, said the people, who weren’t authorized to comment and spoke on condition of anonymity.
  • Senate Bill's Word Change May Save Swaps Phone Trades. A one-word deletion in the 1,565- page Senate financial reform bill may help banks and inter- dealer brokers maintain how they trade swaps in the unregulated $605 trillion over-the-counter derivatives market. The change is in the definition of so-called swap execution facilities, a way for banks, hedge funds and asset managers to trade private derivatives that are to be sent to clearinghouses under legislation written by Senator Blanche Lincoln, chairwoman of the Agriculture Committee. The latest version deletes the word “trading” from the term “trading facility,” according to a copy of the revised bill obtained by Bloomberg News. A “trading facility,” as defined under the U.S. Commodity Exchange Act, prohibits phone transactions, which is how swaps have been traded for three decades. The banks that dominate the market profit by relying on telephone-based trading because it’s less transparent than electronic-trading systems, said Darrell Duffie, a finance professor at Stanford University in California. “Dealer profits depend on the ability to limit the amount of competition for a trade,” Duffie said today in a telephone interview. “The policy objective behind this legislation is to go the other way -- to increase the amount of competition for a trade.” At stake is trading revenue in unregulated markets that last year generated an estimated $28 billion for five U.S. dealers including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, according to reports from the New York-based banks collected by the Federal Reserve and people familiar with banks’ income.
  • Moore Capital Fined in Platinum Manipulation Case. Moore Capital Management LP agreed to pay $25 million to settle charges that a former portfolio manager attempted to manipulate platinum and palladium futures during a surge in prices two years ago, U.S. regulators said.
  • Natural Gas Drops Most in Seven Months on Stockpiles, Output. Natural gas futures fell the most in seven months in New York after government reports showed bulging U.S. inventories and rising production. Supplies gained 83 billion cubic feet in the week ended April 23 to 1.912 trillion cubic feet, the Energy Department said. Analysts forecast an increase of 70 billion. Losses accelerated after a separate department report showed that gas output in February rose 1.6 percent to the highest monthly level since at least January 2005. “Supply is there and demand is not,” said Kyle Cooper, a managing director at energy consultant IAF Advisors in Houston. “It just implies you’ve got to change something because we can’t keep putting gas in storage at this pace.” Natural gas for June delivery fell 36.8 cents, or 8.5 percent, to settle at $3.98 per million British thermal units on the New York Mercantile Exchange, the biggest one-day decline since Sept. 11. Gas has dropped 29 percent this year. Inventories were 18.8 percent above the five-year average, little changed from 18.5 percent in last week’s supply report.
  • Wells Fargo(WFC) Builds Team to Bundle, Trade Mortgages. Wells Fargo & Co., aiming to translate home-lending clout into bigger profits, is building a team to package and trade mortgage-backed securities and curb reliance on Wall Street competitors.
  • Japan Consumer Prices Fall 1.2%, 13th Straight Drop.
  • Asian Stocks May Fall 17% on Greek Crisis, BNP Says. Asian stocks outside of Japan may fall 17 percent in the short term as the Greek fiscal crisis prompts a drop in fund flows, BNP Paribas said. The MSCI Asia excluding Japan Index may decline to around 410 ahead of a May 10 meeting of leaders from the euro region, BNP analysts Clive McDonnell and Ryan Tsai said in a report today, citing their Portfolio Flows model.
  • North Korea's Denials on Ship Sinking May Cloud Lee-Hu Meeting. North Korea’s possible involvement in the sinking of a South Korean warship last month is likely to overshadow today’s meeting in Shanghai between the South’s president, Lee Myung Bak, and Chinese counterpart Hu Jintao. Hu’s summit with Lee, in China to celebrate the opening of the $44 billion World Expo, will help shape any international response should an investigation indicate that North Korea caused the March 26 sinking, which killed 46 South Korean sailors. China is North Korea’s principal trading partner and political ally as well as the host for stalled negotiations on the reclusive regime’s nuclear weapons program. South Korea’s Defense Ministry said the sinking, off its west coast close to the disputed border with North Korea, was most likely caused by a torpedo. South Korea may take the incident to the UN Security Council if North Korea’s role is confirmed, Foreign Minister Yu Myung Hwan said on April 20.
  • Cameron Bolsters Bid to Oust Brown With Win in Debate. Conservative leader David Cameron won the final debate of the U.K. election campaign, three instant-reaction polls showed, gaining momentum in his bid to oust Prime Minister Gordon Brown in the May 6 vote. Cameron’s central message in the 90-minute debate in Birmingham, central England, was that 13 years of Labour Party rule had left Britain struggling to recover from its longest recession and the highest unemployment in 16 years. “If you vote Labour, you’re going to get more of the same,” Cameron said. “If you vote Conservative on Thursday, you can have a new fresh government, making a clean break.”
  • Steel Futures in Shanghai Head for Biggest Drop in Three Months. Steel futures in Shanghai are poised for the largest monthly decline in three months on concern demand may ebb in China, the largest consumer and producer, as the government moved to cool its real-estate market. The government has in the past two weeks raised mortgage rates and down-payment ratios, barred lending for third-home purchases and ordered tighter scrutiny of developers’ financing to restrain property prices that surged at a record 11.7 percent in March. “The short-term outlook for steel has been hurt by the measures the government has taken to curb property speculation,” Xie Shuguang, an analyst Dongguan Hualian Futures Co., said from Guangdong. “Stockpiles have fallen but considering we’re in the peak demand season now, they are not falling as fast as expected.”
Wall Street Journal:
  • Google(GOOG) to Show TV Software in May. Google Inc. is planning to introduce Android-based television software to developers at an event in May, according to people familiar with the matter. The technology—designed to open set-top boxes, TVs and other devices to more content from the Internet—is attracting interest from partners that include Sony Corp., Intel Corp. and Logitech International SA, which are expected to offer products that support the software, these people said.
  • Starbucks(SBUX) Mounts Major Grocery Push. In the days ahead, a clue to the long-range growth strategy of Starbucks Corp. will become apparent, though not at its vast chain of coffee shops. Instead look down the coffee aisle of your local grocer. Starbucks is rolling out Via instant coffee—so far sold only in its own shops and a couple of retail chains—to tens of thousands of supermarkets, mass merchandisers and other outlets in coming weeks.
  • Buffett Is Expected to Fire at Will. Soon after the Securities and Exchange Commission sued Goldman Sachs Group Inc.(GS) alleging fraud, Goldman Chief Executive Lloyd Blankfein asked Warren Buffett for tips on how to handle the explosive situation, according to people familiar with the matter. Mr. Buffett, whose Berkshire Hathaway Inc. invested $5 billion in Goldman at the height of the financial crisis, told Mr. Blankfein he would let him know if he came up with any good ideas. Berkshire shareholders heading to Omaha, Neb., this weekend may soon get a view into Mr. Buffett's thinking. "I expect to get multiple questions about Goldman and I'll give extensive and complete replies," he said in an interview Thursday.
  • Airlines Approach Final Deal to Merge. Continental Airlines Inc.(CAL) and UAL Corp.'s United Airlines(UAUA) are expected to announce Monday that they are merging to form the world's largest airline, people familiar with the matter said.
  • Warning Signal on U.K. Debt? As investors scramble to protect themselves from the next credit flare-up in Europe, their worries are spreading to the U.K. Investors bought a net $443 million of credit-default swaps to insure against a U.K. default last week, according to data compiled by the Depository Trust and Clearing Corp., taking the total outstanding to $8.2 billion. That was easily the biggest gain among sovereign borrowers. The size of protection on the U.K. has roughly doubled since the year began, a move that far outpaces the run-up in Greek CDS last fall.
Bloomberg Businessweek:
  • European Options at Highest Versus U.S. on Debt Fear. Investors are paying the most in seven years for options to protect against losses in European stocks relative to U.S. contracts, speculating Greece’s debt crisis will spread to other nations. Europe’s VStoxx Index, a gauge of options on the Euro Stoxx 50 Index, closed at 29.52 yesterday. That’s 60 percent higher than the VIX, the biggest premium versus the benchmark index for U.S. equity options since May 2003. “Contagion risk is high,” said Justin Golden, a strategist at New York-based Macro Risk Advisors LLC, which advises institutions on equity derivatives. “The market is more fearful of European stocks than they are of U.S. stocks.”
  • Chinese, Indonesian Glossy Paper to Face U.S. Import Duties. Glossy paper imported from China and Indonesia will face antidumping duties, the U.S. Commerce Department said in adding to a record number of trade complaints against the Chinese. Duties on $260 million of paper used for magazines will average 60.27 percent for China and 10.62 percent for Indonesia, the Commerce Department announced yesterday. U.S. Customs will start collecting deposits of the duties while the case proceeds to a conclusion this year, the statement said.
Marketwatch.com:
  • Samsung Profit Jumps on Higher Chip, Panel Prices. Samsung Electronics Co. said Friday its first-quarter net profit grew more than sixfold from a year earlier, largely thanks to brisk sales of chips and flat panels as demand for personal computers and flat-screen televisions improved on the back of the global economic recovery. Sales rose 21% to KRW34.64 trillion in the first quarter from KRW28.67 trillion a year earlier, the company said in a regulatory filing.
IBD:
NY Times:
  • Berkshire Hathaway's(BRK/A) Derivatives Exposure. For someone who once called these instruments “financial weapons of mass destruction,” the Oracle of Omaha has accumulated quite a portfolio. He has sold “put” options on various equity indexes and some credit default protection too, with an exposure of up to $63 billion.
Business Insider:
Forbes:
Chicago Tribune:
  • Chicago-Area Foreclosure Auctions Hit New High. More than 9,300 homeowners lost properties last quarter. More Chicago-area homeowners lost their homes to foreclosure in the first three months of the year than in any quarter in the past five years. This disturbing statistic raises doubts about the effectiveness of mortgage loan modification efforts and could put more downward pressure on property values.
Time:
  • Maybe It's Time to Break Up the Banks. As the Senate takes up debate on financial industry overhaul, there is one issue above all others that is imperative to work out: how to deal with institutions that are Too Big To Fail. The reason the government stepped in with taxpayer money at firms like Citigroup and AIG is still alive and well. Our financial giants are so behemoth and interconnected that should one quickly go out of business, the entire system could be at risk. Unfortunately, as an increasing number of commentators are pointing out, the solution Congress is currently contemplating will likely do little to change that. Now that the bill is being debating in the Senate, other ideas are being put on the table, most visibly from Senator Richard Shelby, the ranking Republican on the Democrat-controlled banking committee that signed off on the original bill. Shelby wants to do away with the $50 billion fund and gain assurances that companies' shareholders and bondholders take a real hit when their company collapses. This is a noble effort to remove a government-mediated safety net and let financial players know that if they take big risks and fail, they will be the ones to suffer. Other good ideas, like forcing banks to issue debt that would be converted to equity in the event of a crisis, have a similar goal. Increasingly, though, I'm coming around on the idea that even these efforts don't go far enough. These ideas are all still about how to deal with the aftermath of a massive financial institution bringing the system to the brink, not preventing that from happening in the first place. Is there anything that would keep too much power and importance from building up inside of any single financial institution? It's tough to say for sure, but what is starting to be clear to me is that only one course of action has a real shot: breaking up the big banks.
Reuters:
  • Florida Democrat Seeks Halt to Offshore Exploration. Florida Democratic Senator Bill Nelson, citing the risk of a potential "environmental and economic disaster" from the Gulf oil spill, said on Thursday he was filing legislation to temporarily prohibit the Obama administration from expanding U.S. offshore drilling.
  • Pakistan to Get $600 Mln Under U.S. Program - Pentagon. The United States plans to quickly transfer $600 million to Pakistan to reimburse the government for military operations over the last year, the Pentagon said on Thursday. "There has been some concern on the Pakistani's part about the rate at which they are reimbursed for Coalition Support Funds for their efforts in the war on terror on our behalf within their borders," Pentagon Press Secretary Geoff Morrell said at a news conference.
Financial Times:
  • Greece agrees €24bn austerity package. Greece has agreed the outline of a €24bn austerity package, including a three-year wage freeze for public sector workers, in return for a multibillion-euro loan from the eurozone and the International Monetary Fund, according to people familiar with the talks. Final details of the measures, which are intended to slash the budget deficit by 10-11 percentage points of gross domestic product over the next three years, were still being worked out, a senior government official said. Negotiations with officials from the IMF, the European Commission, and the European Central Bank are due to be completed at the weekend and the measures will be presented for approval by the Greek parliament next week. The package also includes an increase in value-added tax, the second this year. Greece faces exceptionally strict monitoring by the EU and IMF because of its poor record of implementing previous economic reform programmes. On top of the wage freeze, public sector workers will lose their “13th and 14th month” salaries, paid at Christmas and Easter, and see further cuts in allowances. Andreas Loverdos, social affairs minister, told the Financial Times pensioners would also lose seasonal bonuses as part of an overhaul of the underfunded state pension system. The average retirement age will be raised from 53 at present to 67, he said. “The timetable for the pension measures is still being debated, but there isn’t much room for manoeuvre – this is about saving the country from collapse,” Mr Loverdos said.
citywire:
  • RAB Capital Warns on Commodity Prices. Leading commodity hedge fund RAB Capital has warned that the ever stronger dollar and Asian tightening will ultimately push down metal prices. The group's RAB Special Situations fund managed by Philip Richard told investors this week that while metals performed well in March with copper rising 8.3% and returning to autumn 2008 levels and aluminum up 11% there could be trouble ahead. ‘Some concerns are being raised about commodity prices in the near term,’ the company said today, in its latest update. ‘A strengthening US dollar naturally feeds through to weaker commodity prices and during March fears raised about Greek debt at times impacted positively on the US dollar against the euro. ‘The manager of the fund believes uncertainty relating to the PIGS economies will continue to affect the market for some time. Further, there have been increasing fears Chinese and Indian tightening may negatively impact industrial metals later in the year.’ Over the past 15 years, the global economic cycle has been almost perfectly predicted by the aggregate credit cycle of America and China, and it is this trend, RAB believes, that suggests prices could face a downdraft later this year.
Asahi:
  • North Korea may be preparing to test-fire missiles over the Sea of Japan in May, citing defense officials.
China Securities Journal:
  • China's introduction of a property tax now may be viable because of strong economic growth, citing Jia Kang, head of the Ministry of Finance's research arm.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (CME), target $380.
  • Reiterated Buy on (HOT), raised target to $65.
  • Reiterated Buy on (HGSI), target $38.
  • Reiterated Buy on (OI), raised estimates, boosted target to $44.
  • Reiterated Buy on (OMX), target $22.
  • Reiterated Buy on (VPRT), target $64.
Night Trading
  • Asian indices are -.25% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 99.0 -5.5 basis points.
  • S&P 500 futures -.08%.
  • NASDAQ 100 futures +.01%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (AGN)/.60
  • (AXL)/.22
  • (AVP)/.32
  • (B)/.19
  • (CVX)/1.94
  • (CEG)/1.06
  • (DHI)/-.01
  • (ITT)/.75
  • (DISCA)/.34
Economic Releases
8:30 am EST
  • Advance 1Q GDP is estimated to rise +3.3% versus a +5.6% gain in 4Q.
  • Advance 1Q Personal Consumption is estimated to rise +3.3% versus a +1.6% gain in 4Q.
  • Advance 1Q GDP Price Index is estimated to rise +.9% versus a +.5% gain in 4Q.
  • Advance 1Q Core PCE is estimated to rise+.5% versus a +1.8% gain in 4Q.
  • 1Q Employment Cost Index is estimated to rise +.5% versus a +.5% gain in 4Q.
9:45 am EST
  • Chicago Purchasing Manager for April is estimated to rise to 60.0 versus 58.8 in March.
9:55 am EST
  • Final Univ. of Mich. Consumer Confidence for April is estimated at 71.0 versus 69.5 in March.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • None of note
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.

No comments: