Monday, May 24, 2010

Monday Watch

Weekend Headlines

  • Libor Shows Strain, Sales Dwindle, Spreads Soar: Credit Markets. Corporate bond sales are poised for their worst month in a decade, while relative yields are rising at the fastest pace since Lehman Brothers Holdings Inc.’s collapse as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence. Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly gain since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows. Concern that European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while U.S. legislation threatens to curb credit and hurt bank profits, is driving investors away from all but the safest securities. The rate banks say they charge each other for three- month loans in dollars has almost doubled since February. “This is a quintessential liquidity crisis,” said William Cunningham, head of credit strategies and fixed-income research at Boston-based State Street Corp.’s investment unit, which oversees almost $2 trillion.
  • Dollar to Become 'Growth Currency' During Next Decade, UBS Says. The dollar will probably become a “growth currency” during the next 10 years, shedding its haven status of the past decade, as the U.S. economy outperforms Europe and Japan, said UBS AG, the world’s second-largest foreign-exchange trader. The dollar will return to a pattern seen in the early 1980s and late 1990s, when it appreciated as stocks rose, Mansoor Mohi-uddin, global head of foreign-exchange strategy at UBS in Singapore, wrote today in a research report titled “FX Mega- Trends 2010-2020: Dollar Regime Change.” Central banks may intervene more frequently in currency markets as price swings, or volatility, intensify, he said in separate reports.
  • U.S. Warns China of Seriousness of Tensions Between Koreas. Secretary of State Hillary Clinton met with senior Chinese officials today to convey how seriously the U.S. views developments on the Korean peninsula, a U.S. government official said. In a speech tomorrow morning, South Korean President Lee Myung Bak will call North Korea’s suspected torpedoing of a South Korean navy ship a “clear military attack.” Lee will warn that South Korea will take “all possible strong measures” against additional provocation, the South Korean presidential office said today. North Korea’s alleged attack has overshadowed all other issues on Clinton’s agenda as she prepares for the second annual U.S.-China Strategic and Economic Dialogue to begin in Beijing tomorrow. The U.S. and its allies have not faced such a serious regional incident in decades, said the U.S. official, who spoke on condition of anonymity. The U.S. wants China, an ally and supporter of North Korea, to help fashion a response to the isolated communist regime.
  • Hedge Funds Sell Crude Fastest in Eight Months: Energy Markets. Hedge funds sold oil at the fastest pace in almost eight months, cutting their bullish bets by 32 percent as crude prices plunged on concern Europe’s debt crisis will hurt energy demand. The speculative net-long position in crude oil futures and options combined on the New York Mercantile Exchange fell to 89,335 in the week ended May 18, the biggest percentage decline since Sept. 29, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders Report on May 21. Crude dropped 20 percent from a 19-month high of $87.15 a barrel May 3 on concern Europe will undermine a recovery from the worst recession since World War II. Supplies of oil and all petroleum-based fuels jumped to 1.81 billion barrels in the week ended May 14, the highest stockpiles on a seasonal basis based on Energy Department data back to 1990. “Wall Street was bailing out of the market,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The latest sell-off is confirmation that money managers are exiting. I expect next week’s report will show another significant sell-off.” “There is a tipping point that has occurred that would suggest that the economic recovery has lost momentum, and that the European crisis is taking the momentum out of this market,” said Peter Beutel, president of Cameron Hanover Inc., the trading adviser in New Canaan, Connecticut. Demand growth in North America was little changed for the first three months of the year, according to preliminary figures this month from the International Energy Agency in Paris. Demand for gasoline sank to a six-week low in the week ended May 14, according to data from the Energy Department. If hedge funds and other large speculators can push prices below so-called support at $67 to $68 a barrel, then oil may plunge as low as $60 to $62 a barrel, Schork said.
  • Prosecutors Said to Drop Probe of Ex-AIG Executive. Federal prosecutors won’t bring charges against former American International Group Inc. executive Joseph Cassano related to the insurer’s collapse, according to a person familiar with the investigation. The Justice Department found after a two-year investigation that there was insufficient evidence to charge Cassano, who was the former chief executive officer of AIG’s Financial Products division, the person said.
  • South Korea Seeks UN Response to North Korean Attack. South Korea will seek United Nations Security Council action against North Korea and halt trade with its communist neighbor over the deadly torpedoing of a warship in March that killed 46 sailors. “North Korea will pay a price corresponding to its provocative acts,” South Korean President Lee Myung Bak said in Seoul today. North Korea shipping will also be banned from South Korean waters, Lee said, adding: “If our territorial waters, airspace or territory are violated, we will immediately exercise our right of self-defense.” North Korea, grappling with shortages of food and goods, last week threatened “all-out war” against any move to punish it. The U.S., Japan and other allies have lined up behind South Korea, while China called for calm and said it was evaluating the report of a multinational team released last week that concluded North Korea was behind the attack.
  • Fortescue's Chief Says Australia Unwilling to Back Down. Andrew Forrest, whose Fortescue Metals Group Ltd. stake has declined by about $700 million since Australia proposed a mining profits tax three weeks ago, said the government is unwilling to compromise on the plan.
  • China's Stock Market Has Become a Poor Man's Casino: Andy Xie.
Wall Street Journal:
  • Move to Enhance Spy Chief's Clout. President Barack Obama's decision to fire his national intelligence director has accelerated a review of whether the post is invested with enough clout to carry out its mission effectively. Lawmakers already are weighing whether new legislation would make the post more powerful, while former intelligence officials said the president should clarify the director's role. The White House on Friday said it soon planned to name a successor to Dennis Blair, whose forced resignation was disclosed Thursday. The leading candidate is James Clapper, the top defense intelligence official, though it isn't clear whether he would fill the job permanently, officials familiar with the matter said.
  • Oversight Roils Hedge Funds. Bosses Prepare for Expected SEC Registration; 'You Have to Pay a Lot of Lawyers'. With many hedge-fund managers expected to face mandatory registration with the Securities and Exchange Commission, fund lobbyists and lawyers say they will channel their energy toward minimizing the effects of registration, as officials iron out a raft of details for new rules. Hedge funds in past years battled registration outright, but many came to terms with the notion more recently as the industry boomed. Yet, beneath the seeming air of acceptance, the promise of stricter oversight by a beefed-up SEC, amid seismic changes in Wall Street regulation, is rattling fund bosses more than ever, industry participants say.
  • Venezuela Plans to Lift Oil Output by 300,000 Barrels a Day. President Hugo Chavez said Sunday that Venezuela, a member of OPEC, will increase oil production by some 300,000 barrels a day starting near the end of this year. The country will see "an important jump around the end of the year: about 300,000 barrels a day," Chavez said, according to a statement from the president's office.
  • Merkel Faces Loss of Political Clout. German Backlash Puts Pressure on Chancellor to Resist Efforts for Greater Euro-Zone Integration Amid Debt Crisis. German Chancellor Angela Merkel faces a growing popular backlash over her handling of the European debt crisis that could undercut efforts to forge closer integration of the euro zone. Recent poll data suggest that a majority of Germans have lost confidence in Ms. Merkel's leadership ability while support for her center-right coalition has reached a low point. More than 60% of Germans believe Ms. Merkel has shown poor leadership during Europe's debt crisis and that she no longer has full control of her government, according to a poll by research institute Emnid and German television news channel N-24.
  • Financial Overhaul Puts Bank Ratings at Risk. The financial-overhaul bill passed last week brings big banks closer to what could be major credit-ratings downgrades that would sock them with billions of dollars in additional financing costs.
  • Number of the Week: 75% Chance of Greek Default. The probability of a Greek default by 2015, according to the credit markets.
  • U.S. Was Not Ready for Major Oil Spill. Crude gushing into the Gulf of Mexico and washing ashore in Louisiana is exposing how ill-prepared the U.S. has been to respond to a major offshore oil spill.
  • Congress's Carried Interest Tax Folly. The latest soak-the-rich scheme will mean less capital investment and fewer new jobs. Nero fiddled while Rome burned, but at least he didn't strike the match. Members of Congress are doing Nero one better. In the middle of the second global financial crisis in two years, Congress is preparing to dramatically raise a key tax rate on long-term investment. This is sure to discourage capital investment, increase the cost of money to start and grow businesses, and depress real-estate and stock prices, all at the worst possible time.
  • China's Property Market Braces for the Bear. China property prices could sink 30% -- along with real-estate stocks. THE BEAR MARKET IN RESIDENTIAL PROPERTY in mainland China finally seems poised to begin. After the Chinese government enacted a raft of measures to cool real-estate speculation, sales volume is slowing markedly. One prominent developer thinks residential real-estate prices on the mainland could fall by 30%. Beijing is "hitting the market really hard, coming in with double barrels," Ronnie Chan, chairman of Hang Lung Properties (ticker: 0101.Hong Kong) and Hang Lung Group (10.Hong Kong), said last week in an interview in New York. Prices could decline "by 20% to 30%, or even more" from current levels, says Chan, adding that "I hope [the market] won't go down by 50%, but it's anybody's guess." Goldman Sachs and Credit Suisse reduced their forecasts last week for Chinese real-estate-company earnings, and predicted 30% price declines on residential property. Sentiment is so poor that Hong Kong-based Swire Properties recently pulled its $2.7 billion initial public offering. Credit Suisse analyst Jinsong Du reports that local property brokers expect 20% declines in the secondary market. While prices "are largely unchanged," sell-through rates fell to 20% and 40% early this month, from 60% to 70% previously. Price cuts could start in the second half. Beijing is pushing on the brakes because the property market has grown "irrationally exuberant," Chan relates. The government's stimulus package "bailed out the property market, but also bailed out property developers...which created a moral dilemma in which they were privatizing profits and nationalizing losses," he says.
  • Nicely Trimmed. A smaller but stronger hedge-fund industry has emerged from the financial crisis, presenting investors with some tantalizing choices. Each of the 100 funds on our roster posted average annual returns of 10% or better for the past three tumultuous years.
NY Times:
  • Europeans Fear Crisis Threatens Liberal Benefits. Across Western Europe, the “lifestyle superpower,” the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II. Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism. Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. “The Europe that protects” is a slogan of the European Union. But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead. With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions. “We’re now in rescue mode,” said Carl Bildt, Sweden’s foreign minister. “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change. The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable. In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece’s bloated state sector and its employees. “They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions,” he said. “As for us, the way things are going we’ll have to work until we’re 70.” In Rome, Aldo Cimaglia is 52 and teaches photography, and he is deeply pessimistic about his pension. “It’s going to go belly-up because no one will be around to fill the pension coffers,” he said. “It’s not just me; this country has no future.” Changes have now become urgent. Europe’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region lacks competitiveness in world markets. According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1. Figures show the severity of the problem. Gross public social expenditures in the European Union increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure now is 31 percent, the highest in Europe, with state pensions making up more than 44 percent of the total and health care, 30 percent. The challenge is particularly daunting in France, which has done less to reduce the state’s obligations than some of its neighbors. In Sweden and Switzerland, 7 of 10 people work past 50. In France, only half do. The legal retirement age in France is 60, while Germany recently raised it to 67 for those born after 1963. With the retirement of the baby boomers, the number of pensioners will rise 47 percent in France between now and 2050, while the number under 60 will remain stagnant. The French call it “du baby boom au papy boom,” and the costs, if unchanged, are unsustainable. The French state pension system today is running a deficit of 11 billion euros, or about $13.8 billion; by 2050, it will be 103 billion euros, or $129.5 billion, about 2.6 percent of projected economic output. The problems are even more acute in the “new democracies” of the euro zone — Greece, Portugal and Spain — that embraced European democratic ideals and that Europe embraced for political reasons in the postwar era, perhaps before their economies were ready. They have built lavish state systems on the back of the euro, but now must change.
  • As Financial Reform Takes Shape, Some Relief on Wall St. The financial reform legislation making its way through Congress has Wall Street executives privately relieved that the bill does not do more to fundamentally change how the industry does business. Bankers and many analysts think that the bill approved by the Senate last week will reduce Wall Street’s profits but leave its size and power largely intact. Industry officials are also hopeful that several of the most punitive provisions can be softened before it is signed into law.
  • Study Points to Health Law's Penalties. About one-third of employers subject to major requirements of the new health care law may face tax penalties because they offer health insurance that could be considered unaffordable to some employees, a new study says. The study, by Mercer, one of the nation’s largest employee benefit consulting concerns, is based on a survey of nearly 3,000 employers. It suggests that a little-noticed provision of the law could affect far more employers than Congress had assumed.
Business Insider:
Zero Hedge:
  • Cap and Trade: A Gigantic Scam. James Hansen - the world's leading climate scientist fighting against global warming - told Amy Goodman this morning that cap and trade not only won't reduce emissions, it may actually increase them:
  • Firms Find More Gas Beyond the Marcellus Field. The discovery gives hope to drillers for extending the life of Pa. mining efforts. Wells could be sunk from existing sites. As big as the Marcellus Shale gas bonanza has become, it's not the only Pennsylvania geologic formation yielding new and unexpected quantities of natural gas. Two exploration companies have reported promising discoveries in rock formations layered around the Marcellus like a geologic parfait. Those finds raise the prospect of even more drilling in a state where the gas boom has generated ardent economic hopes as well as passionate environmental fears.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).
  • Republican Djou Wins Hawaii Special. Republican Charles Djou has won Hawaii’s special House election, providing a timely boost to a party unnerved by a decisive Democratic victory in a Pennsylvania special House election Tuesday. Republicans were quick to bill the victory in the seat where President Barack Obama grew up as a sharp rejection of the ambitious Democratic agenda.
Financial Times:
  • U.K. Treasury Chief Secretary David Laws said the country faces choices that fall between "unpalatable and disastrous" as the government cuts spending, citing an interview. "We are moving from an age of plenty to an age of austerity in public finances," he said.
  • David Cameron Vows to Cut Taxes. David Cameron has promised to cut taxes and look again at whether the new 50p higher rate of income tax is worth keeping. In an exclusive interview with The Daily Telegraph, the British Prime Minister said he would deliver “lower” rates of tax as soon as the economic conditions allowed.
  • Hedge Funds Bet Big on the Falling Euro. Hedge funds that made millions from the implosion of America's subprime market are betting on a similarly dramatic collapse of the euro. Hedge funds, including Hayman Advisers and Matrix Group, have told investors that they expect the sovereign debt crisis to worsen despite the €110bn (£79bn) bail-out by the International Monetary Fund, the European Union and the European Central Bank. Anxiety about the financial health of Europe increased yesterday after Spain’s national bank was forced to take control of CajaSur, a savings bank ridden with distressed property debt, after a rescue merger with a rival collapsed. Traders and brokers told The Sunday Telegraph that hedge funds are using a range of financial instruments to bet that the value of the euro will fall. One trader said: “Shorting the euro is the biggest bet in town. “We’re seeing big volumes in credit default swaps and short selling in equities that are exposed to the euro.” There is evidence that bets against the euro are being placed by important investors around the world, which last week took the euro to four-year lows on fears Greece, Spain and Portugal may be forced to leave the single currency.
  • 300,000 Jobs in UK Public Sector Face the Axe. AT least 300,000 Whitehall and other public sector workers may lose their jobs as the coalition government sets to work cutting the £156 billion budget deficit. As George Osborne, the chancellor, prepares to unveil the first £6 billion of cuts tomorrow, the full scale of the job losses that will follow has begun to emerge. The initial savings to be announced will target such items as civil servants’ perks, which include taxis, flights and hotel accommodation. The package will also include a £513m cut in the budgets for quangos, with some being abolished altogether. While the first wave of cuts will mainly target Whitehall waste, more severe reductions of up to 25% in some departmental budgets will follow in a comprehensive spending review in the autumn. Detailed research by The Sunday Times shows that at least 300,000 workers, including civil servants and frontline staff, will lose their jobs over the next few years. Some estimates suggest that the number of job losses could reach 700,000. These will include tens of thousands of health service managers as well as many thousands of doctors and nurses, according to internal documents from the National Health Service. Three out of the 10 strategic health authorities have disclosed that they will reduce their headcounts by a total of 30,132, an average of 8.7%. If these cuts were replicated nationwide, the total job losses would amount to 120,000.
  • Burden of Irish Debt Could Yet Eclipse That of Greece. What will sink us, unfortunately but inevitably, are the huge costs of the September 2008 bank bailout, writes MORGAN KELLY. IT IS no longer a question of whether Ireland will go bust, but when. Unlike Greece, our woes do not stem from government debt, but instead from the government’s open-ended guarantee to cover the losses of the banking system out of its citizens’ wallets. Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt to national income than the one that is sinking Greece.
NZZ am Sonntag:
  • Swiss banks including Lombard Odier Darier Hentsch & Cie, Bank Sarasin & Cie AG and Raiffeisen Switzerland are reporting a rise in new clients from the eurozone, citing the banks. "There are Germans opening up accounts at Raiffeisen branches near the border and seeking the safety of the franc," citing Franz Wuerth, a spokesman for Raiffeisen.
Folha de S. Paulo:
  • Brazil's next government should limit public spending and federal debt, Arminio Fraga, chairman of BM&FBovespa SA and a former central bank president, said in an interview. The growth of the pension system may lead to a financial crisis as the population ages, Fraga said.
  • Huang Hanquan, assistant director of the industrial institute of the National Development and Reform Commission, denied a China Times report that cited him as saying China won't introduce a property tax for three years. Huang said in a telephone interview today that he didn't make the comment about property taxes.
Hong Kong Economic Times:
  • A China property tax is coming soon, citing a government economist. China "won't wait too long" on the property tax that could adjust income gaps in the nation, Zhu Baoliang, chief economist at Beijing-based State Information Center, told a forum.
Weekend Recommendations
  • Made positive comments on (VALE), (EMC), (CTL), (S), (ABX), (BCS), (UBS), (DB), (ALTR), (YHOO) and (SWN).
  • Reiterated Buy on (GOOG), Added to Top Picks Live list, target $640.
Night Trading
  • Asian indices are -.25% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 149.0 -8.5 basis points.
  • S&P 500 futures -.41%.
  • NASDAQ 100 futures -.44%.
Morning Preview Links

Earnings of Note
  • (CPB)/.51
  • (PVH)/.80
  • (DCI)/.59
Economic Releases
10:00 am EST
  • Existing Home Sales for April are estimated to rise to 5.65M versus 5.35M in March.
Upcoming Splits
  • (EW) 2-for-1
Other Potential Market Movers
  • The Chicago Fed Nat Activity Index, BofA Merrill Services Conference, (HRS) analyst meeting, (HXM) analyst meeting and the (HK) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and real estate shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.

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