Thursday, May 13, 2010

Thursday Watch

Evening Headlines

  • Europe Austerity Push Deepens After Rescue Message. Spain and Portugal may be getting the message as they try to stop their economies getting infected by the Greek crisis. Two days after other European governments told them to fix their budgets in return for a $1 trillion backstop, Spanish Prime Minister Jose Luis Rodriguez Zapatero yesterday announced the biggest round of budget reductions in 30 years. In Portugal, Finance Minister Fernando Teixeira dos Santos says he’s prepared for “social tension” after announcing additional cuts. Policy makers are running the risk of union opposition as they force through austerity measures to convince investors they won’t join Greece in asking for an international bailout. While some economists said the European Union lifeline could take pressure off deficit-laden nations to act, it was enough to prompt Zapatero to announce a 5 percent cut in public wages. “The fiscal announcements serve to suggest that the momentum now is indeed towards fiscal cuts,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London. “What we have in the euro zone policy space right now is ‘moral suasion,’ not “moral hazard.’”
  • Senate Swaps-Desk Plan Delayed as Lincoln Faces Election Battle. Senate Democrats are delaying action on a proposal to force banks including JPMorgan Chase & Co.(JPM) and Goldman Sachs Group Inc.(GS) to wall off swaps trading while the plan’s sponsor deals with a re-election battle, lawmakers said. Democrats haven’t filed an amendment to strip or change Senator Blanche Lincoln’s derivatives measure and movement is unlikely until after the Arkansas Democrat’s Senate primary on May 18, Senator Evan Bayh, an Indiana Democrat, said yesterday.
  • Gold Sales Surge at Austrian Mint on Greece's Crisis. Muenze Oesterreich AG, the Austrian mint that makes the best-selling gold coin in Europe and Japan, said sales jumped in recent weeks on concern that Greece’s fiscal crisis will hurt the euro. Buyers have purchased 243,500 ounces of gold since April 26, compared with 205,300 ounces in the first quarter, Vienna- based Marketing Director Kerry Tattersall said by telephone today. “We’re seeing people who want to take money from savings accounts and put it into gold, so it’s small investors who are buying, too,” Tattersall said. “In the last three to four weeks, we haven’t seen any orders out of the U.S. or Japan. It’s a purely European increase. It represents panic buying.” The Austrian mint is known for the Philharmonic gold coin, which it introduced in 1989. “We’re facing production problems again and are producing around the clock,” Tattersall said. “Our stock is running out.”
  • SAP(SAP) to Buy Sybase for $5.8 Billion to Vie With Oracle(ORCL). SAP AG, the world’s biggest maker of business-management software, agreed to acquire Sybase Inc. in a transaction valued at $5.8 billion to help it fend off competition from Oracle Corp. Sybase shareholders will receive $65 a share, Walldorf, Germany-based SAP said in a statement today. That is 56 percent higher than the closing price of $41.57 yesterday, before the deal discussions became public.
  • Fed's Comeback 'Punch' Wins Senate Fight on Rates, Oversight. The Federal Reserve beat back two of the biggest threats in decades to its political independence and bank-oversight powers, surmounting congressional anger over its role in the financial crisis. U.S. senators voted 90-9 today to void a provision in regulatory-overhaul legislation that would have stripped the Fed of oversight of 5,000 banks with less than $50 billion in assets. Yesterday, senators rejected a measure to allow continuous congressional audits of Fed policies.
  • Orszag Predicts Higher Fund Manager Tax to Pass Within Weeks. White House budget director Peter Orszag predicted Congress would approve a measure imposing higher taxes on managers of private equity firms, real estate funds and other investment partnerships in the coming weeks. Orszag, speaking at a conference in New York sponsored by the Reuters news agency, said, “I believe that there will be some legislative changes in carried interest, although the exact parameters are still being negotiated.” He said he expected the Senate to pass the levy “within the next few weeks.”
  • Lending in Asia may dry up as European banks, whose funding to the region is about three times the amount provided by the U.S., seek to "plug their leaks" if Greece's sovereign debt crisis spreads, HSBC Holdings Plc said. European lenders provided $1.08 trillion to the region as of Dec. 31, while U.S. counterparts extended $339 billion of credit, the date show. "Don't shrug off too quickly the possibility that a freeze in the West can again lead to heavy coughing in the East," Frederic Neumann and Song Yi Kim, Hong Kong-based economists at HSBC, said in a report. "European banks needing to plug their leaks could quickly drain liquidity from Asia."
  • Euro Faces 'Challenges,' Japan Can Learn Lessons, Sumitomo Says. The euro will face further challenges as concern over budget deficits in nations such as Greece and Portugal damp its attraction as an alternative to the dollar, according to the research unit of Sumitomo Corp. The emergency funding measures announced by European Union policy makers this week have eliminated the immediate risk of default from Greece, yet it remains possible that some nations may still drop out of the euro area, said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute Ltd. in Tokyo. Japan should take note and address its increasing debt levels before its bond yields begin to rise, he said. The euro will face further challenges as concern over budget deficits in nations such as Greece and Portugal damp its attraction as an alternative to the dollar, according to the research unit of Sumitomo Corp. The emergency funding measures announced by European Union policy makers this week have eliminated the immediate risk of default from Greece, yet it remains possible that some nations may still drop out of the euro area, said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute Ltd. in Tokyo. Japan should take note and address its increasing debt levels before its bond yields begin to rise, he said. Japan has so far avoided much fallout from the European debt crisis, though this may only be temporary, Okuda said. “Japan has a different debt market structure to Europe,” he said. The fact Japanese investors hold over 90 percent of outstanding debt issued by the government and sizeable financial assets accumulated by households “has so far served as a buffer against sovereign risks,” he said. This has helped Japan’s 10-year yields stay mostly below 2 percent in the past decade even as the nation increased spending to counter deflation. “But it is also true that Japan is approaching times where these positive elements can’t fully offset sovereign risk,” Okuda said. “The next few years may become the key as baby boomers retire and begin receiving pensions in force.” About 8 million people, or 6 percent of the population, were born between 1947 and 1949, government data show, a generation referred to as Japan’s baby boomer generation. Almost 23 percent of the country’s 126 million people will be older than 65 this year, according to Bloomberg data. “If 10-year yields rise above 2 percent again, that may be the beginning of a sustained and unfavorable spike,” Okuda said. “Lessons that we should learn from the Greek crisis are that we can’t leave the situation unaddressed and we should embark on fiscal consolidation sooner rather than later.”
  • Armstrong Says Obama's Plan Puts NASA Lead at Risk. Neil Armstrong, the first person to walk on the moon, told a Senate panel today that President Barack Obama is putting U.S. space dominance at risk with a plan for NASA that relies on unproven startup companies. “America is respected for the contributions it has made in learning to sail upon this new ocean,” Armstrong, 79, told the Senate Commerce, Science and Transportation Committee in Washington. “If the leadership we have acquired through our investment is simply allowed to fade away, other nations will surely step in where we have faltered.”
  • Europe's Leaders Slept Through TARP Review Class: Caroline Baum. When U.S. authorities faced financial panic in 2008, their first response was to pump liquidity into the system. It was access to credit, not the quality of credit, that was the issue, they thought. It turned out they were wrong. U.S. banks were facing a full-fledged solvency crisis. They owned assets that weren’t worth the paper their financial statements were printed on. Congress appropriated $700 billion to recapitalize the banks. Fast forward 19 months and travel east across the Atlantic where Europe’s leaders confronted a home-grown sovereign debt crisis, a rout in financial markets and a loss of confidence in the euro. Their solution? Lend more money to already indebted countries. Europe’s leaders must have been snoozing in the back row when the teacher conducted the TARP review class. (TARP stands for Troubled Asset Relief Program.) You can’t recapitalize a sovereign nation by issuing more debt. In the same way that more lending couldn’t enhance U.S. banks’ capital adequacy, “extending more credit to (European) nations that can’t service their accumulated debt won’t make them more creditworthy,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. The flaw in the approach adopted by European governments, as Weinberg sees it, is that lending money to countries like Greece will increase public sector debt, which last year amounted to 78.7 percent of the euro zone’s gross domestic product. The first rule of holes -- when you find yourself in a hole, stop digging -- must not translate well into euro-tongue (or English, for that matter.)
Wall Street Journal:
  • Public Still Backs Offshore Drilling. Public support for expanding the offshore hunt for energy is sturdy, a new NBC News/Wall Street Journal poll suggests, even as a damaged well continues to gush crude into the Gulf of Mexico. Meanwhile, the spill has taken a toll on support for offshore drilling among Senate Democrats, further hobbling the chances for climate-change legislation, which was unveiled by two senators Wednesday. Six in 10 respondents to a survey carried out from May 6 to May 10 said they backed more drilling for oil off the U.S. coast. Some 34% said they "strongly" supported it, and 26% said they supported it "somewhat." More than half of respondents —53%—also said they agreed with the statement that "the potential benefits to the economy outweigh the potential harm to the environment." Respondents in Gulf states were slightly more likely to support additional drilling offshore, with 63% of them saying they would approve of more rigs.
  • The We're-Not-Europe Party. One of the constant criticisms of Barack Obama's first year is that he's making us "more like Europe." But that's hard to define and lacks broad political appeal. Until now. Any U.S. politician purporting to run the presidency of the United States should be asked why the economic policies he or she is proposing won't take us where Europe arrived this week. In an astounding moment, to avoid the failure of little, indulgent, profligate Greece, the European Union this week pledged nearly $1 trillion to inject green blood into Europe's economic vampires. For Americans, this has been a two-week cram course in what not to be if you hope to have a vibrant future. What was once an unfocused criticism of Mr. Obama and the Democrats, that they are nudging America toward a European-style social-market economy, came to awful life in the panicked, stricken faces of Europe's leadership: Merkel, Sarkozy, Brown, Papandreou. They look like that because Europe has just seen the bond-market devil.
  • High Frequency Trading Firms Eye Off-Exchange Opportunities. Executives of high-speed proprietary trading shops are chomping at the bit to break into trading on over-the-counter derivatives markets and see regulatory overhaul as providing a long-awaited opening. A push by regulators and lawmakers to shift trade in some financial derivatives into clearinghouses and electronic trading systems could loosen the tight grip that derivatives dealer banks maintain on the market, and allow high-frequency traders to make markets in products like interest-rate swaps and credit derivatives, according to executives.
  • Senators Question In-Home Caregivers. The Senate Finance Committee launched an investigation into the practices of Amedisys Inc., the nation's largest home health-care company, and three other companies that provide in-home therapy visits reimbursed by Medicare. The committee is investigating whether the companies deliberately boosted the number of home therapy visits to trigger higher Medicare reimbursements. A Wall Street Journal article last month described how the companies' Medicare patients received a high number of the most profitable therapy visits, but few of the least profitable ones. The three other home health companies are LHC Group Inc., Gentiva Health Services Inc. and Almost Family Inc.
  • The Treasury-Financial Complex by Clifford S. Asness and Aaron Brown. The Dodd bill is perfectly designed to create the largest and most powerful crony system in history. Whatever your views on financial reform—whether you want the government to crack down on bankers or to disentangle itself from financial markets—you should fear Sen. Chris Dodd's financial reform bill. In 1,300-some pages, all it really does is legislate power to the government for fixes to be named later. It does this by using terms that are either totally undefined or defined in breathtaking generality. This is a politically understandable solution. But it sweeps aside more than two centuries of accumulated wisdom: that checks and balances are essential to markets, and that rules must be known in advance. Here's one example: In the bill, a "swap" is defined as "any contract or transaction that has financial, economic or commercial consequence involving purchase, sale, payment or delivery with any contingent clause." We challenge lawmakers to think of any contract or transaction that doesn't meet that definition—from buying detergent with a money-back guarantee to getting a rain-check at the car wash. If you maintain a "substantial" net position in swaps, or if your failure to perform under your swaps could cause "significant" losses, you are considered a "major swap participant." And you really don't want to be one considering how you'll be regulated.
  • Cisco(CSCO) Profit, Revenue Both Top Analysts' Expectations. Cisco Systems reported stronger-than-expected quarterly results as a recovering global economy and growing Internet use prompted companies to upgrade their networks. "We emerge from this downturn gaining market share, a larger share of the total wallet spend of our customers,'' Chambers said in a statement. "It is clear that our game plan for how to handle economic downturns is hitting on all cylinders."
  • Big Majority Believes US Still in Recession: Poll. Public attitudes toward the economy have created ominous political problems for the Democratic Party and for Wall Street, according to the new NBC News/Wall Street Journal poll. The survey shows that 76 percent of Americans believe that the US economy remains in recession; an even larger 81 percent describe themselves as dissatisfied with the economy.
NY Times:
  • Prosecutors Ask if 8 Banks Duped Rating Agencies. The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation. The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation. Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.
  • U.A.W. Wants to Share in Big 3's Financial Success. As better times return, the United Automobile Workers is not the union it was before Detroit’s carmakers hemorrhaged billions of dollars. The union is now a part owner of General Motors and Chrysler through a union trust fund, and its members are barred from striking against the two companies over compensation for the next five years. All told, hourly workers gave up pay and benefits worth $7,000 to $30,000 each a year during the downturn, the union estimates. But while those changes might blur the traditional battle lines between management and union, the incoming president of the U.A.W., Bob King, is making it clear some things are not about to change.
Business Insider:
Zero Hedge:
  • Euro Fails to Gain Traction; Short Hedge Funds Won't Budge. The Euro finished lower on Wednesday. Now that credit concerns in the Euro Zone have been taken care for the short-run, investors are becoming worried about the possibility of a slow down in the economy. The size of the new bailout package is expected to have an impact on the Euro Zone economy which may result in a double-dip recession.
Rasmussen Reports:
  • 30% Say U.S. Heading in Right Direction. Thirty percent (30%) of U.S. Voters now say the country is heading in the right direction, according to a new Rasmussen Reports national telephone survey. That's the lowest level of confidence measured in nearly two months. Fifty-seven percent (57%) of Democrats say the country is heading in the right direction, while 36% say it’s not. An overwhelming majority (90%) of Republicans and 70% of voters not affiliated with either major political party continue to think the nation is heading down the wrong track.
  • Republicans Bristle at Feds' Land Plan. A tightly held administration plan to consider designating up to millions of acres of land in the West as national monuments has Western Republicans up in arms. Republican members of Congress are bristling over an Interior Department “not for release” memo that was leaked to Rep. Rob Bishop (R-Utah), outlining 14 areas, totaling 13 million acres in the West that the administration is considering for designation as national monuments. Under the Antiquities Act of 1906, President Barack Obama can designate federally owned lands as national monuments. But members of the all-Republican Congressional Western Caucus say such designations could hurt their districts by further restricting economic development. “The federal government wants to steal millions of acres and put them into wilderness without much discussion or input,” Rep. Jason Chaffetz (R-Utah) told POLITICO.
Beijing Statistics Bureau:
  • Home Sales in Beijing contracted sharply late last month after the government issued measures aimed at cooling property prices. Sales measured by floor area dropped 41% in April from a year earlier. The price of new residential properties rose 21.5% from a year earlier.
  • Shanghai's municipal government may levy a tax of up to 1.5% of the value of properties on May 15, citing a developer. Several Shanghai-based developers have received "hints" that new policies are poised to be issued to cap property prices, and have begun to sell their properties.
Apple Daily:
  • China's central government may receive about 400 billion yuan or 29% less revenue in 2010 than a year earlier because of the decline in property prices and land sales, citing Huatai Securities analyst Chen Yong.
National Business Daily:
  • China's State Council approved a combined $42 billion in fund raising plans by Industrial and Commercial Bank of China Ltd., Bank of China Ltd., Bank of Communications Co. and China Construction Bank Corp.
Yonhap News:
  • Clinton Calls Dai Bingguo to Discuss Implications of Ship Sinking: State Dept. Secretary of State Hillary Clinton has called her Chinese counterpart to discuss the implications of the sinking of a South Korean warship, possibly by North Korea on the disputed sea border in March, the State Department said Wednesday. "They did talk about the ongoing investigation, obviously, and its potential implications once the investigation is completed," spokesman Philip Crowley said.
Evening Recommendations
  • Reiterated Buy on (KMB), target $71.
  • Reiterated Buy on (WMB), raised estimates, target $31.
  • Reiterated Buy on (M), raised estimates, target $35.
Night Trading
  • Asian indices are +.50% to +2.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 105.0 -9.0 basis points.
  • S&P 500 futures +.06%.
  • NASDAQ 100 futures -.11%.
Morning Preview Links

Earnings of Note
  • (AMSC)/.16
  • (WEN)/.01
  • (URBN)/.30
  • (KSS)/.62
  • (NVDA)/.21
  • (CA)/.37
  • (JWN)/.55
Economic Releases
8:30 am EST
  • The Import Price Index for April is estimated to rise +.8% versus a +.7% gain in March.
  • Initial Jobless Claims for last week are estimated to fall to 440K versus 444K the prior week.
  • Continuing Claims are estimated to fall to 4590K versus 4594K prior.
Upcoming Splits
  • (GMCR) 3-for-1
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Lockhart speaking, Fed's Fisher speaking, Fed's Kocherlakota speaking, Fed's Kohn speaking, $16B 30-Yr Treasury Bond Auction, Goldman Sachs Consumer Symposium, BofA Merrill Healthcare Conference, (ADVS) analyst meeting, (TAL) analyst meeting, (IRBT) analyst day, (HAE) analyst meeting and the (TRS) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are 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 75% net long heading into the day.

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