Thursday, May 20, 2010

Thursday Watch

Evening Headlines

  • Juncker Sees No 'Immediate' Intervention to Halt Euro's Slide. Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said that while the pace of the euro’s decline is a concern, foreign-exchange intervention isn’t an urgent issue. “I’m a little bit concerned by the rapidness” of the euro’s slide, Juncker said to reporters in Tokyo today. When asked about intervention, he said: “I don’t think this is a matter of immediate action.”
  • North Korea Blamed for Torpedo That Sank South's Ship. A North Korean submarine torpedoed one of South Korea’s warships in March, a multinational panel said, a finding that puts pressure on China to support tougher international sanctions against its political ally. “There is no other plausible explanation,” the team investigating the March 26 sinking, the deadliest attack blamed on the nation in more than 20 years, said today in a statement. Evidence tying North Korea to the attack, in which 46 sailors died, may help unify international efforts to isolate the regime of Kim Jong Il. The report presents China with a dilemma as provocations by its communist bedfellow will only lead to a build-up of the U.S. and South Korean military on its doorstep, said Kim Yong Hyun, professor of North Korean studies at Dongguk University in Seoul. “China will guard against global hostility building up against North Korea,” Kim said. “China is not only concerned about its relationship with North Korea, but is also worried about the hostility leading to a tighter military alliance between South Korea and the U.S. in its own backyard.”
  • U.S. Mutual Fund Investors Pull $14 Billion After May 6 Plunge. Investors pulled an estimated $14 billion from U.S. stock and bond mutual funds in the week ended May 12, the first net withdrawals since March 2009. Customers took out $12.3 billion from stock funds and $989 million from bonds funds, the Investment Company Institute, a Washington-based trade group, said today in a statement. The last time funds saw net redemptions was in the week U.S. stocks fell to a 12-year low.
  • Russia Drops 'Bellicose' Dollar Talk as Greenback Reserves Grow. The dollar’s ascent against the euro may be stifling Russian efforts to challenge the greenback’s dominance as a reserve currency, with policy makers in Moscow allowing the dollar’s share of foreign reserves to swell. Russia’s central bank “changed the currency structure of reserves” last quarter, raising the U.S. currency’s share by 3 percentage points to 44.5 percent, BNP Paribas said May 18, citing Bank Rossii numbers. The euro’s portion fell 3.7 points to 43.8 percent. The figures, part of the central bank’s annual report to parliament, aren’t official yet, said a Bank Rossii spokesman who declined to be identified, citing bank policy. It’s “very much a case of economic rationalism trumping bellicose politics,” said Neil Shearing, a London-based emerging markets economist at Capital Economics Ltd., in an e- mailed response to questions. “With the euro likely to fall further over the coming quarters and a general retreat to safe havens likely to boost the dollar, expect more of the same.”
  • GE(GE), Goldman(GS) Rescue of Chicago Lender Sparks Republican Outcry. The move by General Electric Co. and several Wall Street banks to salvage a Chicago lender with White House ties prompted Republicans to demand that the Obama administration answer questions about any role it may have played in the rescue. ShoreBank Corp., which needs about $200 million in additional capital to stave off regulators, also is receiving help from Goldman Sachs Group Inc.(GS), Citigroup Inc.(C), JPMorgan Chase & Co.(JPM) and Bank of America Corp.(BAC), the Chicago Tribune reported. Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said they were doing so to gain favor with the administration. “Some believe that ShoreBank was really saved because of an assumption that high-ranking officials in the Obama administration favored a bailout of this failing institution with deep political ties,” Bachus, an Alabama lawmaker, said in a letter he sent to President Barack Obama. General Electric said yesterday it’s investing $20 million in the community bank, which is based on Chicago’s South Side and has long-standing ties to the president. After Obama was elected, former ShoreBank executive Robert Weissbourd served on the president-elect’s transition team. “There is no way a bank without ShoreBank’s political connections would receive this kind of attention,” Bachus said in a statement.
  • Euro Nears 'Milestone,' May Hit $1.16, Merrill's Fujii Says. The euro’s five-month decline is bringing it toward an “historical milestone” and a break below that may send it down to $1.16, according to Bank of America- Merrill Lynch.
  • Japan Economy Grows Less Than Forecast, Putting Pressure on BOJ. Japan’s economy grew less than forecast in the first quarter as an export-led recovery failed to stoke consumer spending, putting pressure on the central bank to do more to end deflation as it begins a two-day meeting.
  • Mining Tax 'Contagion' Set to Spread From Australia. Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks. “It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”
  • China's Options Signal Tumble for Stocks on Record Bearish Bets. Options traders are placing a record number of bearish bets against Chinese stocks as concern deepens that government measures to contain home prices and Europe’s debt crisis will curb earnings. The open interest, or number of existing contracts, for so- called put options on the iShares FTSE/Xinhua China 25 Index Fund surged 24 percent in the past month to 2.15 million as of yesterday, data compiled by Bloomberg show. A gauge of demand for options that bet on a decline in the exchange traded fund and those profiting from a gain widened to the most since 2006 on May 17, Bloomberg data show.
Wall Street Journal:
  • The Euro Turns Radioactive. Longer-Term Investors and Companies, Not Just Hedge Funds, Shun the Currency. Some of the world's largest money managers and central banks have become increasingly skeptical of the euro, presenting a threat to the common currency's prospects. So far during the euro's months-long descent, attention has been focused on hedge-fund selling of European assets but central banks and large managers have a much-larger influence on foreign-exchange markets. Even if they don't dump euro assets, a mere pause in their buying could weigh heavily on the currency. South Korea's central bank, which has about $270 billion in foreign-currency reserves, among the biggest in the world, said this month that the euro zone's sovereign debt problems make the euro, used by 16 nations, less attractive as a reserve currency. Iran's central bank chief this week said that country may rethink its reserves, which the Central Intelligence Agency estimates around $81 billion. And Russia, with $400 billion in foreign-currency reserves, said it shifted its mix of reserves away from the euro last year. Mutual-fund data show that in recent weeks, European and U.S. investors have shifted out of euro-zone equity funds. Asia's largest bond fund, Kokusai Asset Management's Global Sovereign Fund with $40 billion under management, lowered its euro allocation from 34.4% in March to 29.6% on May 10, according to a company manager. And portfolio managers with huge money pools, such as Allianz SE's Pacific Investment Management Co., or Pimco, and Baring Asset Management, expressed caution on the euro in interviews with The Wall Street Journal. "The program of diversifying out of dollars has come to a screeching halt," said Collin Crownover, managing director and global head of currency management for State Street Global Advisors. "If the downward progression of the euro continues, then you see outright selling of euro-zone assets, and it snowballs and gets worse." Money flowed out of Europe at an annualized pace of $50 billion in the first two months of 2010, according to Jens Nordvig, managing director of currency research at Nomura Securities International. That pace has likely increased in recent months, contributing to the euro's recent decline. That outflow is likely due almost entirely to large investors, partly because hedge funds likely have reached the upper limit of their ability or desire to place bets against the euro, suggests Mr. Nordvig. "Somebody new is selling now," he said. And unlike speculative investors, long-term investors likely won't quickly change their recent behavior even if the euro enjoys a respite. "It's making a few people think, 'What am I getting into?' " said Colin Harte, director of fixed-interest and currencies at the London office of Baring, which has more than $47 billion under management. "What if you buy the euro and the Germans vote with their feet and leave" the currency union?
  • Oil Trade With Iran Thrives, Discreetly.
  • Ford(F) Pickup Sales Picking Up In May. Ford Motor said sales in May of its F-Series pickup trucks will be 30% higher compared with May 2009, helped by rising purchases of the auto maker’s 2011 Super Duty trucks. The percentage increase suggests Ford could be looking at F-Series sales of about 43,500 compared with the 33,381 in May 2009. Ford sales analyst George Pipas said about 36% of the F-Series sales are coming from the Super Duty models, which include the F-250 and F-350. These models can carry and tow heavier loads than standard F-150 models that typically sell in much higher volume.
  • Euro Threatens Japan Profits. The euro's weakness threatens a nascent earnings recovery among Japan's export-dependent electronics and auto makers, which are emerging from a tough two-year stretch marked by slumping sales and heavy losses. Major Japanese companies are predicting a modest improvement in results for this fiscal year ending in March 2011 based on rebounding global demand and the benefits of painful restructuring filtering through to the bottom line. But some companies such as Sony Corp., Sharp Corp., Mazda Motor Corp. have heavy exposure to the euro and could be hit by its fall.
  • Trading-Firm Breakdowns Accompanied Market Chaos. As the stock market spiraled out of control two weeks ago, two major firms that handle trades for retail brokerages suffered trading breakdowns. One, the big Chicago hedge-fund firm Citadel Investment Group, stopped taking orders for a number of securities, according to an internal email and people familiar with the matter. Shortly after the market plunged, Citadel asked clients, including discount brokers such as E*Trade Financial Corp. and TD Ameritrade Holding Corp., to route orders elsewhere. Citadel's technical glitch, as well as woes at another firm that trades for retail brokers, Knight Capital Group Inc., show how some everyday investors unknowingly were caught up in the market maelstrom. Citadel Execution Services, the hedge-fund outfit's arm that makes markets, is one of the biggest players in executing trades for retail customers, from day traders to mom-and-pop online investors, executing and routing half a billion shares a day, according to its website. Citadel also ranks second among firms that provide liquidity on the Nasdaq Stock Market, the Nasdaq website says. While it remains unclear what effect Citadel's problems had on the market, its move is emerging as another example of a tripped wire in the market machinery on May 6. Knight was handling so many orders that one of its computers "just blew up," according to a person familiar with the matter.
  • The Primary Election Results Show Rising Intensity Among Republican Voters.
Bloomberg Businessweek:
  • Financial Reforms 'Cosmetic,' Won't Stop More Crises.
  • Goldman's(GS) New Critics: Hedge Funds. It's not just regulators in Washington DC or protesters on the streets of New York who have it out for Goldman Sachs. Hedge fund managers and hedge fund investors are also leveling harsh criticisms of the bank. "They've lost their way, fallen for the trap of short term profits, and abandoning clients," one hedge fund manager told me over cocktails in the casino of the Bellagio Hotel in Las Vegas last night. "It's not the same firm it was a decade ago," said one of the attendees. "They've now got a 'rip your eyes' out culture," another agreed. Quite a few are saying that the SEC's case against Goldman has confirmed what they had come to suspect. Namely, that Goldman Sachs no longer puts its clients first. "Maybe it was legal. But it was wholly unethical," another hedge fund manager said of Goldman's Abacus CDO deal.
  • Investor Insights From The Skybridge SALT Conference. (video)
  • Hedge Fund Chiefs: De-Risking for Survival. (video)
NY Post:
  • Blumenthal's Poll Numbers Tumble After Vietnam Lies Surface. Following bombshell revelations that he claimed he served in Vietnam when he hadn't, Connecticut Senate candidate Richard Blumenthal's once-robust lead in the polls has hit record lows. The Senate hopeful now leads Republican challenger Linda McMahon by a mere three points -- a 10-point drop from two weeks ago, according to according to a Rasmussen poll conducted on Tuesday. The latest poll had Blumenthal at 48 percent compared to McMahon, the co-founder of World Wrestling Entertainment, who had 45 percent of the vote. It's the closest McMahon or any other candidate has ever come to Blumenthal in the polls.
Business Insider:
Washington Post:
  • In Wake of Financial Crisis, IMF Seeks a New Role With Broader Authority. After failing to foresee the biggest financial crisis of its existence, the International Monetary Fund wants more power to probe individual companies to see if they pose the type of broad risks that crippled the world economy in 2008. The new authority being advocated by IMF staff would represent an important shift from the agency's traditional role of analyzing and aiding national economies to serving as a sort of global overseer, particularly when it comes to companies considered so connected around the world that their failure could undermine the economy. The events of the last two years -- in which problems in the U.S. housing market triggered the deepest economic contraction since the Great Depression -- have convinced IMF staff that their ability to monitor such institutions has fallen behind. "We need to learn more about that, and to learn about it we need more data, including from a rather small number of the large financially systemic institutions," IMF Managing Director Dominique Strauss-Kahn said in an interview this week. "The mandate of the fund is to have surveillance of countries, but today you have institutions as big, maybe bigger, than many countries. How can we have global surveillance without having data on what happens with those large financial institutions?" The idea is part of an evolving discussion over the IMF's post-crisis role, a debate that has already led to a historic expansion of the agency's available funds, a discussion of ways to provide troubled countries quicker access to help, and renewed attention to the agency's role in early warning.
  • Derivatives: Who Has Congress' Ear? Whether or not the derivatives reform agenda coming out of Washington makes any sense, one thing is clear: The defense is larger, louder and much better capitalized than the offense. Consumer-advocacy group Public Citizen -- which is distinctly on the offensive line -- says the antireform lobby has "overwhelmingly" usurped the debate. According to a study by the group, nearly 1,000 lobbyists have worked to sway legislators since the start of 2009. Those who argue for a laissez-faire approach to derivatives have outweighed the pro-reform set by a ratio of 11 to 1. "We're completely outnumbered," says Craig Holman, the nonprofit group's sole legislative lobbyist. For comparison's sake, Goldman Sachs (GS) alone has 21. Public Citizen analyzed lobbying data for the nine key bills brought before Congress to create a framework for monitoring the derivatives market, which is still largely unregulated. Of the 982 lobbyists scrambling to catch a lawmaker's ear, 903 of them represented the financial sector or large corporations that are also against reform. Among those lobbying hardest against reform provisions have been the American Bankers Association, the Securities Industry And Financial Markets Association, the Managed Funds Association, the American Council of Life Insurers, Goldman Sachs, CME Group (CME) and Prudential Financial (PRU) on the financial side, as well as the U.S. Chamber of Commerce and National Association of Manufacturers on the corporate side. The Air Transport Association of America was the only group within the top 10 that supported reform. Banks that would be most affected by legislative reform -- Goldman, JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) -- control 97% of the market and belong to the financial trade groups. It's also worth noting that the financial sector is by far the top contributor to political campaigns, particularly to politicians leading financial committees in the House and Senate.
  • Dem Dissidents Block Financial Reform. Senate Majority Leader Harry Reid thought he had locked down 60 votes for Wall Street reform. So he did what you do when you have the votes: Call the roll. But a pair of dissident Democrats and one Republican who Reid claims reneged on a deal to vote “yes” stopped the vote cold — dealing the majority leader an embarrassing setback on a top administration priority. In an unusually dramatic vote, a measure to cut off debate on the Wall Street bill failed 57-42. Democrats Maria Cantwell of Washington and Russ Feingold of Wisconsin voted no, and Democrat Arlen Specter of Pennsylvania was not in the chamber. Cantwell said she wanted votes on two amendments and made clear she wouldn’t go along with Reid’s schedule without it. Feingold said the bill failed the test of preventing another financial crisis. The vote was a high-profile defeat for the already-embattled Reid, who failed to hold together his caucus at a crucial moment and deliver the Republican senators he thought he could count on.
  • Arizona Official to L.A.: Pull the Plug. Arizona Corporation Commissioner Gary Pierce is threatening to encourage the state’s utilities to cut off energy delivery to Los Angeles if the city does not back down from its boycott over the state’s new immigration law. “If an economic boycott is truly what you desire, I will be happy to encourage Arizona utilities to renegotiate your power agreements so Los Angeles no longer receives any power from Arizona-based generation,” Pierce, a Republican, wrote Tuesday to Los Angeles Mayor Antonio Villaraigosa, a Democrat.
  • White House Close to Multi-Billion Energy Package. The White House is expected to soon announce a multi-billion package of new loan guarantees for nuclear and renewable energy projects to be supported by adding $180 million to a pending war funding bill. The proposal follows talks Wednesday between Energy Secy. Steven Chu, White House officials and Speaker Nancy Pelosi (D-Cal.), who used her leverage to ensure solar would share in the funding together with the nuclear industry. The administration has already proposed a greatly expanded loan guarantee program for nuclear as part of its 2011 budget. But Chu would like to advance a quarter of the planned increase into 2010 to make $9 billion more immediately available.
  • U.S. Brokerage Firms Sweeten Recruitment Deals. Merrill Lynch (BAC) and Morgan Stanley Smith Barney (MS) have raised the value of their recruitment packages to attract more brokers at a time when fewer are motivated to change jobs, sources familiar with the hiring practices said on Wednesday. Bank of America Corp's Merrill has increased its upfront cash payment to a maximum 150 percent of a broker's revenue from the prior 12 months, up from 120 percent, two sources with knowledge of the terms said.
  • Netease(NTES) Results Miss View, Q2 to Remain Soft. China's No. 3 game operator (NTES), which posted a softer-than-expected quarterly profit rise of 8.5 percent, is looking at more weakness in the months ahead due to maturing game titles and fewer holidays in the period.
  • China Says U.S. Debt Levels Are a Concern.
  • Applied Materials(AMAT) Posts 2nd-Qtr Profit vs Loss. Applied Materials Inc (AMAT), the world's largest producer of chip-making gear, posted a second quarter profit as customers added capacity to take advantage of growing demand for consumer electronics, especially in emerging markets. All of its business lines, except the solar division, were profitable during with fiscal second quarter ended May 2 and showed strong sequential growth.
  • Autodesk(ADSK) Q1 Tops Street; Europe Clouds Outlook. Autodesk Inc's (ADSK) quarterly results topped expectations, helped by a recovery in corporate spending and international growth, but the design software maker remained cautious about its full-year results citing uncertainties surrounding the European economy. "Going forward, our enthusiasm is tempered somewhat by the devaluation of the euro and the general instability of the European economy," CEO Carl Bass said in a conference call.
Financial Times:
  • Asian Sovereign Wealth Funds Target US Shale Gas. The sovereign wealth funds of China and South Korea are set to lead a $900m investment in a leading US producer of natural gas from shale rock, becoming the latest Asia-based groups to focus on the sector. China Investment Corporation and Korea Investment Corp are in advanced negotiations to join a consortium planning to acquire convertible preferred stock in New York-listed Chesapeake Energy(CHK), according to people familiar with the matter. The talks follow last week’s disclosure that Temasek, the Singapore state investment fund, and Hopu Investment Management, a Beijing-based firm, had acquired $600m of its convertible preferred stock. Chesapeake last week signalled that it would issue a further $500m of preferred stock by mid-June, but this second tranche has swollen to about $900m amid strong investor demand in Asia, people familiar with the situation said.CIC and KIC are each expected to acquire about $300m worth of preferred stock, with the remainder purchased by Hopu, Seatown, an affiliate of Temasek, and a Japanese industrial group. Gas is about 30 per cent less carbon-intensive than oil and about 50 per cent less than coal. New drilling technology has also led to higher estimates for US gas reserves, of 100 years’ worth at current usage rates, up from 30 years’ worth. The convertible preferred stock carries a coupon of 5.75 per cent. The combined $1.5bn investment in preferred stock would eventually translate into an equity holding in Chesapeake of about 10 per cent. Chesapeake is either the number one or number two in the four biggest US shale fields: Haynesville, Marcellus, Barnett and Fayetteville.
  • Germany's 'Desperate' Short Ban Triggers Capital Flight to Switzerland. A year ago, Germany's financial regulator BaFin warned that the toxic debts of the country's banks would blow up "like a grenade" once hidden losses from the credit crisis caught up with them. An internal memo at the time showed that BaFin feared write-offs might top €800bn (£688bn), twice the reserves of Germany's financial institutions. Nobody paid much attention. But the regulator's shock move on Tuesday night to stop short trading on banks, insurers, eurozone bonds – as well as a ban credit default swaps (CDS) on sovereign debt – has left markets wondering whether the slow fuse on Germany's banking system has finally detonated.
The Australian:
  • US Housing Crisis Far From Over. MORE THAN one homeowner in ten in the United States missed at least one mortgage payment in the first quarter of the year, setting a record that suggests America's housing and repossession crisis is far from over. The figures from the US Mortgage Bankers Association also show that 4.6 per cent of homeowners had their homes repossessed in the first quarter -- another record. Moreover, the figures indicate that the profile of Americans who are losing their homes is changing: homeowners who took out conventional, fixed-rate loans are now the fastest-growing group among the foreclosure victims, making up nearly 37 per cent of new repossessions in the first quarter of the year, up from 29 per cent a year earlier. In contrast, the risky subprime loans that kicked off the credit crisis in 2007 made up only 14 per cent of new foreclosures in the January-March period, down from 27 per cent a year earlier. The figures also show that unemployment in the US, which hovers near double-digits, is forcing more homeowners to default across the country, not only in those states hurt most in the initial tidal wave of repossessions spawned by high-risk loans.
China Daily:
  • The yuan is unlikely to be a "major issue" at next week's high-level discussions between the U.S. and China in Beijing, citing Chinese central bank advisor Li Daokui. Li said officials are expected to "play down" the currency issue.
  • 1 in 4 Chinese "Age Above 65 by 2050". Nearly one out of every four people in China will be older than 65 by the year 2050, demographers have forecast. The country's population, currently 1.33 billion, will also not exceed 1.5 billion, Jiang Weiping, director-general of the China Population and Development Research Center, told a population forum on Wednesday. The population will peak around the year 2040 at about 1.47 billion people before starting to decline, he said, citing a forecast from the center's population administration decision information system. China's population will also make up 15 percent of the world's population, down from the longtime 20 percent and above, Jiang said. The country's family planning policies have helped prevent 400 million births in the past three decades, according to statistics.
  • China's commerce minister, Chen Deming, said his country would maintain the stability of its currency in order to foster economic growth.
Yonhap News:
  • North Korea's National Defense Commission said it will send a team to South Korea to investigate accusations that it sank a South Korean warship, citing the North's Korean Central Broadcasting Station. The accusations are a "fabrication," the report said. North Korea threatened to take "stern" measures, including a "full-scale" war, if sanctions are imposed, quoting the report.
Dong-A Ilbo:
  • South Korea may prohibit North Korean vessels from sailing through its territorial waters as it becomes obvious that North Korea sank one of its naval warships, citing a government official.
Evening Recommendations
  • Reiterated Buy on (MCK), target $79.
  • Reiterated Buy on (DPS), target $45.
Night Trading
  • Asian indices are -1.25% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 142.0 +5.5 basis points.
  • S&P 500 futures +.-5%.
  • NASDAQ 100 futures -.11%.
Morning Preview Links

Earnings of Note
  • (TDW)/1.04
  • (SPLS)/.27
  • (SHLD)/.14
  • (WSM)/.12
  • (DLTR)/.84
  • (GME)/.47
  • (CSC)/1.46
  • (INTU)/1.82
  • (ARO)/.46
  • (DELL)/.27
  • (CRM)/.13
  • (FL)/.27
  • (GPS)/.43
Economic Releases
8:30 am EST
  • Initial Jobless Claims for last week are estimated to fall to 440K versus 444K the prior week.
  • Continuing Claims are estimated to fall to 4605K versus 4627K prior.
10:00 am EST
  • Philly Fed for May is estimated to rise +.2% versus a +1.4% gain in April.
  • Leading Indicators for April are estimated to rise +.2% versus a +1.4% increase in March.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The BMO Capital Ag/Protein/Fertilizer Conference, Robert Baird Growth Stock Conference, (GG) investor day, (BA) investor conference, TRV investor conference could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by automaker and technology 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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