Wednesday, May 12, 2010

Wednesday Watch

Evening Headlines

  • European Debt Woes Punish Corporate Borrowers: Credit Markets. Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62 percent decline from the same period in April and 83 percent less than the average for the past year, according to data compiled by Bloomberg. The extra yield investors demand to own corporate debt instead of government securities soared last week to the highest in more than four months. While a finance package hammered out over the weekend by European leaders slowed the decline in the euro and spared Greece from defaulting, investors aren’t showing they’re convinced a 13-month credit-market rally is poised to resume. Corporate bonds have lost 0.47 percent in May, the worst start to a month since February, according to Bank of America Merrill Lynch index data.
  • SEC Sends Subpoenas in Probe of Stock-Market Drop. U.S. Securities and Exchange Commission Chairman Mary Schapiro said the agency’s enforcement unit has issued subpoenas in an investigation of last week’s stock plunge. The division is “fully integrated in our review of the events of May 6 and will recommend appropriate action” if violations are found, she told a House Financial Services subcommittee today. “A number of subpoenas” were sent, she said, without identifying recipients. SEC investigators began preparing for a variety of inquiries in the hours after the Dow Jones Industrial Average briefly dropped as much as 9.2 percent, people familiar with the matter said last week. So far, regulators haven’t found evidence the incident was triggered by computer hackers, terrorists, malicious traders or a so-called fat finger entering an oversized order, Schapiro told lawmakers. The agency is also concerned that firms or exchanges may have lacked required controls to prevent the rout from snowballing, people familiar with the matter said. It will also look at whether traders tried to take advantage of the chaos by steps such as entering orders that drove some stocks down to pennies per share.
  • Lumber Falls as British Columbia Cuts Export Tax. Lumber futures fell to a nine-week low after the government of British Columbia, Canada’s biggest wood-exporting province, said it will eliminate a tax on exports to the U.S., boosting prospects for increased supplies.
  • Bernanke Said To Tell Senators Euro Aid No Panacea. Federal Reserve Chairman Ben S. Bernanke told U.S. senators today that the euro region’s almost $1 trillion aid package to stem its debt crisis isn’t a cure- all, according to a participant. “He said, ‘This is basically not a panacea,’” and that the measures are “temporary,” Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, told reporters in Washington after a closed-door briefing Bernanke held with the panel. “There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries,” Shelby cited Bernanke as saying. “Clearly, there are a lot of problems that exist between now over the next two to three years as to whether or not these economies can take the necessary steps to put themselves in better fiscal shape,” Senator Christopher Dodd, the Connecticut Democrat who chairs the banking panel, told reporters when asked about the Bernanke briefing.
  • Saving Euro Trashes Trichet, Dooms Germany's AAA: Mark Gilbert. One of the proudest achievements of the euro project was ensuring government borrowing costs converged at the lower levels enjoyed by Germany rather than the higher yields paid by its less fiscally disciplined neighbors. That’s over. Done. Finished. Just as the bailout of the banking system produced a plethora of unintended consequences, so the European Union’s decision to pledge almost $1 trillion to defend the single-currency project will unleash a series of undesirable aftershocks. Here are some that are inevitable.
  • Osborne to Set Out $9 Billion U.K. Budget Cuts Within 50 Days. David Cameron’s chancellor of the exchequer, George Osborne, will prepare an emergency budget within 50 days containing 6 billion pounds ($9 billion) of spending cuts to narrow Britain’s record deficit. The measure is part of Conservative Party’s deal with its coalition partners, the Liberal Democrats, announced last night. The agreement also contains a levy on banks, a commission to investigate splitting retail from investment banking, plans to limit bonuses, and measures to increase lending to businesses, party officials said.
  • Japan Debt Faces 2012 Test as Retirees Grow, Dai-Ichi Life Says. Japan may lose its ability to domestically finance its debt “in a few years” because of a surge of retirees in 2012, according to an analyst at Dai-Ichi Life Research Institute. “The key year for public finances will be 2012, as the baby boomers retire and begin collecting their pensions en masse,” Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, said yesterday in an interview in Tokyo. “That may be when Japan’s sovereign risk becomes evident.” Japan, the largest borrower among developed nations, has yet to face a Greece-like fiscal crisis because it has been able to finance most of its spending at home, Nagahama said. The first of Japan’s baby boomers will turn 65 in 2012, making them eligible for pension payments. About 8 million, or 6 percent of the population, were born between 1947 and 1949, regarded as the baby boomer generation in Japan, government data show. Almost 23 percent of the nation’s 126 million people will be older than 65 this year, the highest proportion in the world, according to Bloomberg data. More retirees will lead to a “rapid” surge in the natural growth of the government’s social security burden, which tracks the yearly increase of costs as a result of the aging population, Nagahama said. Costs will rise 2.5 trillion yen annually by 2013, he forecasts, more than double the 1.09 trillion yen growth the government is projecting for this fiscal year.
  • Blackstone(BX)-Led Fidelity Bid May Exceed $15 Billion. A group including Blackstone Group LP and Thomas H. Lee Partners LP is in talks to pay more than $15 billion including debt for Fidelity National Information Services Inc., said a person with knowledge of the matter, a price that values the company’s stock at about $32 a share.
  • China's Bubble Risk Adds Pressure to Tighten Policy. China’s accelerating inflation and surging house prices are adding pressure on policy makers to raise interest rates and allow yuan gains even as their concerns over Europe’s debt woes persist.
Wall Street Journal:
  • U.S. Probes Morgan Stanley(MS). Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis. Morgan Stanley arranged and marketed to investors pools of bond-related investments called "collateralized debt obligations," or CDOs, and its trading desk at times placed bets that their value would fall, traders say. Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles.
  • Seven Children Killed in Attack on China School. An attacker hacked seven children to death Wednesday and wounded 20 others in a violent rampage at a kindergarten in northwest Shaanxi province -- the latest in a string of attacks on schools, a government official said. The slayings occurred despite a countrywide increase in security at schools, with additional police and guards posted at school gates. The attack comes after three similar ones at schools and kindergartens late last month left dozens of children injured, and raised questions on security and issues of massive social inequalities believed to play a role in the violence.
  • Verizon(VZ), Google(GOOG) Developing iPad Rival.
  • China Analyst Sees Beginnings of Unfolding Credit Bust. China's economy is teetering on the edge of a major slowdown, though it's not a shakeout in the property market that's about to spark the distress, according to a noted China strategist. David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world's third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge. "We've got the beginnings of a credit-bubble collapse in China," said Roche.
NY Times:
  • Reed Seeks to Close Loophole for Small Funds. Senator Jack Reed, Democrat of Rhode Island and a member of the Senate Banking Committee, on Monday filed an amendment to the financial reform currently in the Senate that would require all hedge funds, private equity shops and venture capital firms to register with either a state regulator or the Securities and Exchange Commission, Politico reported. The amendment would mean that funds under $100 million, previously exempt from the proposed regulation, would now also be required to register.
  • Market Inquiry Focuses on One Trader. Regulators examining the causes of the brief stock market free fall last Thursday are looking closely at heavy selling in the market for stock-index futures by a single trader, beginning 10 minutes before stock prices began to plummet.
Business Insider:
  • Forget About Housing, The Real Cause of the Crisis Was OTC. Economic bubbles are not recognized by those inside of them, the Congress of the united States being no exception. The $604.6 trillion derivatives bubble, which is equal to more than ten times world GDP, is a global issue. If existing OTC derivatives remain in place and there are no restrictions on what banks can trade derivatives, there is no actual or immediate reduction of systemic risk. Thus, the risks that led to the financial crisis in 2008 are likely to remain present in the global financial system for years to come. In fact, many banks have more CDS risk now than in 2008. Passing a bank-approved version of the financial reform bill, while it may be portrayed as a political victory or serve to calm financial markets temporarily, is unlikely to prevent another global financial crisis.
  • Kyle Bass: Europe Is Nearing Its "Keynesian End", Now Expect Japan Crisis Headlines Next.
  • Morgan Stanley's(MS) TARP Handout. Whose side is Treasury on, anyway? A new report from a federal bailout watchdog reveals that a top Treasury official told executives at Morgan Stanley (MS) how much it would cost the giant bank to repurchase the warrants it issued to the government following its October 2008 rescue. Herb Allison, an assistant Treasury secretary in charge of the Troubled Asset Relief Program, apparently provided the number as Treasury was squeezing Morgan Stanley to pay more after a series of lowball bids. Yet Allison may have unwittingly cost taxpayers some $375 million, says a finance professor who has been tracking the government bailout.

  • Democrats Get Millions From Hedge Fund Billionaires. Despite Democratic-led efforts to impose stricter regulations on hedge funds, the industry’s top titans continue to give generously to the party. The top 10 best-paid hedge fund managers in the U.S.—as identified by AR magazine—have given almost all of their campaign contributions to Democrats. Over their lifetimes, the top 10—which include such high-profile Democratic donors as George Soros—have given a total of $33 million to President Barack Obama’s party. They’ve given only $600,000 to Republicans, according to the National Republican Congressional Committee. Democrats are also taking more from the financial services, insurance and real-estate industries than ever before. Over the past 20 years, Democrats got 45% and Republicans 55% of the $2.4 billion doled out by those industries. In the current campaign cycle, Democrats have nabbed 54% of the money.
Dallas Morning News:
  • Texas House Budget Chief: Gambling Could Help Close State's $18B Gap. Lawmakers will have to close an $18 billion budget shortfall next session and should consider an expansion of gambling, not just deep cuts in spending, the House's chief budget writer said today. "Gambling could help us on our budget," said Rep. Jim Pitts, R-Waxahachie, after his Appropriations Committee heard sobering testimony from revenue and budget experts this morning.
The Hill:
  • Democrats Ignore Causes of Housing Crisis, Refuse to Rein in Fannie & Freddie. Fannie Mae and Freddie Mac are more overleveraged and more underwater than any of the banks in trouble, but the Dodd bill doesn’t even mention them in its hundreds of pages. Senator McCain has offered an amendment that would repeal their liberal housing goals that encouraged more risky lending and fueled the housing crisis, as well as end their dominance of the mortgage market and let the private sector back in. While more needs to be done to quickly end the permanent bailout of these mortgage giants, the McCain amendment is an important first step. True financial reform must include Freddie Mac and Fannie Mae. Congress cannot pretend to have ended “too big to fail” without ending these out of control institutions.
  • CBO Ups Health Care Cost Projections. Congressional Budget Office estimates released Tuesday predict the health care overhaul will likely cost about $115 billion more in discretionary spending over ten years than the original cost projections. The additional spending — if approved over the years by Congress — would bring the total estimated cost of the overhaul to over $1 trillion. Republicans pounced on the news, which they called another sign that the Obama administration makes promises it cannot deliver. “The American people wanted one thing above all from health care reform: lower costs, which Washington Democrats promised, but they did not deliver,” said House Minority Leader John A Boehner (R-Ohio). “It was clearly irresponsible for Washington Democrats to force this legislation through Congress without being truthful about its full impact on the nation’s finances. Republicans are fighting to repeal this job-killing health care law and replace it with reforms focused first on lowering costs and protecting American jobs.”
  • Dems Plot Fee Hike on Oil. Alarmed by the growing cost of the Gulf disaster, Democrats are actively discussing at least a one-cent-per-barrel increase in fees paid by the oil industry to finance a government trust fund covering damage claims from such spills. No final decision has been made, but the added revenue is coveted by tax writers, still struggling to find $45 billion to $50 billion in offsets needed to pay for an election-year package of infrastructure investments and popular tax break extensions.
  • Senate Votes to Dedicate TARP Funds to Deficit. The U.S. Senate unanimously approved a measure on Tuesday that would require the government to use money paid back from banks and other bailed-out companies for deficit reduction, not additional spending. The proposal, which passed by voice vote, could clash with Democratic plans to use some of the money recovered under the Troubled Asset Relief Program to stimulate the economy.Republicans have argued that the recovered money should be used to pay down the budget deficit, which could hit a record $1.5 trillion this fiscal year. Earlier this year, the Senate rejected a Republican proposal that would have ended the TARP program. If it becomes law, the measure would reduce the size of the TARP program from $700 billion to $550 billion and prevent the Treasury Department from redirecting unused funds toward new programs.
  • China Mobile Interested in Bringing Apple(AAPL) iPad to China.
  • Intel(INTC) CEO Confident of Return to Sales, PC Growth. Intel Corp (INTC) expects to double its earnings growth in the next few years and on Tuesday raised its long-term margin outlook, as the world's top microchip maker spreads its chips beyond PCs to gadgets like smartphones and televisions. Chief Executive Paul Otellini told investors on Tuesday that Intel is eager to establish a footprint in fast-growing -- but intensely competitive -- markets, diversifying beyond a PC market it now dominates.
  • Nasdaq, NYSE Short Interest Near Flat in Late April. Short interest on the New York Stock Exchange and the Nasdaq were little changed in late April during a time when the S&P 500 hit a 19-month high, data showed on Tuesday. Short interest on the New York Stock Exchange fell 0.36 percent in the second half of April, while it edged up 0.08 percent on the Nasdaq, the exchanges said on Tuesday.
Financial Times:
  • Exemption Sought to OTC Derivatives Rules. Large US industrial and manufacturing groups have intensified their campaign to ensure they will be exempt from proposed rules to reform the over-the-counter derivatives market. They say the draft legislation does not ensure that they will be allowed to continue using the contracts to hedge against interest-rate and currency fluctuations. OTC derivatives have been blamed for exacerbating the financial crisis, and reforming the market is central to regulatory reforms being considered by the Senate. US lawmakers and regulators want most OTC deals – in which two parties privately agree a customised contract – to be traded and cleared centrally. But debate has intensified over who will be exempt from requirements to process OTC contracts through a clearing house, which would entail posting cash margins on every trade. “The fiercest part of the debate is over where exactly the line is drawn on exemptions,” Terry Duffy, chairman of the CME Group, the world’s biggest listed futures exchange, told the Financial Times. David Hall of Chatham Financial, the interest rate and foreign-exchange risk management advisers, said: “If you don’t get the exemption, you’re going to be forced to abide by all the most stringent clearing margin and trading provisions,”
  • Strauss-Kahn Calls for Eurozone Reform. Eurozone nations should take a big step towards integration with a new system of cross-border budgetary co-ordination, according to the head of the International Monetary Fund. Dominique Strauss-Kahn, IMF managing director, suggested introducing short-term fiscal transfers between member states as a way to avoid a repeat of the crisis that has shaken financial markets. The proposal, made in an interview with the Financial Times, would mark a move towards common economic governance in the 16-nation euro area, but would probably run into resistance in Germany, Europe’s largest economy. “What you need is stronger surveillance and tools to organise transfers from one part of the area to other parts,” he said. Olli Rehn, the EU’s monetary affairs commissioner, will on Wednesday put forward similar ideas on fiscal and economic policy co-ordination. He will urge eurozone countries to adopt procedures under which each state’s annual budget is subjected to review by the area’s 15 other governments well before it becomes law.“This is a not a matter of interfering with national sovereignty,” one high-level EU policymaker said.
Rheinische Post:
  • Germany's ruling coalition government may crumble as Chancellor Angela Merkel's rejection of income-tax cuts deprives her Christian Democratic Union of an economic-policy platform. "There's a danger that the black-yellow project at the federal level faces the end after only seven months," said Josef Schlarmann, a member of the Christian Democrats' executive board. He was referring to the respective party colors of the CDU and its coalition partner, the Free Democratic Party. Schlarmman heads a lobby representing 40,000 business owners and managers allied with Merkel's party.
Securities Daily:
  • China central bank adviser, Li Daokui, said conditions are ripe for the monetary authority to set deposit rates higher because of mounting inflation.
Yonhap News:
  • China's Wealth Divide Past Warning Level: Analysts. The Gini coefficient - a commonly used measure of inequality of wealth - has reached 0.47 in China, overtaking the recognized warning level of 0.4, government-affiliated experts have said. "The Gini coefficient in China has been continuously rising after it reached the alarming 0.4-level 10 years ago," Chang Xiuze, a researcher with the academy of microeconomic research under the National Development and Reform Commission, was quoted as saying in the Economic Information Daily on Monday. Li Shi, a professor on income distribution and poverty studies with the Beijing Normal University, said the income of the top 10 percent of the richest Chinese was 23 times that of the bottom 10 percent in the country in 2007, as compared with 1998, when the gap was only 7.3 times. Some economists believe the widening wealth gap is partly the result of large amounts of "illegal income" resulting from corruption. "The income of senior executives in some State-owned enterprises is about 128 times of the average social income," Su Nanhai, director of the labor and wage institute under the Ministry of Human Resources and Social Security, was quoted as saying. "It is sad that smart and hardworking people cannot have high incomes if they work in non-monopolized trades," he said.
  • Toyota Motor Corp.(TM) will reduce its annual domestic production capacity by 20% to 3.2 million vehicles in 2015. Toyota doesn't expect a strong increase in sales after the recent worldwide vehicle recalls.
Shanghai Securities News:
  • Shanghai will impose a series of regulations, including residential property taxes, to curb the real-estate prices in the financial hub of China as early as this month, citing people close to the government.
Evening Recommendations
  • Reiterated Buy on (CMI), target $83.
  • Reiterated Buy on (ETN), target $88.
  • Reiterated Sell on (SPWRA), lowered target to $12.
Night Trading
  • Asian indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 114.0 +6.0 basis points.
  • S&P 500 futures -.68%.
  • NASDAQ 100 futures -68%.
Morning Preview Links

Earnings of Note
  • (M)/.04
  • (CSCO)/.39
  • (JACK)/.39
Economic Releases
8:30 am EST
  • The Trade Deficit for March is estimated to widen to -$40.5B versus -$39.7B in February.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,600,000 barrels versus a +2,755,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +400,000 barrels versus a +1,257,000 barrel increase the prior week. Distillate inventories are expected to rise by +1,150,000 barrels versus a +573,000 barrel gain the prior week. Finally, Refinery Utilization is expected unch. versus a +.64% gain the prior week.
2:00 pm EST
  • The Monthly Budget Deficit for April is estimated to widen to -$56.0B versus -$20.9B in March.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Rosengren speaking, Fed's Lockhart speaking, Fed's Bullard speaking, $24 Billion 10-Year Treasury Bonds Auction, weekly MBA mortgage applications report, Bloomberg Global Confidence Index, BofA Merrill Healthcare Conference, UBS Financial Services Conference, Deutsche Bank Alt Energy/Utilities/Power Conference, Jefferies Internet/Media/Telecom Conference, (CCC) analyst meeting and the (HUN) investor day could also impact trading today.
BOTTOM LINE: Asian indices are slightly higher, boosted by automaker and gold shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.

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