Wednesday, July 21, 2010

Wednesday Watch


Evening Headlines

Bloomberg:
  • BP(BP) Signs North America and Egypt Asset Deals With Apache(APA). BP Plc, the U.K. company battling a record oil spill in the Gulf of Mexico, agreed to sell assets in North America and Egypt to Apache Corp. for $7 billion as part of its plan to raise cash to fund liabilities. The deals with Apache include BP’s Permian Basin holdings in Texas and southeast New Mexico as well as gas properties in western Canada, London-based BP said today in a statement. BP also agreed to sell Western Desert business concessions and an East Badr El-din exploration concession in Egypt.
  • China won't relax policies aimed at restraining property prices any time soon, according to HSBC Holdings Plc's Greater China Chief Economist Hongbin Qu. "It is unrealistic for the market to expect policy easing in China any time soon," said Qu in an interview.
  • Lack of Sales Leaves Dubai Property Buyers Guessing on Prices. A dearth of Dubai home sales and foreclosure auctions is stalling a recovery because buyers aren’t able to gauge how far prices have fallen during the market’s two-year slump. “There are very few transactions at the moment,” said Craig Plumb, head of Middle East research at broker Jones Lang LaSalle Inc. “We are not going to see the bottom of the market until we see transactions through the foreclosure process.” Home prices in the sheikhdom have dropped about 50 percent from their peak two years ago and Credit Suisse estimates a further decline of as much as 20 percent. “People are only going to buy if they believe the price is realistic,” Plumb said. Data provided by the Dubai Land Department is too incomplete to provide a valuable guide to selling prices, he said.
  • BHP(BHP) Billiton's Iron Ore Output Climbed 16% After Expansions in Australia. BHP Billiton Ltd., the world’s largest mining company, said fourth-quarter iron ore production rose 16 percent, driven by expansions at its Australian mines and surging global steel demand. Output was 31.2 million metric tons in the three months ended June 30 compared with 27.1 million tons a year ago, the Melbourne-based company said today in a statement. That compares with a 32 million ton estimate by Credit Suisse Group AG. Australia, the world’s largest iron ore exporter, will boost sales 50 percent this fiscal year, according to government estimates, as BHP and Rio Tinto Group expand output.
  • U.S. Drug-War Aid to Mexico Lags Promises as Violence Rages, Damps Growth. The U.S. government has delivered only about 9 percent of the $1.6 billion in drug-war aid promised to Mexico and Central America under a 2008 accord as violence across the border reaches an all-time high. U.S. agencies were forced to delay delivering training and equipment included in the Merida Initiative because they lacked staff and funding, the U.S. Government Accountability Office determined in a report, a draft of which was provided by the office of Congressman Eliot Engel, Chairman of the House Foreign Affairs Subcommittee on the Western Hemisphere. The GAO will present the report in testimony before Congress tomorrow. The shortfall in U.S. assistance hurts President Felipe Calderon’s fight against organized crime, said Adam Isacson, senior associate at the Washington Office on Latin America, a human rights and economy research group. Armed groups in northern Mexico murdered political candidates in this year’s regional elections and have expanded their tactics, including detonating a car bomb in Ciudad Juarez last week. “When you consider the urgency with which politicians talk about violence in Mexico and the threat it poses to us, to have only delivered 9 percent after two years is pretty remarkable,” Isacson said in a telephone interview from Washington.
  • U.S. Spy Chief Nominee Clapper Sees Rising Danger in North Korea Relations. The U.S. may be entering “a dangerous new period” with North Korea marked by military provocations designed to advance the Stalinist state’s political goals, President Barack Obama’s nominee for intelligence chief said. That threat is the “most important lesson” for the U.S. intelligence community to take from North Korea’s sinking of a South Korean warship, James Clapper told the Senate Intelligence Committee in written testimony for his confirmation hearing yesterday. “We may be entering a dangerous new period when North Korea will once again attempt to advance its internal and external political goals through direct attacks on our allies in the Republic of Korea,” said Clapper, who was head of intelligence for U.S. Forces Korea and the Pacific Command in the mid-1980s.
  • Transocean(RIG) Is BP Spill Focus as Five Workers Named 'Parties of Interest'. Transocean Ltd. employees onboard the Deepwater Horizon drilling rig when it exploded in the Gulf of Mexico have become the focus of a U.S. government probe into the cause of the fatal disaster. Stephen Bertone, chief engineer on the rig, and Mike Williams, chief engineer technician, were designated as parties of interest yesterday by a joint U.S. Coast Guard-Interior Department investigative panel. That boosted to five the number of Transocean workers who could face criminal charges stemming from the accident that killed 11 people. No one from BP Plc, which leased the Deepwater Horizon to drill the Macondo well, or from other companies involved in the work has been named a party of interest, according to the panel’s website.
Wall Street Journal:
  • 153 'VIP' Loans to Fannie Cited. Countrywide Financial Corp.'s controversial "VIP" mortgage program made 153 loans to employees of Fannie Mae, the giant federally backed financial institution that helped fuel Countrywide's growth, according to a letter released Tuesday by Rep. Darrell Issa. Another 20 such VIP loans, which often provided mortgages on terms more favorable than those available to the general public, went to employees of Freddie Mac, another big government-backed buyer of mortgage loans, the Issa letter said. While it has been reported that VIP loans went to some top Fannie Mae officials, the latest information indicates that the activity was more widespread.
  • U.S. Drills Deep Into BP(BP) as Spill Drama Drags On.
  • Obama's Economic Fish Stories. On unemployment, the president claims that the stimulus bill was several times more potent than his chief economic adviser estimates. Such statements hurt his credibility. A president's most valuable asset—with voters, Congress, allies and enemies—is credibility. So it is unfortunate when extreme exaggeration emanates from the White House.
  • CMBS Market Rises From Ashes of Collapse. Big Banks Lead the Return of Key Funding Source for Commercial-Property Owners; Still, a Fraction of Precrash Levels. Even as woes mount in the commercial-real-estate market, a once-vital source of funding for commercial-property owners is showing signs of life. Banks including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. are expected to launch in the coming weeks two offerings of commercial-mortgage-backed securities, or CMBS, totaling $1.4 billion, according to people familiar with the matter.
  • Housing Market Stumbles. Construction Slows, Inventories Build Amid Weak Job Growth, Tax-Credit End. The housing market, whose collapse pulled the economy into recession in late 2007, is stalling again. In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market.
  • The Rev. Wright Media Cover-Up. Someone who belonged to JournoList continues to leak information from its archives, providing a fascinating glimpse into how some liberal journalists coordinate their story lines to protect their favorite politicians and ideas. The Daily Caller website reports that at several times during the 2008 presidential race, "employees of news organizations including Time, Politico, the Huffington Post, the Baltimore Sun, the Guardian, Salon and the New Republic participated in outpourings of anger over how [Barack] Obama had been treated in the media, and in some cases plotted to fix the damage." Some of the comments will no doubt revive conservative allegations of a liberal news media conspiracy. Spencer Ackerman, then of the Washington Independent, now at Wired, urged fellow journalists to kill the story of Mr. Obama's ties to the controversial Revered Jeremiah Wright by going after some of his critics. "Fred Barnes, Karl Rove, who cares -- and call them racists," he urged.
  • Tiger Sowing Seeds of Growth. Julian Robertson Weighs Reopening Firm to Outsiders a Decade After He Shut Fund. Julian Robertson famously wound down his hedge fund at Tiger Management LLC a decade ago amid losses and turned to managing his own fortune. Now, the 78-year-old legendary investor is considering reopening Tiger, a launching pad for young money managers, to the outside world. Mr. Robertson has beefed up Tiger's management ranks as part of a potential expansion that could involve creating a "seeding" fund or a fund of hedge funds for outside investors.
  • TARP Lending Programs Curtailed. The Treasury Department, under Congressional orders to shrink and end sooner the much-maligned Troubled Asset Relief Program, plans to curtail two programs originally intended to help consumer and small-business lending. Treasury officials say they plan to end a long-delayed, never-utilized $30 billion program designed to boost small-business lending and cut the amount of money available for a Federal Reserve lending program. The Treasury will also stop creating any new programs to stabilize the financial sector.
Bloomberg Businessweek:
  • European Bank Stress Tests Said to Describe Three Scenarios. European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors. In the last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document that was dated July 15.
CNBC:
  • Apple(AAPL) Outstrips Wall Street Earnings Forecasts; Shares Jump. Apple easily topped analysts' expectations in its fiscal third quarter and gave a better-than-expected sales forecast, pushing the company's stock higher in extended trading Tuesday. Although the iPhone and iPad generated most of the headlines, it was the Mac computer that helped make the quarter for the company. Apple said it sold 3.47 million Macs in the quarter, along with 9.41 million iPods, 8.4 million iPhones and 3.27 million iPads. The company reported fiscal third-quarter earnings of $3.51 a share excluding one-time items, up from $1.35 a share a year ago. Revenue leaped to $15.7 billion, up from $8.337 billion last year.
NY Times:
  • S.E.C. Pursuing More Cases Tied to Financial Crisis. Days after the Securities and Exchange Commission secured a $550 million settlement from Goldman Sachs, the agency’s chairwoman said on Tuesday that the commission was pursuing several other investigations related to the 2008 financial crisis. The chairwoman, Mary L. Schapiro, told reporters after a Congressional hearing that the S.E.C. had “a number of cases coming out of the financial crisis related to C.D.O.’s and other products” and involving Wall Street firms, banks and other financial institutions.
Business Insider:
Rasmussen Reports:
  • Voters Still Think Bailouts Were a Bad Idea. A new Rasmussen Reports national telephone survey of Likely Voters finds that just 25% say it was a good idea for the federal government to provide bailout funding for banks and other financial institutions. Fifty-six percent (56%) hold the opposite view and feel these bailouts were a bad idea.
Politico:
  • Climate Bill on the Ropes. The Senate climate bill has been at death’s door several times over the past year. But with the days before the August recess quickly slipping away, the case may truly be terminal now. Senate Majority Leader Harry Reid (D-Nev.) has wanted to introduce a sweeping energy and climate bill by next week, and Reid even told POLITICO on Monday night that the package was almost ready to go. But by Tuesday afternoon, Reid was noncommittal about when a bill would come or what it would contain.
USA Today:
  • Estate Tax to Return in 2011, And it Could Hurt Ordinary Folks. The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say. Families who live in areas with high property values are particularly vulnerable, says Clint Stretch, tax principal for Deloitte Tax who lives outside Washington, D.C. "People in my neighborhood bought a house for $32,000 in the '60s, and now it's worth $1 million," he says. "If they've got anything else, they would be paying an estate tax."
Reuters:
  • US Financial System Support Up $700 Billion in Past Year - Watchdog. Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said on Wednesday. The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and to guarantee more mortgages to the support the housing market. Increased guarantees for loans backed by the Federal Housing Administration, the Government National Mortgage Association and the Veterans administration increased the government's commitments by $512.4 billion alone in the year to June 30, according to the report. "Indeed, the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases," the TARP inspector general, Neil Barofsky, wrote in the report. Barofsky also in the report ramped up his criticism of the Treasury's housing relief efforts, saying that its program to reduce monthly mortgage payments for struggling homeowners was showing "anemic" participation numbers and had failed to "put an appreciable dent in foreclosure filings."He said Treasury had refused his repeated recommendations to announce more effective goals and benchmarks for its mortgage modification program, which could reach up to $50 billion in TARP funds."Treasury's refusal to provide meaningful goals for this important program is a fundamental failure of transparency and accountability that makes it far more difficult for the American people and their representatives in Congress to assess whether the program's benefits are worth its very substantial cost," Barofsky wrote.
  • At Least 25 Hurt in Turbulence Aboard United Flight. A wide-body United Airlines (UAUA) jet shaken by severe turbulence was diverted on Tuesday to Denver International Airport with at least 25 people injured on board, officials said. United Flight 967 hit the turbulence over Kansas after taking off from Dulles International Airport outside Washington, D.C., en route to Los Angeles, Federal Aviation Administration and airline officials said.
  • VMware(VMW) Outlook Beats Street View, Shares Rise. VMware Inc's (VMW) revenue forecasts beat Wall Street expectations and the business software maker said sales were strong to small- and mid-sized businesses. Its shares rose in 5 percent in after-market trade.
  • North American Chip-Gear Orders Rise 10.5% in June.
Financial Times:
  • Derivatives Reform to Punish Property Industry. The European Union’s proposed reform of over-the-counter derivatives markets is intended to reduce the systemic risk caused by speculative use of derivatives, typically by hedge funds and other financial institutions. It was assumed those using derivatives for bona fide hedging and prudent risk management purposes would be excluded from the margin requirements that the new regulations would demand. However, it is now becoming clear that the European property industry risks being one of the biggest victims of regulatory overreach. Under the EU’s plans real estate fund managers are clearly classified in the same way as hedge funds and would therefore be subject to the full force of these regulatory changes from day one. However, the definition of a financial counterparty is not specific and may well go further to encompass listed property companies and joint ventures. The use of derivatives is widespread within the property sector. Indeed, it is usually a requirement of any bank facility that a certain proportion of the debt, often 100 per cent, be hedged. This hedging serves to protect the company from rising rates and ensures that the rent, or income, will always be sufficient to pay the interest on the bank loan. By far the most common derivative used for hedging is the interest rate swap. With prevailing market rates very low, the cumulative mark to market value of interest rate swaps would be awe-inspiring. In June Savills estimated that, in the UK alone, the mark to market value of swaps linked to property loans expiring in the next three years was about £10bn ($15bn). This is probably a fairly conservative estimate. With no current provision for “grandfathering” of existing trades, to avoid default, this additional equity would need to be raised in a very short period of time. It goes without saying that a number of property companies will be unable, or unwilling, to put forward large amounts of cash as margin when the swap is already secured against the property itself. These companies will then have two options: either they restructure the hedging (by converting to fixed-rate loans) or they liquidate. The banks, of course, should be delighted with these alternatives as about the one thing they will value more than being able to impose higher margins in a restructuring is actually getting their money back. This would fundamentally change the way in which property companies manage their risk. Companies will have to choose between funding themselves on a more expensive and less flexible basis, probably ill-suited to their business plans, or not hedging at all.
Radio Free Asia:
  • North Korea is cracking down on DVD, MP3 and radio use to stem the spread of information from outside, citing a personal in the country. Authorities are modifying media players in the nation so they can't play foreign or pirated CDs or DVDs, as well as removing radio-play functions from MP3 players and voice recorders. The government has also barred individuals from bringing in such items from abroad.
Munhwa Ilbo:
  • U.S. and South Korean defense and foreign ministers plan to warn North Korea against further military provocation in a joint statement to be announced later today.
asahi.com:
  • China to Let Renminbi Fall if Exports Drop. If China's export juggernaut falters, the country's central bank will allow its renminbi currency to fall against the U.S. dollar, thereby making Chinese goods cheaper overseas, a key monetary adviser here said. Zhou Qiren, a member of the Monetary Policy Committee, an advisory body to the People's Bank of China, also told The Asahi Shimbun in an interview that Beijing's announcement June 19 that it would allow the renminbi to fluctuate more flexibly against the greenback starting June 21 should have been made much earlier. Zhou said having a fixed exchange rate with the dollar over the past two years had been a burden for China. The best way for China to reverse a sharp fall in exports would be to allow its currency to fall in value, too, he added. Chinese exports to both the United States and Europe had been surging until June. But there is now concern that exports will start falling. Following are excerpts of the interview with Zhou:
Shanghai Securities News:
  • Shanghai's average new luxury home prices dropped 13% in July from April following expanded government restrictions on the property market, citing China Real Estate Information Corp. In Shenzhen, average luxury home prices declined 6.3% in June from April.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (ALTR), boosted estimates, raised target to $34.
  • Reiterated Buy on (GS), target $200.
Night Trading
  • Asian equity indices are unch. to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 127.0 -5.0 basis points.
  • Asia Pacific Sovereign CDS Index 124.50 -2.25 basis points.
  • S&P 500 futures -.22%.
  • NASDAQ 100 futures +.31%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (UTX)/1.17
  • (APH)/.61
  • (MTB)/1.26
  • (DGX)/1.06
  • (LCC)/1.18
  • (SWK)/.77
  • (EMC)/.27
  • (MAN)/.22
  • (ABT)/1.00
  • (GENZ)/.49
  • (BLK)/2.30
  • (CMA)/.23
  • (AMR)/.00
  • (ETN)/1.17
  • (KO)/1.03
  • (FCX)/1.27
  • (NTRS)/.74
  • (USB)/.38
  • (MO)/.50
  • (WFC)/.49
  • (MS)/.47
  • (QCOM)/.54
  • (RHI)/.07
  • (NFLX)/.70
  • (CA)/.42
  • (EBAY)/.38
  • (XLNX)/.53
  • (SBUX)/.29
  • (FFIV)/.59
  • (ISRG)/2.06
  • (WDC)/1.35
  • (ADS)/1.31
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,200,000 barrels versus a -5,058,000 barrel decline the prior week. Gasoline supplies are expected to rise by +650,000 barrels versus a +1,601,000 barrel gain the prior week. Distillate inventories are estimated to rise by +1,500,000 barrels versus a +2,943,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to fall by -.43% versus a +.7% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking before Senate and the weekly MBA mortgage applications report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

No comments: