Wednesday, October 13, 2010

Wednesday Watch


Evening Headlines

Bloomberg:

  • Japan's Machinery Orders Unexpectedly Gained in August. Japanese machinery orders unexpectedly advanced in August, a sign that a recovery in earnings may encourage companies to spend on plant and equipment even as the yen surges. Factory orders rose 10.1 percent from July, when they increased 8.8 percent, the Cabinet Office said today in Tokyo. The median forecast of 28 economists surveyed by Bloomberg News was for a 3.9 percent decline.
  • Stimulus of $1 Trillion Adds Nothing to Deficit: Frank Aquila. Imagine if American companies could add more than $1 trillion to their domestic coffers in an instant without selling a subsidiary, issuing a single share or incurring a penny of debt. While every company would no doubt use this cash differently, the windfall could fund a return of capital to shareholders through increased dividends and share buybacks. Or it could be used to repay debt, fund capital expenditures or make strategic acquisitions. How the companies would deploy the money doesn’t matter. The important thing is that the cash would be put to work. So why hasn’t this already happened? The answer is clear: U.S. tax policies penalize the repatriation of so-called foreign-source income, essentially the profits earned by foreign subsidiaries of American corporations. This cash pile isn’t being hoarded or held on the sidelines, as many pundits have suggested; rather, it is being kept offshore by our own tax structure.
  • CFTC to Scrutinize Algorithmic Trading After May Market Plunge. The top U.S. commodity regulator will review algorithmic trading and other practices such as “spoofing” and “quote stuffing” as part of the largest rewrite of Wall Street rules since the 1930s. “Weekly we hear concerns about high frequency traders and how they are affecting the markets, positively and negatively,” Commissioner Michael Dunn said at a meeting in Washington today. “Phrases like ‘quote stuffing’ and ‘spoofing’ are bantered about as ways that algorithmic traders are gaming the marketplace.”
  • Nobel Winner Liu, Quiet Literary Critic, Terrifies Beijing: George Walden. Two steps forward, one back. That’s the pattern with modern China, and today looks like a “one back” moment. First Chinese leaders pursue a beggar-my-neighbor currency policy. Next they denounce as “obscene” the Norwegian Nobel Committee’s award of the Peace Prize to Liu Xiaobo, a literary critic and former professor locked up for 11 years for saying what he thinks. When the world objects, they put his wife under house arrest. For good measure, this nation of 1.3 billion souls threatens to retaliate against the 5 million good folk of Norway. And who provoked this loathing? An author whose books include “The Fog of Metaphysics,” a review of Western philosophies. Whatever the qualities of the Chinese leadership, oversensitivity to world opinion isn’t among them. The coincidence of the Nobel controversy with the currency war will make many people stop to ask where the new China is going. The answer: in two directions at once.

Wall Street Journal:
  • Fed Chief Gets Set to Apply Lessons of Japan's History. Mr. Bernanke is preparing for a potentially important policy speech Friday, when he could detail his thinking on the Fed's next steps at a conference sponsored by the Federal Reserve Bank of Boston on monetary policy in a low-inflation environment. The conference is a reprise of a 1999 conference at which Mr. Bernanke and other academics took Japanese officials to task for failing to get their economy moving. Buried in Mr. Bernanke's earlier writings on Japan are hints of how he is shaping the Fed's responses to today's slow recovery.
  • First Miner is Rescued in Chile. Florencio Avalos, the first of 33 miners to be rescued, surfaces after 69 days underground. A rescue worker rode a specially designed capsule into a mine where 33 men have been trapped half a mile underground for 69 days, reaching them about 15 minutes later in the first phase of a complex operation to bring the miners to the surface. Cheers and clapping broke out at San Jose mine as rescuer Manuel Gonzalez entered the capsule.
  • Iraq Oil is 'Game Changer'. Production Revival Will Challenge Big Suppliers Like Saudis, IEA Chief Says. The revival in Iraqi oil production will be a "game-changer" for global oil supplies and a challenge for other big oil producers like Saudi Arabia, the International Energy Agency said Tuesday. Fatih Birol, the IEA's chief economist, said in an interview that 20 years from now, Iraq could be pumping two to three times more than the 2.5 million barrels a day it currently produces—"comforting" oil markets worried about shrinking supplies, and possibly buffering against price spikes.
  • NFL Braces for a Costly Labor Fight. As Sponsors Get Jittery, League Says it May Lose $1 Billion Even If Next Season Is Saved. Even as the NFL romps through a season of record television ratings, the owners, and some of the league's key sponsors and corporate partners, are bracing for what could be an expensive and debilitating player lockout next spring.
  • Using the iPad to Connect. Parents, Therapists Use Apple Tablet to Communicate With Special Needs Kids.
  • J.P. Morgan(JPM), BofA(BAC), Wells Fargo(WFC) Tops in Foreclosed Home Loans. The banks with the largest dollar amounts of foreclosed home loans on their books are J.P. Morgan Chase & Co., Corp. and Bank of AmericaWells Fargo & Co., according to analyst firm SNL Financial. Several large banks, including J.P. Morgan and Bank of America, have instituted widespread foreclosure halts because of worries about documentation problems. The halts come at a time when many of the biggest lenders are struggling to work through the nonperforming assets still weighing on their books. J.P. Morgan has $19.5 billion, or 7.5% of its 1- to 4-family mortgage loans, in foreclosure, according to data from SNL. Bank of America has $18.7 billion, or 4.39%, and Wells Fargo has $17.5 billion, or 4.74%. The three big mortgage lenders have billions of dollars more in servicing rights on loans in foreclosure. Bank of America has $88 billion of loans it services for other lenders where the properties are in foreclosure; J.P. Morgan has $54.5 billion and Wells Fargo has $36.4 billion. The data are as of June 30.
  • CDS Aren't Always Sound Indicators of Credit Risk - Fitch. Credit default swaps, derivatives that compensate investors when a company defaults on its debt, are commonly used to assess the relative riskiness of senior corporate bonds, but are not always an accurate predictor of future defaults, according to a new report from Fitch Ratings. That's because the behavior of CDS market participants can distort the perception of a company's risks, the ratings agency said. "It is important to realize there are other factors that can move CDS pricing that are separate from the reference entity's creditworthiness," Robert Grossman, group managing director at Fitch Ratings, said.
  • More Ethanol to Be Allowed in Cars. The Obama administration plans to allow higher levels of ethanol for gasoline used by newer cars, a step that would benefit corn growers but which has been strongly opposed by auto makers, livestock ranchers, oil refiners and some public-health advocates. As early as Wednesday, the Environmental Protection Agency plans to announce it will allow ethanol levels in gasoline blends to be as high as 15% for vehicles made since 2007, up from 10% currently, according to two people familiar with the matter. For cars made between 2001 and 2006, the agency will say it is awaiting the outcome of additional research and not ready to announce a decision. The agency's move is likely to be strongly challenged by livestock ranchers, auto makers and oil refiners.
CNBC:
  • US 30-Year Mortgage Rates Fall Again: Zillow. Interest rates on 30-year fixed-rate mortgages fell for a fourth straight week, real estate website Zillow.com said on Tuesday. Mortgage rates on 30-year fixed mortgages, the most widely used loan, were 4.13 percent Tuesday afternoon, down from 4.16 percent at the same time last week, according to Zillow Mortgage Marketplace.
Business Insider:
Zero Hedge:
New York Post:
  • Broken Promises. ObamaCare's First Victims. This month, McDonald's warned that the health-care reform law passed in March could force it to drop health coverage for some 30,000 workers. A few days later, 3M announced that starting in 2013 it will no longer provide health-insurance coverage to its retirees. That came on the heels of a decision by Harvard Pilgrim, Massachusetts' second-largest insurer, to drop its Medicare Advantage health-insurance program at year's end, forcing 22,000 senior citizens in Massachusetts, New Hampshire and Maine back into traditional Medicare. Then there's the Principal Financial Group, which recently decided it was getting out of the health-insurance business. Roughly 840,000 people will likely lose their insurance as a result. This is just the tip of the iceberg.
IBD:
CNNMoney.com:
  • Mexican Investigator in Falcon Lake Case is Beheaded, Officials Say. The lead Mexican investigator in the Falcon Lake case, Rolando Armando Flores Villegas, has been killed, his severed head delivered Tuesday in a suitcase to the Mexican military, officials told CNN. "His head was delivered to the army garrison this morning in a suitcase after he failed to report back home last night," Zapata County, Texas, Sheriff Sigifredo Gonzalez Jr. said.
Forbes:
  • Deepwater Drilling Ban Lifted, Malaise Remains Intact. So the Obama administration has lifted the deepwater drilling moratorium. Unfortunately for the President, it’s going to be too late to regenerate many offshore jobs before election day, but we’ll take it. Before the Deepwater Horizon disaster there were 33 floating drilling rigs at work in the gulf. Today that’s down to just 6, with half of those doing plugging and abandonment work. Many of the rigs have been sent on long-term contracts (at rates ranging from $225,000 to $400,000 per day) to Brazil and west Africa. It’ll take years for them to come back.
Politico:
  • Mixed White House Signals on Stimulus. President Barack Obama appears to be backing away from an election-season push for a second stimulus of $50 billion in transportation projects, according to transportation industry officials and congressional leaders who say the signs are unmistakable. One clear signal: The president never mentioned his stimulus plan at a White House event Monday with governors, mayors and transportation leaders that was supposed to be dedicated to the $50 billion proposal. Instead, the president emphasized a longer-term effort to pass a $450 billion, six-year infrastructure plan.
  • Global Ban Ordered on 'Don't Ask'. A federal judge has ordered a worldwide halt to enforcement of the Defense Department’s "don't ask, don't tell" policy regarding gays in the military. U.S. District Court Judge Virginia Phillips issued the injunction Tuesday after finding last month that the policy – made law by Congress in 1993 – violates the Constitutional rights of service members. She acted on a lawsuit brought by the Log Cabin Republicans, a political organization of gay conservatives.
Reuters:
  • Intel's(INTC) Q4 Outlook Sets Upbeat Tone for Tech Earnings. Intel Corp forecast upbeat fourth-quarter sales and margins as resilient demand from emerging markets and corporations offset weak consumer spending, raising hopes that the technology sector could end 2010 on a strong note. Shares of Intel and rival Advanced Micro Devices Inc (AMD), which have warned about weak consumer demand for computers, climbed 1 percent in after-hours trade.
  • US Mortgage Bonds Steady Despite Foreclosure Flap.
  • US Corporate Credit Improvement May Be Nearing End - Moody's. Improvement in U.S. corporate credit quality may be nearing an end as companies use debt to boost share valuations and large impending debt maturities risk sparking a resurgence of defaults by risky borrowers, Moody's Investors Service said on Tuesday.
  • Investors Earmark $281 Billion for Global Property in 2011 - Report. An estimated $280.6 billion of capital will be available to invest in global commercial real estate in 2011, with the U.S. market drawing the most buyer interest as it bottoms out, a report said on Wednesday.
  • CSX(CSX) Profit Tops Street View; Shares Rise. CSX Corp reported a stronger-than-expected quarterly profit on Tuesday, citing rising freight volumes in nearly all its markets. Shares in CSX, which operates a 21,000-mile network across 23 U.S. states and two Canadian provinces, rose 1.7 percent in post-market electronic trading.
Financial Times:
  • Fears of Global Currency War Rise. Thailand is introducing a tax on foreign holdings of bonds, the latest in a string of attempts by emerging economies to curb destabilising capital inflows amid fears of a global currency war.
The Guardian:
  • Brussels Plans Stirct New Controls for Offshore Oil Drilling. The European commission is to reveal plans for tougher controls on offshore oil and gas drilling tomorrow. It would force national governments to abide by rules set in Brussels and extend liability for oil companies in the event of a disaster, The Guardian has learned. The commission will also call for a moratorium on "complex" drilling projects in Europe until the lessons of the Deepwater Horizon disaster in the Gulf of Mexico have been digested – a move that has been rejected by Britain. If the commission proposals became European law they would have far-reaching effects on the UK oil industry. More than half the offshore rigs in the EU are in British waters.
The Standard:
  • Bank Regulator Hits Out at Speculators. China Banking Regulatory Commission chief Liu Mingkang said intervention is necessary to curb speculation in the mainland property market. And instituting financial policies and imposing property taxes to curb speculation does not amount to suppressing the property industry in the mainland, the regulator told CCTV. The mainland property market heated up once again in August and September, after cooling somewhat in May to July, according to the CBRC's observation. That signaled the resurfacing of property speculation in the secondary market during the period, with the majority of transactions focused on mid- and high- end houses. "Such big transactions prove that buyers are only purchasing flats to sell and they are not end-users," Liu said. "It is wrong to use property as an investment tool to make a profit as it does not comply with the government's policy." During the first week of October, house transactions in Shanghai jumped 41.9 percent from a month earlier to 425,700 square meters, according to Caing.com. Meanwhile, average selling prices in Beijing, Shanghai, Guangzhou and Shenzhen in August rose 10.6 percent, 9.54 percent, 7 percent and 6.9 percent, respectively, from a month ago, data from property agencies showed.
South China Morning Post:
  • A group of former Chinese officials has called on the government to end media censorship in an open letter published online. The letter said the lack of free speech in Ch9ina is a "scandal." Signatories of the letter include Li Rui, former deputy head of the Chinese Communist Party's organization department and an ex-secretary for Mao Zedong; and Hu Jiwei, former editor-in-chief of the People's Daily.
China Securities Journal:
  • China will become "extremely cautious" in raising interest rates in order to prevent hot money inflows and to control the pace of yuan appreciation, Zhang Monan, a researcher with the State Information Center, wrote in a commentary published today. China may be forced to abandon its independent interest rate policy stance as it faces a slew of challenges such as inflation, rapidly rising asset prices and capital inflows, Zhang wrote. Excess liquidity resulting from quantitative monetary easing in major economies is set to pose an increasingly grimmer challenge to China's economy in the next few years, Zhang wrote.
Shanghai Securities News:
  • China aims to cut energy use per unit of gross domestic product by 17% from this year over the next five years, citing a person involved in the drafting of a government plan.
Evening Recommendations
Morgan Stanley:
  • Reiterated Overweight on (VMW), target $90.
Keybanc:
  • Rated (ATK) Buy, target $93.
  • Rated (FLIR) Buy, target $35.
  • Rated (ORB) Buy, target $20.
  • Rated (AVAV) Buy, target $31.
Wells Fargo:
  • Rated (CA) and (CHKP) Outperform.
RBC Capital:
  • Rated (ALL) Outperform, target $38.
  • Rated (PGR) Outperform, target $24.
Night Trading
  • Asian equity indices are -.25% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 102.0 +2.0 basis points.
  • Asia Pacific Sovereign CDS Index 97.0 +2.75 basis points.
  • S&P 500 futures +.13%.
  • NASDAQ 100 futures +.09%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (HST)/.11
  • (ADTN)/.43
  • (JPM)/.88
  • (APOL)/1.29
  • (IGTE)/.21
Economic Releases
8:30 am EST
  • The Import Price Index for September is estimated to fall -.2% versus a +.6% gain in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Lacker speaking, $21 Billion 10-Year Treasury Notes Auction, (CHK) analyst meeting, (WMT) annual meeting and the weekly MBA Mortgage Applications report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and technology 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.

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