Tuesday, December 21, 2010

Tuesday Watch


Evening Headlines

Bloomberg:

  • China Needs to Prepare for Long-Term Inflation Fight, CCTV Says. China needs to prepare for a long- term fight against inflation, state broadcaster China Central Television reported today, citing Peng Sen, vice chairman of the National Development and Reform Commission, as saying today at a meeting on prices. The effect of government policies on prices is just beginning to take hold and won’t be long lasting, CCTV cited Peng as saying. Consumer price gains have been caused by factors including the supply of goods, global commodity prices and excessive liquidity, CCTV cited Peng as saying. The root causes of price gains has not yet been resolved, Peng was cited as saying.
  • Oil Imports to China Set to Slow in 2011 as Economy Cools: Energy Markets. China’s appetite for oil, which helped drive crude to the highest level since October 2008, may ease next year as the government takes steps to tackle inflation and work on expanding refineries slows. China’s inflation accelerated to the fastest pace in 28 months in November, fueling speculation the government will raise interest rates next year. Higher borrowing costs may reduce the country’s sway over global commodity markets, according to Goldman Sachs Group Inc.
  • Scottish Investors Say No to Spanish Bonds Even at 5.5%: Euro Credit. Spanish bond yields, approaching their highest level in eight years, still don’t offer enough reward to tempt fund managers 1,000 miles north in Scotland. The yield on 10-year Spanish debt rose 1.52 percentage points to 5.52 percent in the past two months as investors speculated Spain might follow Greece and Ireland in needing a rescue package to avoid default. “You should ask if any of us would buy Spanish government bonds yielding five-and-a-half percent,” Bill Dinning, head of strategy at Aegon Asset Management, said during a discussion among three investors overseeing 360 billion pounds ($557 billion) at Bloomberg’s Edinburgh office. “Probably not.” “It’s too risky,” said Andrew Milligan, who holds the same post at Standard Life Investments. Spanish debt prices slumped last week after borrowing costs rose at the government’s final bond sale of the year. The 10- year yield climbed more in November than in any month since at least 1993, according to data compiled by Bloomberg. Moody’s said on Dec. 15 it might cut the nation’s Aa1 credit rating, citing “substantial funding requirements, not only for the sovereign but also for the regional governments and the banks.” The cost of insuring Spanish government debt climbed to a three-week high yesterday, with five-year contracts protecting $10 million of debt up $12,000 to $344,000 a year. “Spreads remain high by historical standards, emphasizing the need for Spain to strengthen financial-market confidence in the sustainability of government finances,” the Organization for Economic Cooperation and Development said yesterday. “If the high sovereign spreads persist, funding conditions in the private sector could be affected.”
  • CFTC Swap Plan May Save Billions in Bank Revenue. A revised proposal by the Commodity Futures Trading Commission for how private swaps can be traded will prevent dealers from losing billions of dollars in revenue, according to Moody’s Investors Service analyst Alexander Yavorsky. The commission rewrote a prior attempt at the rule last week after Chairman Gary Gensler pulled the proposal from consideration at a Dec. 9 meeting. The original rule would have required dealers to provide executable prices to all market users of credit-default, interest-rate and other swaps prior to any trade being done on an electronic system that mimics how futures exchanges operate. The revised rule proposal, passed by the CFTC in a 4-to-1 vote on Dec. 16, allows banks to show negotiable prices on a request-for-quote, or RFQ, system that can be limited to a select number of trading partners. This more flexible model will limit competition among swap-execution facilities and allow volumes to grow, New York-based Yavorsky said in a report today. “The RFQ model will reduce pressure on market-making revenues - billions of dollars per dealer,” Yavorsky said. A key question is how much the per-trade profit reduction is offset by an increase in the number of trades, he said.
  • BofA(BAC), Lenders Face Possible N.J. Foreclosure Freeze. Bank of America Corp., JPMorgan Chase & Co.(JPM) and four other mortgage lenders and service providers face a possible suspension of foreclosures in New Jersey by Jan. 19, under a judge’s order. The action, announced today by New Jersey Supreme Court Chief Justice Stuart Rabner, also covers Citigroup Inc.’s mortgage unit, Ally Financial Inc.’s GMAC mortgage unit, OneWest Bank and Wells Fargo & Co. The lenders were implicated in “robo-signing,” the submission of hundreds or thousands of foreclosure claims without personal knowledge of their contents, Rabner said.
  • Sugar Rises to 29-Year High on Shortfall; Cocoa Gains on Ivorian Dispute. Raw sugar rose to a 29-year high in New York on speculation that supplies from India and Brazil, the world’s largest growers, won’t be enough to meet demand for a third straight year.
  • Cotton Jumps Daily Limit to Record as Demand Outlook Improves. Cotton prices jumped the most allowed by ICE Futures U.S., rising to a record on speculation that demand will rise as the U.S. economy strengthens. “It appears everybody wants to own commodities, and cotton is involved in that,” said Sid Love, the president of Joe Kropf & Sid Love Consulting Services LLC in Overland Park, Kansas. Prices are up “on a combination of people trying to do business and speculative buying,” he said.
  • Warner, Chambliss to Push Debate on Debt in Next Congress. Senators Mark Warner and Saxby Chambliss will seek to put the U.S. debt atop the agenda in next year’s Congress by offering measures to cut government spending, reduce popular tax breaks and trim entitlement programs. Warner, a Virginia Democrat, and Chambliss, a Georgia Republican, have been working over the past six months to court a group of 25 senators from both sides of the political aisle in a bid to gather support for their bill, Warner said today in an interview.
  • FCC's Copps Says He Won't Block Net-Neutrality Rules. Michael Copps, a member of the Federal Communications Commission, said he won’t vote against rules for Internet-service providers to be considered by the agency tomorrow. “While I cannot vote wholeheartedly to approve the item, I will not block it by voting against it,” Copps, a Democrat, said in an e-mailed statement today. Copps, who had argued for more stringent rules, said he would vote to “concur so that we may move forward.” Copps, 70, is part of the three-Democrat majority at the FCC, and has been considered a swing vote since the agency’s two Republicans have said they oppose the rules.
  • Gold Climbs as European Sovereign-Debt Concerns Drive Record Fund Holdings. Gold advanced for a third day as European sovereign-debt concerns increased demand for the precious metal as an investment haven, with holdings in exchange-traded products climbing to an all-time high. Immediate-delivery bullion rose 0.2 percent to $1,387.28 an ounce at 1:12 p.m. in Melbourne. The price gained as much as 0.9 percent yesterday after dropping 0.8 percent last week. Gold assets in exchange-traded products, or ETPs, reached a record 2,114.6 metric tons as of yesterday, according to data collected by Bloomberg from 10 providers. Holdings have gained 18 percent this year.
  • China Money Rate Jumps to 2-Year High After Banks' Reserve Ratios Raised. China’s money-market rate rose to the highest level in over two years, reflecting reduced availability of cash after lenders were ordered to set aside more capital as reserves. The amount of cash major banks must set aside as reserves rose by half a percentage point to 18.5 percent from yesterday, the sixth increase this year. The central bank will inject up to 27 billion yuan ($4 billion) of funds through open-market operations this week, about half of the average 56 billion yuan pumped in during each of the last five weeks, said Frances Cheung, a senior strategist at Credit Agricole CIB. “Market liquidity is tightening after the reserve hike,” said Hong Kong-based Cheung. “The cash injection for this week won’t be a lot. Some banks are also more reluctant to lend cash as we approach year-end; come early next year there may be some loosening.” The seven-day repurchase rate, which measures lending costs between banks, jumped 54 basis points to 4.075 percent, according to a daily fixing published at 11 a.m. by the National Interbank Funding Center in Shanghai. That’s the highest level since June 2008.

Wall Street Journal:
  • SEC Probes Hurd Exit From H-P(HPQ). Federal regulators are investigating Mark Hurd's departure from Hewlett-Packard Co., in a broad inquiry that includes claims the former chief executive shared inside information, people familiar with the matter said.
  • Odds Skew Against Investors in Bets on Strangers' Lives. In the summer of 2005, a firm called Life Partners Holdings Inc. said Marvin Aslett, an Idaho rancher 79 years old, had two to four years to live. It didn't make this estimate on his behalf but for its customers. The company arranges to buy life-insurance policies from people like Mr. Aslett and sells fractional interests to investors, who collect the death benefits when the insured people die. The investors in a $2 million policy on Mr. Aslett's life would have made a tidy return had he died as projected. But more than five years later, the rancher, now 84, says he runs on a treadmill, lifts weights and chops wood, adding that all of his grandparents lived well into their 90s. "I'm healthy as a horse," he says. "There's going to be a lot of disappointed investors."
  • U.S. Mulls New Push to Shape Bank Pay. U.S. regulators are considering whether to require large financial firms to hold onto a chunk of executive pay to discourage the excessive risk-taking that contributed to the financial crisis, according to people familiar with the situation. Giant companies such as Bank of America Corp., J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that are considered critical to the U.S. economy, could be forced to award half or more of their executives' pay in the form stock or other deferred compensation, instead of up-front cash. The discussions by the Federal Reserve, Securities and Exchange Commission and other federal banking agencies are the result of a provision in the Dodd-Frank financial-overhaul law that instructs regulators to prohibit any bonus plan that "encourages inappropriate risks" at financial firms with more than $1 billion in assets.
  • Funding Deal Snags Health Law. A Senate deal to fund the federal government until early March doesn't include money to enact the health-care overhaul or stepped up regulation of Wall Street, boosting Republican efforts to curb key elements of President Barack Obama's domestic agenda.
  • Blacksonte(BX) Raises Fund of $15 Billion for Buyouts. Blackstone Group is finalizing a new $15 billion fund, the largest fund for buyout deals since the financial crisis erupted and one of the largest on record. The big sum is the latest sign of improving interest in private equity and of the power of some well-known firms to attract investors, despite some high-profile losses in the industry over the last few years. The fund will be the sixth largest on record, based on information from data tracker Preqin.
  • H-P(HPQ) Amps Up Cisco(CSCO) Sales Rivalry, Offering Big Discounts on Switches. Hewlett-Packard Co. and Cisco Systems Inc. were once close-knit partners, filling complementary niches in the hardware companies use to run their businesses. Just how much that situation has changed became clearer Monday. H-P, a computing giant that has branched into networking, disclosed a sales promotion giving customers 20% off the list price of certain switching systems if they shift away from comparable gear sold by networking rival Cisco, which has branched into server computers. "Cisco has never seen this level of competition before," boasted Marius Haas, H-P's senior vice president and general manager for networking.
CNBC:
MarketWatch:
Business Insider:
Zero Hedge:
IBD:
Politico:
  • Boehner Referees GOP Spending Fight. Republican leaders are already refereeing a fight between tight-fisted budget hawks and business-as-usual spenders at the Appropriations Committee.
Reuters:
  • Hedge Funds May Skirt Direct Fed Scrutiny: Source. The Federal Reserve does not believe any one hedge fund can topple the financial system and therefore the private pools of capital may escape direct supervision by the central bank, an industry source familiar with the Fed's position said. The newly created Financial Stability Oversight Council, which includes the Treasury secretary and 14 U.S. supervisors, including the Fed, are in the early stages of determining which non-bank firms pose a threat to the financial system. Firms labeled as "systemically important" will be subject to rigorous oversight by the Fed but will also have access to the central bank's emergency lending facilities. The indication that hedge funds might escape this designation is sure to send a huge sigh of relief through the $1.7 trillion industry, which has long avoided the tighter controls imposed on mutual funds, for example.
  • Darden(DRI) Shares Down on Red Lobster Results. Darden Restaurants Inc's shares fell 3 percent after a promotional slip-up led to disappointing sales at its Red Lobster chain. The company, which also owns Olive Garden and LongHorn Steakhouse, narrowed its full-year target for same-restaurant sales growth at its "Big Three" brands to 2 percent, versus a prior target of growth between 2 percent and 3 percent.
  • North Korea Backs Down Over South Korean Drill. North Korea stepped back from confrontation over "reckless" military drills by the South on Monday and reportedly issued a new offer on nuclear inspections, drawing a cautious response from Seoul and Washington.
  • Michael Dell Snaps Up $100 Million of Company's Stock. Dell Inc founder and chief executive Michael Dell is spending $100 million to snap up more of his company's stock. Dell acquired 7.37 million of the company's shares for $13.57 each on Friday, according to filing with the U.S. Securities and Exchange Commission on Monday.
  • U.S. Expects Foreclosure Probe Results Next Month. An Obama administration task force examining allegations of fraud in the mortgage foreclosure process will deliver its findings next month, two top officials said on Monday.
Telegraph:
  • Pimco Says 'Untenable' Policies Will Lead to Eurozone Break-Up. Pimco, the world's largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course. Andrew Bosomworth, head of Pimco's portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro. "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt. Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013. "The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said. The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable. The austerity policies are stifling the growth needed to stabilise debt levels. Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle. The withering comments from the world's top investor in EMU sovereign debt is a blow for Portugal and Spain. Both nations are hoping bond spreads will start to narrow before they face a funding crunch in the first quarter of next year.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (STZ), target $25.
RBC Capital:
  • Rated (STI) Outperform, target $31.
Night Trading
  • Asian equity indices are +.50% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 106.0 unch.
  • Asia Pacific Sovereign CDS Index 106.75 +1.75 basis points.
  • S&P 500 futures +.31%
  • NASDAQ 100 futures +.28%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (KMX)/.34
  • (CCL)/.32
  • (CMC)/.01
  • (CAG)/.45
  • (CTAS)/.38
  • (FINL)/.05
  • (HOV)/-.66
  • (NAV)/.60
  • (NKE)/.88
  • (RHT)/.20
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The weekly retail sales reports and the weekly ABC consumer confidence reading could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by real estate and technology shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

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