Monday, February 07, 2011

Monday Watch

Posted by Gary .....at 12:57 AM

Weekend Headlines
Bloomberg:
  • Egypt Constitutional Talks Planned as Violence Recedes. Egyptian Vice President Omar Suleiman and some members of the opposition agreed on limited steps to resolve the crisis, even as the government stood firm against the demand from protesters that President Hosni Mubarak resign. Suleiman met yesterday with the Wafd and Tagammu parties, the Muslim Brotherhood, which is banned from politics, and billionaire Naguib Sawiris. The negotiators agreed to set up a committee that will recommend by the first week of March constitutional changes needed for free and fair elections, Suleiman said in a statement. The talks, along with diminished violence in Cairo’s Tahrir Square, a reopening of the nation’s banking system and resumption of work at the country’s courts, indicated a shift in the crisis that erupted last month. Egyptian credit-default swaps dropped Feb. 4 as the U.S.-backed discussions began. “This is the beginning and early stages of a very protracted negotiation about power and how to share it,” said Brian Katulis, a senior fellow at the Center for American Progress in Washington and one of several outside analysts who have consulted with the White House’s National Security Council in the last week.
  • Hedge Fund Oil Bets Surge on Middle East Unrest: Energy Markets. Hedge funds raised bullish bets on oil by the most in eight weeks on concern that political unrest in Egypt will spread and disrupt supplies from oil-producing countries in the Middle East. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 17 percent in the seven days ended Feb. 1, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the largest gain since the week ended Dec. 7. Net-long positions in oil held by managed money, including hedge funds, commodity pools and commodity-trading advisers, increased 29,928 futures and options combined to 201,941, according to the CFTC report.
  • ECB May Raise Rates If Inflation Not Declining by Year End, Gonzalez Says. Interest rates will have to rise if inflation doesn’t start to decline by the end of this year, Jose Manuel Gonzalez-Paramo, a European Central Bank executive board member, said, according to Spain’s ABC newspaper. “We cannot let it get beyond our control,” Gonzalez- Paramo said, the newspaper reported today, citing an interview. Even so, the ECB thinks the pick-up in inflation is temporary, linked to raw materials prices, and that it will start to fall again at the end of the year, Gonzalez-Paramo said, according to ABC.
  • Gore's Investment Firm Said to Start $500 Million Asian Fund. Al Gore’s Generation Investment Management LLP, which buys shares of companies it deems socially responsible, aims to start a $500 million fund to invest in Asia, said two people briefed on the plan. Generation is looking to invest in countries including China and India as Asia’s growth, and the region’s demands for natural resources, increasingly affect the world economy. The firm, which targets pension funds and wealthy clients, closed its main global equity fund in 2008 to new money after assets rose to about $5 billion. Gore, the former U.S. vice president, founded London-based Generation in 2004 with David Blood, who previously headed asset management at Goldman Sachs Group Inc(GS). Generation’s earnings almost quadrupled in 2009 to 31.5 million pounds ($50.8 million) from 8.3 million pounds in 2008, according to a Sept. 9 filing with the U.K.’s Companies House. Generation was eligible to distribute most of the profits to its 10 partners, including Gore, Blood, 51, and Peter Knight, a campaign manager to former U.S. President Bill Clinton. Five percent of the firm’s earnings go to the Generation Foundation, a U.K.-registered charity that researches sustainable development.
  • Investors' $102 Billion Metals Wager Showing Bull Market Intact. After the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years. “I had to chuckle when I saw reports that it was over for gold,” said Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, and has about 20 percent of his assets in gold. The Standard & Poor’s GSCI Precious Metals Index dropped 6.5 percent in January, the most for the month since 1991. Gold traded in London retreated 6.2 percent and silver 9.3 percent.
  • Egypt Crisis to 'Impact' India Central Bank Actions, Gokarn Says. Egypt’s political crisis poses a risk to oil prices and will “impact” the Indian central bank’s actions, Deputy Governor Subir Gokarn said. “A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something which we didn’t anticipate at the time of making the policy announcement on Jan. 25,” Gokarn said yesterday in Dabolim, in the western Indian state of Goa. “It is going to have an impact on our thinking, on our actions going forward.” India, which meets about three-quarters of its annual energy needs from imports, is bracing for the economic impact of anti-government protests in Egypt.
  • Fed Spends 40% on Benchmark Treasuries as Newest Proves Cheapest. The Federal Reserve’s Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now, policy makers are focusing on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages. More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.
Wall Street Journal:
  • Egyptian Government, Banned Islamists Meet. Surprise Cairo Talks With Muslim Brotherhood Threaten Opposition Unity; Most Demand President Ouster Before a Parlay. Egypt's regime sat down formally for the first time with representatives of the outlawed Muslim Brotherhood, casting aside a longstanding taboo in the government's scramble to placate masses of demonstrators seeking President Hosni Mubarak's ouster—and threatening to divide protest groups who had pledged to reject any talks until Mr. Mubarak is gone. Vice President Omar Suleiman's meeting Sunday with a group that Egypt's rulers have repressed for decades underscored the extent of the change wrought by nearly two weeks of massive protests. Mr. Suleiman also held out the prospect of political liberalization by agreeing to relax media restrictions, ease detentions, set up a committee to redraft election laws and consider lifting a draconian state of emergency. But other than the Muslim Brotherhood, no other opposition groups that have driven the demonstrations were willing to drop their demand that the president step aside before talks begin. The Brotherhood's surprise move to enter talks caught off guard many opposition leaders, who are concerned the regime is trying to divide and isolate the protesters and shrink their crowds to ease the pressure to make substantive reforms. "The big concern now is if pressure doesn't continue, then there is no urgency for moving forward on a transition now," one Western diplomat said. The Obama administration, which sent some mixed signals about the urgency of Mr. Mubarak's ouster over the weekend, praised the government's willingness to sit down with the Muslim Brotherhood and called the group's participation in talks a test of its intentions. U.S. diplomats have had low-level contacts in the past with Egyptian lawmakers linked to the Muslim Brotherhood, over objections from the regime. In an interview with Fox News televised just before Sunday night's Super Bowl, U.S. President Barack Obama sought to play down concerns that the group could take power and install a government hostile to U.S. interests. "I think that the Muslim Brotherhood is one faction in Egypt. They don't have majority support in Egypt but they are well-organized and there are strains of their ideology that are anti-U.S., there is no doubt about it," Mr. Obama said. He declined to call for an immediate Mubarak ouster, but said it's time for the regime to "start making change."
  • Hackers Penetrate Nasdaq Computers. Hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year, and federal investigators are trying to identify the perpetrators and their purpose, according to people familiar with the matter. The exchange's trading platform—the part of the system that executes trades—wasn't compromised, these people said. However, it couldn't be determined which other parts of Nasdaq's computer network were accessed. Investigators are considering a range of possible motives, including unlawful financial gain, theft of trade secrets and a national-security threat designed to damage the exchange. The Nasdaq situation has set off alarms within the government because of the exchange's critical role, which officials put right up with power companies and air-traffic-control operations, all part of the nation's basic infrastructure. Other infrastructure components have been compromised in the past, including a case in which hackers planted potentially disruptive software programs in the U.S. electrical grid, according to current and former national-security officials. "So far, [the perpetrators] appear to have just been looking around," said one person involved in the Nasdaq matter. Another person familiar with the case said the incidents were, for a computer network, the equivalent of someone sneaking into a house and walking around but—apparently, so far—not taking or tampering with anything.
  • Bank of America(BAC) Pays $410 Million to Settle Overdraft Suit. Bank of America Corp. agreed to pay $410 million to settle a Florida lawsuit filed against the bank by checking-account customers who alleged they had been charged excessive overdraft fees.
  • 'Swaps' Add a New Risk. Many mutual funds hold a type of financial instrument that most individuals have never heard of—and that in extreme conditions could saddle them with losses due to a risk they didn't know they were taking. Swaps are the derivative of choice for many inverse and leveraged exchange-traded funds, which use the instruments to deliver two or three times the daily performance of a referenced index (or its inverse), be it the Standard & Poor's 500-stock index, a bond index or a commodity. While these funds have functioned as intended, some investors have been confused by the way the exaggerated daily returns of these leveraged funds compound over longer periods of time. Some funds use swaps for exposure to hard-to-reach foreign markets that limit access to their exchanges or securities.
  • France's Lagarde Says Euro Is Victim. French Finance Minister Christine Lagarde on Sunday said global foreign-exchange imbalances must be tackled, as the euro is the victim of a weak U.S. dollar and Chinese yuan. "We must reform the international monetary system so that the euro is not caught in the middle, hit by the expense of trade-offs between two currencies that are deliberately weak," Ms. Lagarde said in an interview on television channel France 5.
  • Vote: Best and Worst Super Bowl Ads.
  • 'Toxic' Assets Still Lurking at Banks. During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months. But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.
  • Texas to Probe Rolling Blackouts. Texas officials have ordered an investigation into rolling blackouts that struck the state's electric grid last week, including whether market manipulation played a role along with harsh weather in disrupting natural-gas and electricity supplies to millions of people. The Public Utility Commission of Texas asked the state's independent energy-market monitor, Daniel Jones, to conduct a probe to see if power generators, pipeline companies or others broke market rules. Among the questions are whether some firms faked power-plant problems to push prices higher, or were slow to restart plants that were off line.
  • Bond Market Flashes Inflation Warning. Jump in U.S. Treasury yields signals market fear that Fed is behind the curve on prices. The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery.
  • Verizon(VZ) iPhone Sales Are Brisk. Verizon Wireless said the number of iPhones it sold in the first two hours of availability Thursday exceeded the one-day total for any other device's debut in the carrier's history.
  • An ObamaCare Appeal From the States by Mitch Daniels. Twenty-one governors representing more than 115 million Americans have written to Kathleen Sebelius asking for more flexibility on health-care reform. Unless you're in favor of a fully nationalized health-care system, the president's health-care reform law is a massive mistake. It will amplify all the big drivers of overconsumption and excessive pricing: "Why not, it's free?" reimbursement; "The more I do, the more I get" provider payment; and all the defensive medicine the trial bar's ingenuity can generate. All claims made for it were false. It will add trillions to the federal deficit.
Bloomberg Businessweek:
  • S&P 500 Beating Analyst Estimates for Sales by Most Since 2006. More U.S. companies are exceeding sales forecasts than any time in four years, helping extend the biggest stock-market rally since 1936. Caterpillar Inc. and United Parcel Service Inc., barometers for the economy because of their building and delivery businesses, are among the 72 percent of Standard & Poor’s 500 Index companies that reported more revenue last quarter than analysts estimated, the largest proportion since at least 2006, according to data compiled by Bloomberg. Sales beat projections by an average 2.3 percent, the most in two years, the data show. “You really did need top-line growth because the cost- cutting got to where you couldn’t cut any more,” said Eric Green, a money manager at Penn Capital Management in Philadelphia, which oversees $5.6 billion. “But you’re seeing it now. Many companies are having that nice top-line growth, and as that goes up, it should have a magnified affect on earnings. It’s very positive for the equity markets.”
CNBC:
NY Times:
  • Betting on News, AOL(AOL) is Buying The Huffington Post. The two companies completed the sale Sunday evening and were expected to announce the deal Monday morning. AOL will pay $315 million, $300 million of it in cash and the rest in stock. It will be the company’s largest acquisition since it was separated from Time Warner in 2009. The deal will allow AOL to greatly expand its news gathering and original content creation, areas that its chief executive, Tim Armstrong, views as vital to reversing a decade-long decline. Arianna Huffington, the cable talk show pundit, author and doyenne of the political left, will take control of all of AOL’s editorial content as president and editor in chief of a newly created Huffington Post Media Group. The arrangement will give her oversight not only of AOL’s national, local and financial news operations, but also of the company’s other media enterprises like MapQuest and Moviefone.
  • E-Readers Catch Younger Eyes and Go in Backpacks.
  • Stock-Hedging Lets Bankers Skirt Efforts to Overhaul Pay. Intent on fixing a banking system that contributed heavily to the recent financial crisis, lawmakers and regulators pushed Wall Street to overhaul its pay practices. Big banks responded by shifting more compensation into stock, a move intended to align employees’ interests more closely with those of investors and discourage excessive risk-taking. But it turns out that executives have a way to get around those best-laid plans. Using complex investment transactions, they can limit the downside on their holdings, or even profit, as other shareholders are suffering. More than a quarter of Goldman Sachs’s(GS) partners, a highly influential group of around 475 top executives, used these hedging strategies from July 2007 through November 2010, according to a New York Times analysis of regulatory filings. The arrangements were intended to protect their personal portfolios when the firm’s stock was highly volatile, especially at the height of the crisis. In some cases, executives saved millions of dollars by using these tactics. One prominent Goldman investment banker avoided more than $7 million in losses over a four-month period. Such transactions are at the center of a debate over whether Wall Street executives should be allowed to hedge their stock holdings. The concern with hedging is that executives can easily break the ties between compensation and company performance. Employees who hedge their holdings are less concerned about a falling share price. “Many of these hedging activities can create situations when the executives’ interests run counter to the company,” said Patrick McGurn, a governance adviser at RiskMetrics, which advises investors. “I think a lot of people feel this doesn’t have a place in a compensation structure.” More broadly, critics say, the practice of hedging represents another end run around financial reform.
Business Insider:
Zero Hedge:
Forbes:
Daily Finance:
  • Why Global Food Price Inflation Really Matters. So-called core inflation excludes volatile food and energy prices in an attempt to give a more accurate picture of long-term inflation. That's why Bernanke can say inflation remains muted. Take out food and gas prices, and inflation really is pretty low. But even some bullish economists aren't buying it, like Ed Yardeni, president of Yardeni Research. He's starting to fret that Bernanke may have unleashed a global inflation beast with his second round of quantitative easing. "Governments are scrambling to purchase more grains to quell food riots," said Ed Yardeni, president of Yardeni Research, in a Thursday note to clients. "The idea was to avert deflation and to bring back just a tiny bit of inflation. The unintended global consequences seem to be hoarding, hyper-inflating commodity prices, food riots and revolutions."
NJ.com:
  • N.J. Faces Growing Shortage of Doctors Due to Med School Costs, Insurance Concerns. New Jersey faces a widening shortage of physicians within the next nine years without reforms that improve the business environment to practice medicine in the state and funding to help medical school more affordable, health-care industry experts are warning. "New Jersey's business and health-care leaders must partner with our legislators and key policymakers to make our state a friendlier environment for our physicians," said Patricia Costante, CEO of Lawrence-based malpractice insurance provider MDAdvantage. Additionally, New Jersey is a high-tax state, placing yet another financial disincentive for new physicians to open up a practice here, Cinotti said. After all, medicine isn't practiced in an economic vacuum. "Doctors cannot stay in business and be broke," he said. A growing concern among physicians and would-be physicians is the possibility that the way medical care is provided in the United States will shift to give medical professionals who aren't doctors more responsibility and an increased share of the business that traditionally belonged to physicians, Costante said. "Where it gets to be very contentious is that these can be classes of professionals that can actually replace physicians," she said. Additionally, New Jersey's failure to adopt medical malpractice liability reform that would limit how much money juries can award plaintiffs in malpractice cases remains a significant issue for physicians considering setting up their practice here because it drives up the cost of their insurance premiums, Costante said. In the physician and malpractice insurance community, New Jersey has the reputation of being a "judicial hellhole," she said.
Politico:
Intl Business Times:
  • US Says Dependence on China for Rare Earth is Economic, National Security Risk. The report by American Security Project Research Assistant, Emily Coppel, released Tuesday, noted that the United States has the "second-biggest deposit of rare earth minerals in the world. North American mines alone could supply U.S. rare earth needs." "The U.S. will need to develop new technologies and invest in mining operations to solve the long-term supply problem," Coppel suggested.
Reuters:
Financial Times:
  • Highbridge to Launch Standalone Credit Fund. Highbridge Capital, the $27bn hedge fund owned by investment bank JPMorgan(JPM), has hired Serge Adam to head its Principal Strategies unit and is preparing to launch a new standalone credit fund. The move comes barely a week after the New York-based firm dumped its entire event trading team, headed by Jason Esralew, as part of a “streamlining” effort.
  • Wall St Looks to Boost Market in US Muni CDS. Wall Street is seeking to expand the market for derivatives that allow banks and investors to profit from – or hedge against – bond defaults by struggling US states and local governments. Mounting concerns about the health of cash-strapped states such as California and Illinois has already resulted in increased trading of credit default swap (CDS) contracts on US municipal debt – the derivatives that increase in value when the chances of a municipal bond default increases. With hedge funds and other investors wanting to speculate on the health of US state and municipal governments – and banks wanting to hedge their exposures amid concerns over rising risks – efforts are being made to boost the CDS market.
Telegraph:
BBC:
  • Three US 'Hikers' Accused of Iran Spying Go On Trial. As the trial is being held behind closed doors, observers such as Swiss Ambassador Livia Leu Agosti, who represents US interests in Iran, were barred from attending the trial. They are accused of crossing the border illegally, but say that if they did so, it was by accident. The charge of espionage, which can carry a death sentence, was added later. The US has repeatedly said there is no basis for the trial and has called on Iran to release Mr Bauer and Mr Fattal.
AFP:
  • Oil ouput from Iraq's northern Kurdish region is due to double to 200,000 barrels a day by the end of 2011, Prime Minister Nuri al-Maliki said in an interview. The central government will respect profit-sharing contracts signed by semi-autonomous Kurdistan and foreign oil companies, Maliki confirmed.
Frankfurter Allgemeine Sonntagszeitung:
  • 40% of Germans said the country would be better off without the euro, according to a survey by the Allensbach Institute for Public Opinion Research. Only 15% said Germany would be "worse off" and 29% answered that the country would be "just as good" without the common currency, citing the survey of about 1,000 people.
Yonhap News:
  • China and North Korea will sign an agreement this month to jointly develop resources including gold, smokeless coal and rare-earth elements, citing sources familiar with North Korean issues.
Sabah:
  • Iranian companies made up one in five of all the foreign -owned businesses set up last year in Istanbul, citing figures from the city's chamber of commerce. The increased Iranian presence in the Turkish commercial hub reflects the impact of U.S.-led trade restrictions that have limited Iranian access to the global economy.
Weekend Recommendations
Barron's:
  • Made positive comments on (SBUX), (DD) and (IDCC).
  • Made negative comments on (QCOR).
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 107.50 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 120.0 unch.
  • S&P 500 futures +.02%.
  • NASDAQ 100 futures -.03%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (CTSH)/.69
  • (HUM)/.78
  • (L)/.87
  • (HAS)/.92
  • (ADVS)/.12
  • (BDX)/1.28
  • (LNCR)/.48
  • (VECO)/1.60
  • (FMC)/1.04
  • (SYY)/.46
  • (CNA)/.66
Economic Releases
3:00 pm EST
  • Consumer Credit for December is estimated to rise to $2.5B versus $1.346B in November.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The UBS Healthcare Conference, (RTEC) analyst meeting and the (SYA) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

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