Tuesday, April 26, 2011

Tuesday Watch

Evening Headlines

  • China Said to Raise Capital Adequacy Ratios for 5 Biggest Banks. China’s banking regulator set capital targets for the nation’s five biggest lenders above the minimum 11.5 percent ratio amid concern that credit risks may rise, three people with knowledge of the matter said. Industrial & Commercial Bank of China (1398) Ltd., the world’s largest lender, and three rivals were told last month to maintain capital adequacy ratios of at least 11.8 percent in 2011, one of the people said, declining to be identified as the plan isn’t public. Agricultural Bank of China Ltd. (1288), the nation’s fourth-biggest, should target 11.7 percent, two of them said. The move may help China’s policy makers curb loan growth after inflation accelerated and real estate prices rose following a $2.7 trillion two-year credit boom. “The regulator doesn’t seem comfortable any longer with Chinese banks’ capital levels after their overseas rivals raised money,” said May Yan, a Hong Kong-based analyst at Barclays Capital. “If the target stays at the current level, the banks probably won’t need to worry too much in the next two years as credit growth is already slowing down. But the market will be concerned if the target is pushed higher and higher.” There’s a “high likelihood of a significant deterioration” in banks’ asset quality after the two-year credit boom, Fitch Ratings said April 12. Fitch lowered its outlook on China’s long-term, local-currency rating to negative because of the risk that the government would have to bail out its banks. A downgrade would be the first on China’s debt since July 1999.
  • Asia Faces 'Serious Setback' on Rising Food Costs, ADB Says. Asia faces a “serious setback” from surging oil and food prices that are fueling inflation and threatening to push millions into extreme poverty, the Asian Development Bank said. The region’s growth may be reduced by as much as 1.5 percentage points should the pace of gains in oil and food prices seen so far this year persist for the rest of 2011, the Manila-based lender said in a statement today. Domestic food inflation in many Asian economies has averaged 10 percent this year, an increase in prices that may push an additional 64 million people into extreme poverty, defined as living on less than $1.25 a day, it said. Policy makers from China to India and Singapore are stepping up the fight against inflation through interest rate increases or currency appreciation as political unrest in the Middle East boosts crude oil prices. The pattern of “higher and more volatile” food prices is also likely to continue in the short term amid declining grain stocks, the ADB said. “To avert this looming crisis it is important for countries to refrain from imposing export bans on food items, while strengthening social safety nets,” ADB chief economist Rhee Chang Yong said in the statement accompanying a report on global food inflation today. “Efforts to stabilize food production should take center stage, with greater investments in agricultural infrastructure to increase crop production and expand storage facilities, to better ensure grain produce is not wasted.”
Wall Street Journal:
  • Syria Steps Up Violence. Syria's government escalated its crackdown on protestors Monday, sending tanks and armored vehicles into the southern city of Deraa, and raiding homes and deploying snipers in suburbs surrounding the capital and other hot spots, according to witness and activist accounts posted online. The latest military assault killed at least 35 people, many of them in Deraa where the uprising has been most intense, and in the northwestern town of Jableh. The government also deployed members of an elite unit headed by President Bashar al-Assad's brother Maher—the army's fourth division—and parts of the country were cut off from electricity and telephone service. The Assad government's decision to crack down harder after a weekend that saw more than 80 protesters killed puts more pressure on the international community to respond strongly, despite concerns many countries have about pushing the regime to the breaking point. "Things now are taking a very dangerous turn," said an Arab diplomat who is following the situation closely.
  • Taliban Jailbreak Rattles Afghan South. Escape of Hundreds via Prison Tunnel Refills Ranks of Insurgent Commanders. The Taliban crowed Monday over the jailbreak of hundreds of militants from a high-security prison in Kandahar, an escape the government called a "disaster" and analysts described as a serious blow to attempts to stabilize southern Afghanistan.
  • Financiers Switch to GOP. Hedge-fund managers made a big bet on Barack Obama and other Democrats in 2008. Now, with the 2012 contest gearing up, some prominent fund managers have turned their backs on the party and are actively supporting Republicans.
  • Fight for Lehman's Remains Heats Up. A three-way battle over the remnants of Lehman Brothers Holdings Inc. is coming to a head, as the defunct investment bank's estate fights with big-name hedge funds and Lehman's former archrival Goldman Sachs Group Inc.(GS) over how to divvy up $61 billion in assets.
  • Loan Middlemen Become a Big Draw. With tens of billions of dollars in underwater commercial real-estate loans coming due by the end of next year, some savvy investors are trying to get to the head of the line in the race to snap up distressed properties. Taking the lead among those trying to profit from the pain is real-estate investor Andrew Farkas, who tops a roster of high-profile investors—including Fortress Investment Group, Cerberus Capital Management and Vornado Realty Trust—that have bought companies that act as middlemen on troubled commercial mortgages.
  • China Won't Speed Yuan Appreciation, Schumer Says. Sen. Charles Schumer, a leading U.S. critic of China's currency policies, came away from a meeting with the head of the People's Bank of China dissatisfied about Beijing's unwillingness to allow the yuan to appreciate more quickly. Mr. Schumer, a Democrat from New York who was traveling with nine other lawmakers, had a one-on-one breakfast with Zhou Xiaochuan, governor of the People's Bank of China. Mr. Schumer said in a telephone interview on his way back from China that the PBOC told him China wouldn't accelerate the appreciation of its currency from its current pace, a refusal likely to spark an outcry on Capitol Hill. "I got the distinct impression from Gov. Zhou that they feel they have gone as far as they are willing to," Mr. Schumer said.
  • Malls Test Apps to Aid Shoppers. Shopping malls, threatened by the rapid growth of online retailing, are experimenting with mobile applications to help consumers navigate their stores and parking lots and, in some cases, find sales and special discounts.
  • Commodity Bets Draw Debate. The Commodity Futures Trading Commission is moving to increase oversight of the growing number of mutual funds that make speculative bets on gold, oil and other commodities and currencies through offshore subsidiaries. Officials at the federal agency are concerned that a proliferation of non-U.S. subsidiaries set up by mutual funds beyond the reach of current regulations could expose investors to volatile swings in commodities prices and potentially huge losses. A proposed rule by the CFTC would essentially preclude mutual funds from using subsidiaries to invest in commodities, but the mutual-fund industry is fighting the move.
  • Football's Future If The Players Win by Roger Goodell. There would be no draft. Incoming players would sell their services to the richest teams. Late Monday afternoon, U.S. District Court Judge Susan Richard Nelson issued a ruling that may significantly alter professional football as we know it.
Bloomberg Businessweek:
  • How Japan Dealt a Double Blow to Hedge Funds. To the banker-poet T.S. Eliot, April was the cruelest month. But for many hedge fund traders who take bets on economic trends around the world, March was the cruelest they can remember. “We just got whacked. Japan was a double hit—killing our longs and our shorts,” a young hedge funder said at a beer garden in Manhattan’s meatpacking district.
  • Netflix(NFLX) Earnings Leap, But Shares Slide on Weak Outlook. Netflix reported better-than-expected profit and revenue, but issued an outlook for the second quarter that disappointed investors, sending shares down in extended trading. Netflix posted first-quarter earnings of $60.2 million, or $1.11 a share—up from $32.3 million, or 59 cents per share, in the period a year ago. Revenue rose 46 percent to $719 million, it said on Monday. Analysts had expected revenue of $703.6 million, according to Thomson Reuters.
Business Insider:
New York Times:
  • A Regulator Moves Postcrisis to Expand Power Over Wall St. Richard G. Ketchum is plotting Finra 2.0. The chairman and chief executive of the Financial Industry Regulatory Authority has ambitious plans to expand the influence of Wall Street’s self-regulatory agency. At Mr. Ketchum’s urging, Finra is vying to replace the Securities and Exchange Commission as the top enforcer overseeing tens of thousands of investment advisers.
  • More Regulation of World Finance Needed, Soros Says. Hedge fund manager and conspiracy theorist fave, George Soros, told The Economic Times of India that more regulation of global finances is required, but just how much regulation is subject of serious debate between the world’s leading economies. The role of the regulators should be to exercise mainly thorough a free market. So you want to have markets as free as possible because while markets are unstable, regulators are even more imperfect than markets because they are subject to political influences they can be corrupt and they can be mistaken. So their role should be kept to a minimum but what that minimum is, is a matter for debate.” Soros also levied harsh criticism on US politicians and their inability to regulate the bulge brackets in the US. Without naming brand names, Soros told the Economic Times that the banking system has become too oligarchical. Instead of the financial powers being regulated more by the state following the near catastrophic 2008 derivatives crash that cost the equivalent of Japan’s entire GDP, the state has instead opted to blame itself for the problems and regulate less, he said. The regulators failed to regulate the economy that is why you had a crisis and when you had crisis then they had to keep the financial institutions alive in order to prevent the total big round and this creates what is called a moral hazard which allows the financial institutions to indulge in excessive lending and excessive profits and excessive stimulation. Because, if things collapse, then the regulators have to pick up the pieces,” Soros said. The billionaire investor seems to believe that financial markets, the Central Bank governors, state regulators and politicians worldwide are at loggerheads over what to do to avoid another 2008-style credit crash. In light of any changes going forward, more crashes are likely, though Soros did not come out and say that.
Washington Times:
  • Consequences of Debt Crisis Aren't Too Dire for Our Leaders. Just how dire is the crisis over the $14,294,000,000,000 debt ceiling, which America will hit on about May 16? So dire that President Obama spent much of last week traipsing across the West collecting campaign cash (and hit the golf course for Round No. 65 on Saturday). So dire that Congress headed off on a two-week vacation (and Sen. Harry Reid jetted off to China on a 10-day junket with nine colleagues, costing taxpayers millions). So dire that lawmakers have scheduled their first major meeting on the issue for May 5 - 11 days before America goes into global default. And, last, so dire that the “smartest president ever” has put his top man on it - Vice President Joe Biden. The message from the unmiffed politicos inside the Beltway is clear: When you’re $14 trillion in debt, what’s another trillion or two? Let’s just get another credit card - even if we have to pay 29.9 percent - and charge it up.
LA Times:
  • SEC Shuts Down Beverly Hills Hedge Fund and Wealth Management Business. In an unusual move, the Securities and Exchange Commission has temporarily shut down a Beverly Hills hedge fund and wealth management business -- which allegedly sought to defraud investors -- before anyone actually invested. Elijah Bang and Daniel Lee, who operated IU Group Inc., allegedly targeted retirees, professors and Christians by misrepresenting the business and its financial performance, soliciting clients using a variety of company names and claiming that the fund managed over $800 million, according to an SEC statement on Monday.
  • Euro Slips After Trichet, But Dollar Still Seen Wobbly. The euro slipped on Tuesday after European Central Bank Governor Jean-Claude Trichet said he shares the view that a strong dollar is in the interest of United States, a comment taken by some market players as showing frustration over the dollar's relentless fall and also an attempt to talk up the currency. Trichet also told two Finnish newspapers he does not see any significant second-round inflation, prompting traders to dump euro long positions against the dollar, although many traders think the dollar will remain under pressure from a perception that the U.S. central bank is far more reluctant to tighten its policy.
  • iShares Silver Trust Holdings Jump 2.2% to Record High. Holdings in the iShares Silver Trust, the world's largest silver-backed exchange-traded fund, had risen by 2.2 percent from April 21 to a lifetime high of 11,390.06 tonnes by April 25, as silver prices surged towards their 1980 peaks.
  • North Carolina Might Sue Banks Over Forex Trading. The North Carolina Treasurer's office may pursue claims against custodian banks over foreign exchange trading, making it the latest state to review the controversial business.
  • Express Scripts(ESRX) Profit Shy of Estimates, Shares Fall. Pharmacy benefit manager Express Scripts Inc reported a lower-than-expected quarterly profit and revenue on Monday, despite having cautioned Wall Street that the results would not measure up to the prior quarter. Express shares fell more than 6 percent in extended trading after reporting its first-quarter results.
  • U.S. May Expand Oversight of Rig Contractors.
  • Nasdaq(NDAQ), ICE(ICE) Doubt NYSE-D. Bourse Cost Savings. Nasdaq OMX Group and IntercontinentalExchange warned NYSE Euronext investors to be "highly skeptical" of the additional cost savings that the NYSE says will result from its friendly merger with Deutsche Bourse.
Frankfurter Allgemeine Zeitung:
  • European Central Bank Governing Council member Erkki Liikanen said that the ECB will prevent second-round inflation effects, citing an interview. "Inflation expectations are strongly anchored and we will oppose any trace of second-round effects," Liikanen, who also heads Finland's central bank, said. "Emerging markets are growing so quickly that costs are also increasing there," Liikanen said. "This inflation pressure will affect the euro area and make monetary policy more difficult."
People's Daily:
  • China's Communist Party needs "blood" ties with the country's public, the People's Daily said in a front-page commentary. The Party should insist on struggling for the people's interests. The Party is facing many new challenges and some "unaccustomed situations" in its work related to the masses. This may affect the connection between the Party and the Chinese people, the commentary said.
Economic Information Daily:
  • China may raise interest rates and banks' reserve requirement ratios in the second quarter to control liquidity, Ba Shusong, a researcher at the State Council's Development Research Center, wrote in a commentary.
Evening Recommendations
  • Reiterated Buy on (K), target $61.
  • Rated (ATHN) Underperform, target $30.
  • Rated (MDAS) Outperform, target $21.
Night Trading
  • Asian equity indices are -1.0% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 104.50 unch.
  • Asia Pacific Sovereign CDS Index 111.50 unch.
  • S&P 500 futures -.17%.
  • NASDAQ 100 futures -.16%.
Morning Preview Links

Earnings of Note
  • (CPLA)/.82
  • (IACI)/.26
  • (LXK)/1.24
  • (PNR)/.44
  • (MHP)/.37
  • (KO)/.87
  • (HSY)/.70
  • (ACI)/.32
  • (LMT)/1.51
  • (AKS)/.01
  • (COH)/.60
  • (MMM)/1.43
  • (F)/.50
  • (UA)/.19
  • (UPS)/.84
  • (ITW)/.84
  • (ALTR)/.64
  • (PNRA)/1.07
  • (WMS)/.41
  • (AMZN)/.61
  • (APKT)/.24
  • (BRCM)/.35
  • (CBG)/.12
  • (ADVS)/.12
  • (SWK)/1.00
  • (ILMN)/.31
  • (SFSF)/.00
  • (X)/-.39
  • (ODP)/.02
  • (AGCO)/.38
  • (BWLD)/.74
  • (VLO)/.29
  • (AN)/.43
  • (DAL)/-.50
  • (DV)/1.23
  • (CMI)/1.44
Economic Releases
9:00 am EST
  • The S&P/CS 20 City MoM% SA for February is estimated to fall -.4% versus a -.22% decline in January.
10:00 am EST
  • Consumer Confidence for April is estimated to rise to 64.5 versus 63.4 in March.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The 2-Year Treasury Notes Auction, weekly retail sales reports, Richmond Fed Manufacturing Index for April and the Barclays Retail/Restaurants Conference could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by commodity and real estate shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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