Wednesday, April 20, 2011

Wednesday Watch

Evening Headlines

  • NATO Sees 'Limit' to Airstrikes' Power to Stop Qaddafi Forces. A NATO commander said “there is a limit” to the alliance’s ability to stop the Libyan regime’s shelling of Misrata, as the U.K. sent a team of military advisers to assist rebels fighting to end Muammar Qaddafi’s 42- year rule. Qaddafi’s troops have been using artillery and rockets in Misrata, under siege for about 50 days, with rebels holding part of the city and the port area that is their only supply link. Unicef, the UN Children’s Fund, said a ship carrying first aid kits, drinking water and other supplies for up to 25,000 people was expected to reach the port today, and the World Health Organization described Misrata Hospital as “overwhelmed,” with 120 civilian patients in need of emergency evacuation.
  • Fiscal Conservatives Dodge $10 Trillion Debt: Simon Johnson. Washington is filled with self- congratulation this week, with Republicans claiming that they have opened serious discussion of the U.S. budget deficit and President Barack Obama’s proponents arguing that his counterblast last Wednesday will win the day. The reality is that neither side has come to grips with the most basic of our harsh fiscal realities. Start with the facts as provided by the nonpartisan Congressional Budget Office. Compare the CBO’s budget forecast for January 2008, before the outbreak of serious financial crisis in the fall of that year, with its latest version from January 2011. The relevant line is “debt held by the public at the end of the year,” meaning net federal government debt held by the private sector, which excludes government agency holdings of government debt. In early 2008, the CBO projected that debt as a percent of gross domestic product would fall from 36.8 percent to 22.6 percent at the end of 2018. In contrast, the latest CBO forecast has debt soaring to 75.3 percent of GDP in 2018. What caused this stunning reversal, which in dollar terms works out to a $10 trillion swing for end-year 2018 debt, from $5.1 trillion to $15.8 trillion?
  • Swaps Regulator Watchdog Failed U.S. Government Standards Audit. The U.S. Commodity Futures Trading Commission’s internal watchdog has “significant deficiencies” in its auditing systems and received a failing grade in a government-required review completed in March. From October 2006 through March 2010, the agency’s Office of the Inspector General failed to meet government standards for quality control procedures, overseeing independent accountants, documenting budget requests, and auditing contractors, according to the 37-page review. The IG’s office also failed to regularly make its reports available on the Internet, the review said.
  • Georgia Joins Dissenters Opposing Writedown Plan in State Foreclosure Deal. Georgia Attorney General Sam Olens said he has “significant concerns” about a proposal to reduce loan balances for some homeowners as part of a settlement of a nationwide foreclosure probe, joining at least seven other states that have criticized such a plan. A deal with the top mortgage servicers in the U.S. that includes writedowns could encourage homeowners who are current on their loans to stop making payments, Olens, a Republican, said today in a telephone interview. “You’re declaring in advance who the winners and losers are,” Olens said. “I’m a little concerned that this process disengages the normal market forces.” Republican attorneys general in Virginia, Texas, Florida, South Carolina, Oklahoma, Nebraska, and Alabama have signed letters opposing the imposition of writedowns.
  • UAW Said to Seek Early Labor Agreements With GM(GM), Ford(F), Chrysler. The United Auto Workers is seeking an early contract settlement in talks with the U.S. automakers this year, breaking a pattern of brinksmanship that stretches at least four decades, two people familiar with the plan said. UAW Vice President Joe Ashton, who leads bargaining with General Motors Co. (GM), has said the union wants a deal before the current four-year agreements with GM, Ford Motor Co. (F) and Chrysler Group LLC expire on Sept. 14, said the people, who asked not to be identified revealing internal discussions. The union may seek a deal with GM first, one of the people said.
  • Wasteful U.S. Federal Spending Grows 15% Led By Health Agencies. Wasteful spending by U.S. agencies increased 15% to $125.4 billion in fiscal year 2010, with federal health care agencies making the most improper or unnecessary payments, according to congressional auditors. The increases in improper payments is "alarming," Kay Daly, the General Accountability Office's director of financial management and assurance, said in written testimony to a House Oversight and Government Reform subcommittee. The U.S. Centers for Medicare and Medicaid Services made $70.4 billion in erroneous payments last year, the most of any agency, according to Daly's testimony.
  • BofA(BAC) Said to Plan Spinoff of $5 Billion Private-Equity Unit. Bank of America Corp. (BAC), the biggest U.S. lender by assets, plans to wind down its flagship $5 billion buyout fund, according to a person with knowledge of the plan.
  • Japan's Exports Fall a More-Than-Expected 2.2% After Quake. Japan’s exports fell more than economists expected in March as shipments of automobiles tumbled, declines analysts said may worsen as companies struggle to restore facilities and output in the wake of a record earthquake. Overseas shipments declined 2.2 percent from a year earlier, the first drop since November 2009, the Finance Ministry said in Tokyo today. The median estimate of 19 economists surveyed by Bloomberg News was for a 1.1 percent drop. Car exports fell 28 percent from a year earlier and shipments for electronic devices also slid as the disaster prevented companies from transporting goods.
Wall Street Journal:
  • Austerity Chills the Ardor for Muni Debt. For many cities and states, the love affair with debt has cooled, as governments cut back on spending and as borrowing comes under political attack.
  • None Dare Call It Default. For nearly a year, Europe's official refusal to acknowledge even the possibility of a Greek debt default has bordered on the comical. But with Greek two-year bonds yielding 20% and credit-default swaps priced as if a default is more likely than not, EU denial has gone from amusing to dangerous. Media reports this week have cited Greek, German, EU and IMF officials anonymously admitting the obvious: Even if Greece meets the targets agreed in its bailout package, it will be saddled with a debt burden that is unsustainable, which makes a restructuring of those debts, now approaching 150% of GDP, inevitable. All these reports have so far been met with strenuous denials from spokesmen and other officials. Behind these official denials lies a more sophisticated narrative that says a default or restructuring would hurt so many institutions that might need their own bailouts that relieving Greece of some of its burden will do more harm than good. According to this argument, it would be better for Greece to continue to muddle through for now on EU and IMF life support than to expose creditors, including Greek and other European banks, to potential losses on Greek debt. We could add a third argument, which is that openly discussing debt restructuring might make it inevitable, leading to capital flight. None of this is persuasive. With debt yields on Greek bonds at record highs, the market has already priced in the likelihood that Athens will never make good on its obligations on time and in full. At this stage, it makes more sense to inform taxpayers, investors and governments about where the exposure and risks lie, which is why it's vital that Europe's current stress tests look carefully at sovereign-default scenarios. If Greece must restructure its debt—and that seems very likely—better that it do so in an orderly fashion than to wait until its hand is forced. The conventional wisdom about the collapse of Lehman Brothers is that the worst of the financial panic could have been averted if only Lehman had been saved from going under. That wisdom is wrong. Lehman's collapse triggered a full-blown crisis in no small part because investors had little clarity about who was solvent and who wasn't, and who would be saved and who would be left to fail. The way to prevent Greece from becoming Europe's sovereign-debt Lehman isn't to pretend that a restructuring can't happen, but to start explaining how such an event could be handled, together with much greater disclosure of who could be hurt and how. Banks that are vulnerable can then get their houses in order before it's too late. One lesson from September 2008 is that pretending that the all-but-inevitable is inconceivable doesn't make it impossible. But it will make a crisis that much more acute when it arrives.
  • Facebook Seeking Friends in Beltway. President Barack Obama will travel to Facebook Inc.'s Silicon Valley headquarters Wednesday to hold a "town hall" meeting on the economy with users of the social-networking site. But Facebook is still trying to find a path to Washington, where the company has only a fledgling lobbying operation, even though it finds its privacy policies under increasing scrutiny and is trying to navigate a politically sensitive expansion into China.
  • Banker Darts Around Loan Gridlock.
  • Spill's Toll on Oil Output Grows Clearer. One year after the BP PLC oil spill, Gulf of Mexico energy output is beginning to show the impact of the Obama administration's 10-month freeze on deep-water drilling. Offshore oil production, most of which comes from the Gulf, is expected to average 1.55 million barrels a day this year, down 13% from 2010, according to the U.S. Energy Information Administration. Following the April 20, 2010, blast on the Deepwater Horizon drilling rig operated by BP and the subsequent oil spill, the Obama administration stopped awarding permits for deep-water drilling until late February. The drilling suspension, along with a new, slower permitting process, will result in the loss this year of about 375,000 barrels of oil a day, according to energy consultancy Wood Mackenzie.
  • The Other Medicare Cutters. Obama's plan relies on a politically insulated board of experts. The debate over Paul Ryan's Medicare reform ideas has largely been healthy, even amid the liberal distortions. But why has there been so little scrutiny of President Obama's new Medicare proposal? Anyone worrying about more individual choice and responsibility in health care might be interested to learn that the alternative is turning every one of these decisions over to a 15-member central committee.
  • China Economist: Current Interest Rates Not High Enough To Control Inflation. An economist with a Chinese state-run think tank said Wednesday that current interest rates are not high enough to control inflation and China should further raise the benchmark interest rates to strengthen its management of inflation expectations. Wang Jun, a researcher at the China Center for International Economic Exchanges, said at a conference that China's economy currently faces major risks from high inflation and real estate bubbles, and the authorities should continue to adopt a combination of policy tools, such as tightening monetary policy, to control liquidity, according to a transcript published on the website of the Xinhua News Agency. Wang said China should also increase flexibility in the yuan's exchange rate and use currency tools to curb the current high inflation. He said that China has been seeing a very strong hot money inflows since last year, which is an important contributor to China's excess liquidity and inflation because the central government has to issue more money to buy the new forex. China's central bank and financial institutions bought a net CNY407.9 billion worth of foreign exchange in March, up from CNY214.5 billion in February, according to a Dow Jones Newswires calculation based on central bank data. Wang added that inflationary pressure may probably remain high throughout this year. "Moderate inflation might be a long-term trend, " he said.
Zero Hedge:
Institutional Investor:
  • Hedge Fund In A Box. Trading shops looking to quickly deploy high-frequency trading strategies have a new ally. Rickard & Winans, a Chicago start-up, has built a combination order management/trading infrastructure platform for high-frequency traders. The system allows hedge funds or broker-dealers to integrate their trading strategies into an all-in-one platform that itself plugs into the markets. And while there are other vendors offering similar services - such as Portware or Ften - Rickard & Winans claim a distinction that, execs there say, improves performance.
Global Pensions:
  • Public Funds Increase Hedge Fund Exposure 50%. The research firm said 295 public pension plans worldwide are now known to be allocating to hedge funds, up from 196 in 2007. The mean allocation to the asset class has also grown in the same period from 3.6% to 6.6% and is now one percentage point higher than the average private equity allocation of these investors. Preqin found public pension systems generally invest in hedge funds for capital preservation and portfolio diversification purposes and seek absolute returns of 6.1%. This is lower than the average expectations of other investor types, which stand at 7%. Funds of hedge funds are also popular with pension funds - four-fifths of public pension systems making their first investments into the asset class in 2010 did so through multi-manager allocations. Overall, some 70% of all pension funds investing in hedge funds have funds of funds commitments in their portfolios. Hedge funds have outperformed public pension funds' average annualised return expectations of 6.15% by producing average returns of 9.8%. Despite negative returns over a three-year timeframe, public pension system investors have increased their allocations to the asset class. This is in stark comparison to the many high-net-worth counterparts that have reduced their hedge fund commitments during the period, Preqin said.
  • Letting The Banks Off The Hook. Judging by last week's performance, it looks as though the country's top bank regulator is back to its old tricks. Though, to be honest, calling the Office of the Comptroller of the Currency a "regulator" is almost laughable. The Environmental Protection Agency is a regulator. The OCC is a coddler, a protector, an enabler of the institutions it oversees.
USA Today:
  • Had A Naughty Misdial? Porn Firm Snaps Up 1-800 Numbers. Records obtained by The Associated Press show that over the past 13 years, a little-known Philadelphia company called PrimeTel Communications has quietly gained control over nearly a quarter of all the 1-800 numbers in the U.S. and Canada, often by grabbing them the moment they are relinquished by previous users. As of March, it administered more 800 numbers than any other company, including Verizon and AT&T. And many, if not most, of those 1.7 million numbers appear to be used for one thing: redirecting callers to a phone-sex service.
  • NRG Energy Abandons Texas Nuclear Expansion Plan. NRG Energy Inc said on Tuesday that regulatory uncertainty in the United States in the wake of Japan's Fukushima nuclear accident would force the company to abandon a plan for two additional reactors in Texas and to write off its investment in the project. NRG will record a first-quarter 2011 pretax charge of about $481 million for the impairment of net assets of Nuclear Innovation North America (NINA), its nuclear development joint venture with partner Toshiba American Nuclear Energy Corp (TANE), an affiliate of Toshiba Corp.
  • Intel(INTC), VMWare(VMW) Give Downtrodden Tech Sector a Lift. Strong results from a clutch of technology heavyweights, led by top global chip maker Intel Corp (INTC.O) and "cloud computing" specialist VMware Inc (VMW.N), may give the battered U.S. tech sector a boost. International Business Machines Corp (IBM.N) also blew past Wall Street targets, raising its profit forecast and citing strong sales of mainframe computers and brisk business in emerging markets. Those results set a brighter tone for a bedraggled tech sector than recent analysis might have suggested.
  • Intuitive Surgical(ISRG) Q1 Profit Tops Street View. Intuitive Surgical Inc (ISRG.O) reported higher-than-expected first-quarter profit on increased sales of its da Vinci robotic surgical systems and growth in procedures using its high priced equipment. Intuitive sold 120 da Vinci systems in the quarter at a cost of nearly $1.4 million each. That exceeded Wall Street estimates for 112 and brought total systems placed worldwide to 1,840. The company sold five da Vinci systems in Japan, which has been seen as an important area of future growth once Intuitive receives procedure reimbursement approvals there. However, the sales took place before the massive March earthquake and tsunami that has caused serious disruptions to Japan's healthcare system, Intuitive said.
  • The Japanese government may contribute several trillion yen to create a fund that will help Tokyo Electric Power Co. compensate victims of its nuclear accident, citing a person familiar with the plan.
  • Japan's three biggest banking groups will take a combined charge of 150 billion yen for a decline in the value of shares in Tokyo Electric Power Co.
Economic Observer:
  • China's National Development and Reform Commission is drafting a plan for an society-wide wage increase to help spur domestic consumption.
China Securities Journal:
  • Chinese central bank adviser Xia Bin said the nation may continue to increase interest rates because of the country's negative real rates and because property control measures have yet to be satisfactory. Xia said that short-term efforts to control consumer price gains are aimed at preventing the economy from overheating and that the central bank will use the reserve requirement ratio to control the nation's money supply. China's short term goal for the property market is to curb unreasonably rapid price increases, Xia said.
National Business Daily:
  • Nestle SA, Ausnutria Dairy Corp. and Friesland Foods raised milk powder prices in China by an average of about 20%.
Evening Recommendations
  • Rated (REGN) Buy, target $68.
  • Reiterated Buy on (PKG), target $33.
  • Reiterated Buy on (WMB), target $38.
Night Trading
  • Asian equity indices are +.50% to +1.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 107.0 -4.0 basis points.
  • Asia Pacific Sovereign CDS Index 115.75 -.75 basis point.
  • S&P 500 futures +.58%.
  • NASDAQ 100 futures +.70%.
Morning Preview Links

Earnings of Note
  • (HCBK)/.18
  • (TXT)/.17
  • (ETN)/.80
  • (UTX)/1.07
  • (DGX)/1.00
  • (EMC)/.31
  • (NDAQ)/.60
  • (MO)/.44
  • (STJ)/.78
  • (ABT)/.90
  • (WFC)/.67
  • (FCX)/1.26
  • (APH)/.71
  • (UNP)/1.30
  • (T)/.57
  • (QCOM)/.80
  • (YUM)/.64
  • (FFIV)/.85
  • (ETFC)/.12
  • (GILD)/.97
  • (AMGN)/1.29
  • (WDC)/.67
  • (MAR)/.27
  • (BSX)/.04
  • (EW)/.42
  • (NE)/.18
  • (AAPL)/5.39
  • (AXP)/.92
  • (MI)/-.17
Economic Releases
10:00 am EST
  • Existing Home Sales for March are estimated to rise to 5.0M versus 4.88M in February.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,300,000 barrels versus a +1,627,000 barrel increase the prior week. Distillate inventories are expected to rise by +150,000 barrels versus a -2,681,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,750,000 barrels versus a -7,000,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.88% versus a -3.0% decline the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The weekly MBA mortgage applications report and the Bank of America Merrill Auto Summit report could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by commodity 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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