Friday, June 10, 2011

Friday Watch

Evening Headlines


  • Euro May Have to Coexist With a German-Led Uber Euro: Business Class. It appears another rescue is on the way for Greece. It won't solve the currency union's problems. The real threat to the euro isn't that a weak peripheral country like Greece might withdraw in an effort to devalue its way to competitiveness, but rather that Germany might want to pull out. Germany's incentive to leave grows with each bailout, and Berlin could ultimately make a simple calculation that extrication will be less costly than continuing the sacrifice needed to keep the euro.
  • Greece's banks face a $32 billion funding gap over the next year should depositors continue to withdraw their money at the current pace, according to Henderson Global Investors. Deposits by businesses and households held in Greek banks have declined more than 17% since December 2009. While the lenders have been able to make up the shortfall by posting collateral at the ECB or calling in loans to foreign banks, they are running out of assets, said Simon Ward, Henderson's London-based chief economist. "The end game is a full-scale bank crisis, so at some point depositors will have to be stopped from withdrawing their funds," said Ward, who helps oversee Henderson's $100 billion of assets. "I can't see what is going to plug the gap. Any new money coming from the European Union or International Monetary Fund is going to be needed for government finances so there seems to be an additional requirement for the banking system."
  • Fed Said to Consider Expansion of Capital Reviews. The Federal Reserve may expand its annual review of bank capital beyond the 19 largest financial institutions to push rigorous risk-management standards into more banks, according to people familiar with the discussions. Firms with assets of $50 billion or more would be required to conduct an exam, with boards showing Fed examiners how stock buybacks, dividends, earnings, and new regulations affect capital over several years, said the people, who declined to be identified because the proposal isn’t final. The Fed completed its first annual study of capital plans in March, clearing the way for firms such as Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) to boost dividends. Bankers, including JPMorgan Chase Chief Executive Officer Jamie Dimon, have criticized stricter federal oversight of the biggest firms, saying new regulations may impair lending and economic growth.
  • Maiden Lane Sales Spark Stampede to Dump Risk. Federal Reserve auctions of mortgage securities that the central bank assumed in the rescue of American International Group Inc. are fueling a selloff in credit markets as Wall Street rushes to hedge against losses on stockpiled debt. Declines in credit-default swaps indexes used to protect against losses on subprime housing debt and commercial mortgages accelerated this month, reaching almost 20 percent in the past five weeks as the cost of the insurance climbs, according to Markit Group Ltd. The plunge this week started infecting everything from junk bonds to the debt of financial companies. The Fed has been selling the $31 billion Maiden Lane II portfolio piecemeal after rejecting a $15.7 billion bid from AIG for the entire pool in March. Since then, Europe’s sovereign debt crisis has deepened and the U.S. recovery has shown signs of slowing, with unemployment rising to 9.1 percent, the highest level this year, and the economy growing 1.8 percent in the first quarter, less than forecast. “Dribbling risk into the market makes sense if everything is good and continues to improve,” said Ashish Shah, the head of global credit investments in New York at AllianceBernstein LP, which oversees $214 billion in fixed-income assets. “But when you get yourself into a position where the Street suddenly feels they’re long inventory and the macro backdrop is weaker, now you’re selling into weakness.”
  • Hong Kong Auditor Rejected by U.S. as China Blocks Inspections. The Public Company Accounting Oversight Board rejected Hong Kong-based Zhonglei CPA Co.’s application to become a registered U.S. auditor, citing an inability to inspect its work for companies based in China. This was the first time the PCAOB blocked an auditor since toughening rules in October. The decision follows the U.S. Securities and Exchange Commission’s increased focus on Chinese- based companies that trade on American stock markets. Yesterday, the SEC cautioned investors about buying stakes in companies that gain listings through so-called reverse mergers, saying they may be prone to “fraud and other abuses.” “The PCAOB is putting a line in the sand that is telling China very clearly that if you want your CPA firms to be involved in companies listed here in the U.S., you’ve got to agree to ensure that there are high-quality audits, and that means letting us in to inspect,” said Lynn Turner, a former SEC chief accountant who serves on a PCAOB advisory group. The SEC has halted trading in firms such as Guangzhou, China-based Heli Electronics Corp. and Rino International Corp. of Dalian, China, in the past few months. More than 24 companies have disclosed auditor resignations or accounting problems to the SEC since March, Chairman Mary Schapiro wrote in an April 27 letter. As short sellers increased bearish bets against the stock, the Bloomberg Chinese Reverse Mergers Index of 78 shares listed in the U.S. has dropped 43 percent in 2011.
  • Government is More to Blame for Weak Recovery Than Fading Stimulus: Echoes by John B. Taylor.
  • Prudential's Grier Says Fed Oversight of U.S. Insurers Is Science Fiction. Prudential Financial Inc. (PRU) said new global rules for financial firms won’t work and the Federal Reserve’s revised mandate to potentially oversee insurers is science fiction. Prudential Vice Chairman Mark Grier told analysts today that Solvency II and Basel III, the insurer and bank standards being readied by European regulators, will fail in a crisis. In remarks about the Fed’s expanded role, Grier said he refers to systemically important financial institutions, or SIFIs, as “sci-fi,” which is short for science fiction. “Solvency II and Basel III aren’t even going to work,” Grier said today at Newark, New Jersey-based Prudential’s annual investor and analyst conference. “If there’s a crisis everybody’s going to go back to doing stress tests because no one’s going to believe those things.”
  • China's Sina(SINA) Extends Stock Losses. Sina Corp., the owner of China’s third-most visited website and the Twitter-like Weibo service, fell for a fifth day in New York, extending losses after the biggest decline since 2008 yesterday. Sina slid 6.1 percent to $90.92 at 4 p.m., the lowest closing price since March 18. It plunged 11 percent yesterday. The MSCI China/Information Technology Index has fallen 6.3 percent this month, compared to a 2.2 percent decline on the benchmark emerging markets index. Allegations of accounting irregularities at some smaller Chinese companies have eroded demand for larger peers including Sina, Baidu Inc.(BIDU) and Inc. (SOHU), which have lost at least 17 percent of their value since the end of April, after reaching record highs that month, according to Aaron Kessler, an analyst at ThinkEquity LLC in San Francisco. Longtop Financial Technologies Ltd. (LFT), a Hong Kong-based software provider, was sued by an investor alleging the company overstated profit margins and concealed adverse facts last month. “There’ve been some accounting concerns in the sector, also concerns of a global economic slowdown that have impacted these names,” Kessler said.
  • Bank of Korea Raises Key Interest Rate to 3.25%. The Bank of Korea raised interest rates for a third time this year to rein in inflation that has exceeded its target range and curb record household debt. Governor Kim Choong Soo boosted the benchmark seven-day repurchase rate to 3.25 percent from 3 percent, following quarter-percent increases in January and March, the central bank said in a statement in Seoul today.
  • Food Inflation in India May Climb as Government Raises Minimum Crop Prices. Food-price inflation in India, Asia’s third-largest economy, may accelerate after the government raised the prices it pays farmers for food grains and oilseeds, making crops more expensive, economists said. The minimum prices for monsoon-sown crops including paddy, soybeans and corn were increased to help boost planting, the farm ministry said in New Delhi yesterday. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor. An increase in food prices would add to inflationary pressures in India, where the central bank has boosted interest rates nine times since March 2010. An index measuring wholesale prices of agricultural products advanced 9.01 percent in the week ended May 28 from a year earlier, the trade ministry said yesterday. Overall inflation in India has been above 8 percent for 16 months. The jump in global food costs has pushed 44 million more people into poverty since June 2010, according to a World Bank estimate. Higher prices helped spark the riots across northern Africa this year, toppling Tunisian President Zine El Abidine.
  • Lagarde Favored Over Carstens for IMF's Top Post as Nomination Period Ends. Christine Lagarde, who has taken her campaign to head the International Monetary Fund to India and China while keeping her fans posted on Twitter, may be poised to defeat her main rival, Agustin Carstens.
Wall Street Journal:
  • Bond Deal May Augur More European Travails. A crack opened in Europe's credit markets last week that could portend deeper trouble for the region's banks and governments. Investors balked at buying a €1 billion ($1.46 billion) bond offering by Banco Santander SA that was backed by debt of Spanish local governments, according to people familiar with the sale. That left a group of big European banks that managed the deal holding roughly €500 million of the debt. The lack of demand, unforeseen by Santander or the managers, underscores the jittery nature of the region's credit markets. That some of the biggest banks in Europe, including Commerzbank AG, HSBC Holdings PLC and Société Général SA, were left holding the bag also demonstrates how easily sovereign risk can spread around the euro zone.
  • France to Set Calendar for Possible Lagarde Probe. A French criminal court said it would announce a calendar Friday for reviewing accusations that Finance Minister Christine Lagarde had overstepped her authority. Ms. Lagarde is campaigning for the top job at the International Monetary Fund.
  • Report Slams U.S. Nuclear Regulator. The U.S.'s top nuclear-power regulator "strategically" withheld information from his colleagues in an effort to stop work on a controversial proposed waste dump, according to a report by the agency's internal watchdog, a finding likely to inflame debate about how to handle the nation's nuclear waste. The June 6 report by Nuclear Regulatory Commission Inspector General Hubert T. Bell offers an unflattering portrait of the NRC and its leader, Gregory Jaczko, who is described as having a temper that makes it "difficult for people to work with him."
  • The Lone Star Jobs Surge. The Texas model added 37% of all net U.S. jobs since the recovery began. Richard Fisher, the president of the Federal Reserve Bank of Dallas, dropped by our offices this week and relayed a remarkable fact: Some 37% of all net new American jobs since the recovery began were created in Texas. Mr. Fisher's study is a lesson in what works in economic policy—and it is worth pondering in the current 1.8% growth moment. Using Bureau of Labor Statistics (BLS) data, Dallas Fed economists looked at state-by-state employment changes since June 2009, when the recession ended. Texas added 265,300 net jobs, out of the 722,200 nationwide, and by far outpaced every other state.
  • A Gulf Drilling Revival. Notice how the energy breakthroughs are in oil and natural gas. Exxon Mobil Corp.'s huge new oil discovery in the Gulf of Mexico is good news for domestic energy production, but it's even better news as a sign that last year's panic over the BP spill won't continue to cripple American offshore oil exploration. Every so often, reality triumphs over politics.
  • US Regulators Scramble to Warn on Chinese Stocks. Regulators scrambled to warn of the risks surrounding Chinese companies that have listed in the United States through reverse mergers, though critics said the intervention was too little, too late following a series of accounting scandals. Brokerages also continued to crack down by preventing investors from borrowing on margin to buy many Chinese stocks amid concerns about whether they were overvalued. The U.S. Securities and Exchange Commission said Thursday that it was urging investors to review company filings and in particular watch for those who are not required to file financial reports with the regulator, but plenty of investors have already been burned.
Business Insider:
Zero Hedge:
NY Times:
  • Muddy Waters Research Is a Thorn to Some Chinese Companies. Carson C. Block makes even Wall Street cringe. Last week, the founder of the investment firm Muddy Waters Research issued a scathing report on a Chinese forestry company, calling it a “pump and dump” scheme that has been “aggressively committing fraud.” The remarks set off a sharp sell-off in shares of the company, Sino-Forest, prompting Canadian authorities to temporarily halt trading. Since the report, the stock has fallen more than 70 percent, erasing billions of dollars in value from a company whose investors include Paulson & Company, the hedge fund run by the billionaire John A. Paulson. “They overstated assets by billions of dollars and funneled money to an undisclosed subsidiary,” said Mr. Block, whose firm is based in Hong Kong and the United States.
USA Today:
  • Groups Sue Obama Administration Over Drilling Approval. Environmental law firm Earthjustice, which filed suit on behalf of several groups, claims the Obama administration's approval ignored relevant concerns involved with deepwater drilling.
  • Short Bets on U.S. Stocks Rise in Late May. Short interest on both the New York Stock Exchange and Nasdaq rose through the second half of May, the exchanges said on Thursday, suggesting investors added to short positions on expectations of further losses as the market lost ground. Short interest on the NYSE rose 2.17 percent to 13.22 billion shares through May 31, from 12.94 billion shares as of May 13. Short interest on the Nasdaq rose 3.41 percent in the second half of May to 7.25 billion shares, from 7.01 billion shares as of May 13.
Financial Times:
  • Powerful People Held to Account for Financial Crisis. Reckless Endangerment: How outsized ambition, greed, and corruption led to economic Armageddon, by Gretchen Morgenson and Joshua Rosner, Times Books, $30 Gretchen Morgenson, a New York Times business report­er and col­umnist, is never one to pull her pun­ches – and certainly not in her new book, Reckless Endangerment, about the causes of our recent “economic Armageddon”, as the book’s subtitle has it. Reckless Endang­erment is written with Josh­ua Rosner, a fin­ancial and policy analyst at Graham Fisher & Company. The gist of the argument is that Fannie Mae and Freddie Mac, the two housing-oriented, government-sponsored entities (GSEs) now in receivership and liquidation mode, and their defen­ders in Congress laid the foundations for the Great Recession. The book is late to the party, but Morgenson says that it “identifies powerful people whose involve­ment in the debacle has not yet been chronicled and it connects key incidents that have seemed heretofore un­related”.
  • Traders Flummoxed by Natural Gas 'Flash Crash'. Energy traders have been puzzled by a fleeting plunge in natural gas futures, the latest instance of anomalous price moves following the shift of commodities to electronic platforms. The New York Mercantile Exchange floor had been closed for more than five hours when late on Wednesday Nymex July natural gas dropped 39 cents, or 8.1 per cent, to $4.510 per million British thermal units. After a few seconds, it bounced back up.
Yonhap News:
  • South Korean Finance Minister Bahk Jae Wan said the government should use "all possible policy measures" to stabilize prices. Price instability is likely to continue for a while, Bahk told a government meeting.
21st Century Business Herald:
  • China's soybean demand may not be as strong as it looks because some domestic companies are increasing imports to obtain funds through letters of credit, citing a company executive. About 10% to 15% of more than 6 million tons of soybean inventories at China's main ports may be inflated by the trade financing, citing a Shenyin & Wanguo Futures Co. manager Lin Xunfeng.
China Business News:
  • China may allow the country's three largest oil companies to adjust fuel prices while crude oil costs are below $130 a barrel. Filling stations may be allowed to raise or cut fuel prices when crude oil costs change more than 4% on average over 22 consecutive working days, according to a plan under discussion.
  • UN Report: Iran Accelerating Development of Long-Range Missiles. Monitors sent to various countries uncover and document unauthorized activity by Iranian officials. A report by a panel of experts convened by the United Nations reveals that over the past year Iran has stepped up the pace of its efforts to develop long-range missiles. The report by the panel, which was convened a year ago after the UN Security Council imposed stiffer sanctions against Iran in an effort to halt the Iranian nuclear program, has not been officially released. In a campaign led by the United States, the United Nations has shown concern over Iran's development of medium- and long-range missiles in addition to the nuclear program itself. Iran's efforts to develop missiles have therefore been monitored along with Iranian weapons-smuggling operations.
Evening Recommendations
  • Reiterated Buy on (SYMC), target $24.
Night Trading
  • Asian equity indices are -1.0% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 112.50 -.5 basis point.
  • Asia Pacific Sovereign CDS Index 117.0 +1.0 basis point.
  • S&P 500 futures -.32%.
  • NASDAQ 100 futures -.26%.
Morning Preview Links

Earnings of Note
  • (LULU)/.38
Economic Releases
8:30 am EST
  • The Import Price Index for May is estimated to fall -.7% versus a +2.2% gain in April.
2:00 pm EST
  • The Monthly Budget Deficit for May is estimated at -$59.0B versus -$135.9B in April.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The (TRV) investor conference and the (ARRS) analyst conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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