Friday, June 17, 2011

Friday Watch

Evening Headlines

  • Merkel's Greek Bondholder Gambit Tested as Sarkozy Presses for Compromise. Chancellor Angela Merkel meets with President Nicolas Sarkozy today to resolve the impasse over a second Greek rescue as Germany’s insistence that bondholders share the cost fans the risk of contagion. Stocks plunged worldwide amid political turmoil and street fighting in Athens, putting the focus on the leaders of Europe’s two biggest economies to break the deadlock in Berlin. That means reconciling German calls for investors to help bail out Greece with European Central Bank warnings backed by France against any compulsory move that might trigger a default. “Germany is playing a domestic political game” to appear tough, Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin, said by phone. “It would have been much wiser to accept a purely voluntary solution one or two weeks ago. The collateral damage of this could be enormous.”
  • Euro Heads for Second Weekly Loss. The euro headed for a second weekly decline before European leaders meet to discuss the Greek debt crisis today amid concern the situation is worsening. The single currency was near a one-month low versus the yen as Greek Prime Minister George Papandreou prepares to announce changes to his cabinet today after failing to garner opposition support for austerity measures. The yen rose against most of its major counterparts before a U.S. report forecast to show consumers grew less confident this month as the world’s largest economy slows. Greece aid “is dependent on the Greek parliament passing the additional austerity package,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “That’s going to limit the potential for any bounce in the euro.” German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet today in Berlin to discuss a rescue package for Greece. EU finance ministers agreed on June 14 to convene again on June 19 after they failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new plan for Greek aid.
  • Default by Greece 'Almost Certain': Greenspan. Alan Greenspan, former Federal Reserve chairman, said a default by Greece is “almost certain” and could help drive the U.S. economy into recession. “The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan, 85, said in an interview today with Charlie Rose in New York. “The chances of Greece not defaulting are very small.” Greek government bonds slumped, pushing the yield on the two-year note above 30 percent for the first time, as Prime Minister George Papandreou’s failure to win support for more austerity fueled speculation the European country will fail to meet its obligations. More than 20,000 people protested in Athens this week against wage reductions and tax increases, with police using tear gas on crowds and strikes paralyzing ports, banks, hospitals and state-run companies. The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” said Greenspan, who ran the central bank from 1987 to 2006. That may leave some U.S. banks “up against the wall.” The U.S. debt issue is becoming “horrendously dangerous,” said Greenspan, who added he doubts lawmakers have another year or two to solve it.
  • Greek Default Threat Ignored Makes European Bank Stress Tests 'Irrelevant'. European Union stress tests on the region’s banks are becoming “irrelevant” because they ignore the possibility of a default by Greece. “Everybody is so concerned about Greece defaulting and the effect that’s going to have on banks, yet that’s not something even being considered as part of the stress tests,” said Jane Coffey, head of U.K. equities at Royal London Asset Management, which manages about $51 billion. “Greece defaulting isn’t exactly a black swan event. There’s a very good chance it will happen.” The cost of insuring Greek government debt against the risk of default surged to a record yesterday as concern mounted that policy makers will struggle to stop the crisis. Credit-default swaps indicate an 82 percent chance Greece will fail to meet its commitments within five years, according to CMA prices. “The stress tests have lost all credibility and look like a complete waste of time for all involved,” said Lex van Dam, a London-based fund manager at Hampstead Capital LLP, which oversees about $500 million. “They are totally irrelevant.”
  • Bond Sales Plummeting as Spreads Soar on Greece: Credit Markets. Investors steering clear of the corporate bond market are driving down debt offerings to the least this year as European officials struggle to contain a Greek debt crisis that's sent relative yields to a five-month high. Bond sales from the U.S. to Europe to Asia declined 56% this week to $27.9 billion, according to Bloomberg. Investors are demanding an extra 1.65 percentage points in yield over government debentures, the most since January, Bank of America Merrill Lynch Index data show.
  • Consumer Spending Fades in China Economy. Government data this week showed retail sales growth slowed to 16.9 percent in May, less than the average of the past five years and a figure that’s inflated by soaring prices for food. By contrast, spending on fixed assets such as factories and property climbed 26 percent, excluding rural households, in the first five months, the fastest pace in almost a year. “Consumption hasn’t taken off,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. “What has happened is a shift from exports to investment as a driver of growth.” Analysts at Capital Economics, a London-based research group, estimate that private consumption may have fallen to 34 percent of gross domestic product last year, the lowest level since China began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates. “Just at a time when the government in China and a lot of people elsewhere are hoping to see Chinese consumers step up to the plate, actually they’ve been staying away from shops,” said Mark Williams, an economist in London with Capital Economics and a former adviser on China to the U.K. Treasury. “The trend over the past couple of years has been relentlessly downward.”
  • Asia Housing Boom Stalls on Policy Tightening. “Across Asia-Pacific, you have seen a policy induced pullback,” said Rod Cornish, head of real estate strategy at Macquarie Capital Advisers in Sydney. “It’s a required pullback because if some of these markets had been allowed to continue, you would have had more overbuilding, more overvaluation, and a bigger correction down the track.”
  • Ethanol Production Tax Break, Tariff Rejected by U.S. Senate in 73-27 Vote. The U.S. Senate voted to eliminate a tax credit and a tariff that subsidize ethanol production, providing the strongest signal yet that Congress will curtail subsidies for corn-based biofuel. The 73-27 vote exceeded the 60-vote threshold needed to advance the measure as part of an economic development bill. The underlying legislation isn’t likely to become law, so the vote mostly indicated that it will be difficult for ethanol supporters to extend the 45-cent-a-gallon tax break and the 54- cent-a-gallon tariff beyond their scheduled Dec. 31 expiration.
  • Syrians Flee Second Northern Town as Fear of Government Crackdown Spreads. Syrians are fleeing a second town and nearby villages in the north of the country, fearing President Bashar al-Assad’s forces are preparing to widen their crackdown on anti-government protesters in the region, according to human-rights activists. The people of Ma’arrat an Nu’man “have information that the army will surround the villages, and they are leaving before the army comes,” Ammar Qurabi, head of Syria’s National Organization for Human Rights, said in a phone interview yesterday. “We are scared now of a repeat of Jisr al- Shughour.”
  • China Bond Sale Fails for Second Time This Year on Rate Increase Concern. “The auction was affected by tighter liquidity brought by the reserve-ratio hike,” said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. “The high auction yield represents investor expectations for a near-term policy rate hike.”
Wall Street Journal:
  • Trichet: Clear Position is Greek Default Should Be Avoided - Report. It is the clear position of the European Central Bank that a Greek default in any form should be avoided, as should any action in the Greek crisis that would spawn a credit event, ECB President Jean-Claude Trichet says in an interview to be released Friday. Trichet tells the British newspaper The Times that the ECB is not making any decision on whether or not the private sector is involved in the next step in dealing with the Greek debt crisis. "It is first of all for the executive branches to see what they want to do," he says. The Governing Council is telling these decision makers that "to embark in a compulsory way of dealing with this issue is not advisable." "We are telling them that doing anything that would create a credit event or selective default or default is not advisable," he says. Still it remains the decision of political authorities and the ECB will act accordingly, based on decisions made, he notes. "I am confident that next Sunday, the Eurogroup will be able to decide on the disbursement of the fifth tranche of the loans for Greece in early July," EU Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels Thursday. "And I trust that we will also be able to conclude the pending review, in agreement with the IMF." The issue of a longer-term aid package for Greece, and, by implication the role of the private sector, would then be delayed to July.
  • Europe's Greek Stress Test. The longer banks hold rotten paper, the likelier a second financial crisis becomes. Greek debt is in trouble—again. After a month of dickering, it seems likely that the International Monetary Fund and the European Union will agree to roll over Greece's debt so bondholders will be paid in full. Why is Europe so terrified of letting bondholders bear some of the risk that comes with high yields? The answer is that most of those bondholders are banks. If Greece defaults, then important French and German banks will be in deep trouble. Even a small rescheduling would force the banks to admit their losses. If Greece is allowed to default, reschedule or abandon its restructuring, Ireland, Portugal, Spain and Italy may soon follow. This scenario is beyond the EU's bailout capability. And it would leave the European financial system in shambles, because, again, the banks are holding that debt. There are four key facts to recognize:
  • Airline-Emissions Plan Draws U.S. Fire. The U.S. is preparing to deliver its first formal objections to the European Union's impending emission-trading plan for airlines, said people familiar with Washington's position, ratcheting up global pressure on the EU to scale back its ambitions. China, Russia and other major countries, as well as airlines world-wide, have recently criticized the project. The pollution-control plan, which is set to include aviation starting in January, forces any carrier departing or arriving at an EU airport to buy credits for greenhouse-gas emissions above specified levels, with large fines for noncompliance.
  • The IMF wants South Korea to raise interest rates faster and let its currency rise further to tame inflation, citing officials familiar with discussions taking place between the IMF and Seoul.
  • Key Seniors Association Pivots on Benefit Cut. AARP, the powerful lobbying group for older Americans, is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington's debate over how to revamp the nation's entitlement programs. The decision, which AARP hasn't discussed publicly, came after a wrenching debate inside the organization. In 2005, the last time Social Security was debated, AARP led the effort to kill President George W. Bush's plan for partial privatization. AARP now has concluded that change is inevitable, and it wants to be at the table to try to minimize the pain. "The ship was sailing. I wanted to be at the wheel when that happens," said John Rother, AARP's long-time policy chief and a prime mover behind its change of heart.
  • Report Sees Danger in Afghan Allies. The killings of American soldiers by Afghan troops are turning into a "rapidly growing systemic threat" that could undermine the entire war effort, according to a classified military study. The study by Jeffrey Bordin, a political and behavioral scientist working for the U.S. Army in Afghanistan, warns that the magnitude of the killings "may be unprecedented between 'allies' in modern history."
  • Wall Street Eyed in Metal Squeeze. Goldman Sachs Group Inc.(GS) and other owners of large metals warehouses are being scrutinized by the London Metal Exchange after being accused by users like Coca-Cola Co. of restricting the amount of metal they release to customers, inflating prices. The board of the LME met on Thursday to discuss complaints from aluminum users and market traders, who say operators of warehouses, which also include J.P. Morgan Chase & Co.(JPM) and Glencore International PLC, should be forced to allow the metal out more quickly to meet demand.
  • Raters Drawing SEC Scrutiny. U.S. securities regulators are weighing civil fraud charges against some credit-rating companies for their role in developing the mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter. The Securities and Exchange Commission's long-running probe into the deals has widened to the major credit-rating firms, including Standard & Poor's, the people said.
  • China Economists See Interest Rates Headed Up. Economists surveyed by Caixin said they expect the Chinese government will continue to tighten monetary policies in an aim to rein in inflation after key economic data released on June 14.
  • Desperate Public Pension Funds Double Bets in Hedge Funds. Public pension funds managing the retirement and health care benefits of teachers and firemen are pouring money into hedge funds, as much as doubling the money they allocate to the industry, in a desperate attempt to bridge the funding gap in their plans.
Business Insider:
Zero Hedge:
NY Times:
Crain's NY:
  • Nearly 300 Hedge Funds Open in 1Q. Coupled with 181 hedge fund liquidations during the first quarter, there are now an estimated 9,418 active hedge funds, the highest number in three years.
Pensions & Investments:
  • Och-Ziff Bets $12 Billion on Increased Market Volatility. Daniel Och’s hedge fund group bought options on almost $12 billion of U.S. stocks during the first quarter, a move that might generate profits if markets turn more volatile this year. The strategy, disclosed in a May regulatory filing by New York-based Och-Ziff Capital Management Group LLC, included an $8.8 billion option bet on companies in the Standard & Poor’s 100 index. The firm bought both bearish put options and bullish calls on most of the companies, including Exxon Mobil Corp.(XOM), American Express Co.(AXP) and General Electric Co(GE).
ABC News:
  • John Edwards Sought Millions From Heiress as Feds Closed In - ABC News Exclusive. Just weeks before federal prosecutors charged John Edwards in a six-count felony indictment, ABC News has been told, the two-time Democratic presidential candidate requested millions of dollars from Rachel "Bunny" Mellon, the banking heiress whose financial support of Edwards is at the center of the criminal case. One person with knowledge of the request confirmed the amount was in the millions of dollars but was unwilling to discuss why Edwards was seeking the money.
San Francisco Chronicle:
  • Amazon(AMZN) Tax Bill Makes it to Governor Brown's Desk. The Amazon tax has made it to Gov. Jerry Brown's desk. It survived the first round of gubernatorial vetoes, the two main budget bills he turned down on Thursday. But when asked what they think Brown will do now, the unanimous answer from the offices of lawmakers pushing for the measure is, "We don't know."
  • Huawei Rejects US Eximbank Chief's China Aid Claim. "It is fundamentally and utterly incorrect," said Bill Plummer, vice president of external affairs for Huawei. He was responding to a comment by U.S. Export-Import Bank President Fred Hochberg on Wednesday that one reason Huawei's "growth has been so dramatic is that it's backed by a $30 billion credit line from the Chinese Development Bank."
  • S&P 500 ETF Has Largest Inflow in 3 Years - Lipper.
  • US Equity Funds Inflows Largest in 4 Months - Lipper.
  • Steel Dynamics(STLD) Q2 Outlook Lower Than Street View. Steel Dynamics Inc forecast lower-than-expected second-quarter earnings, hurt by reduced metal margins and lower orders for its steel products.
  • US May Treat Internet Curbs as Trade Barriers. The United States is looking into ways to craft trade countermeasures that treat curbs on Internet commerce as nontariff barriers to trade, Commerce Secretary Gary Locke said on Thursday.
  • U.S. Fed Balance Sheet Hits Another Record Sizes. The U.S. Federal Reserve's balance sheet expanded to a record size in the latest week, as the central bank bought more bonds in an effort to support the economy, Fed data released on Thursday showed. The purchase was part of its $600 billion program, dubbed QE2, aimed at stimulating investment and economic activity. The balance sheet -- a broad gauge of Fed lending to the financial system -- swelled to $2.811 trillion in the week ended June 15 from $2.795 trillion the prior week.
  • Japan Cleanup of Radioactive Water Hits Snag. Japan's crisis-hit nuclear power plant could spill more radioactive water into the sea within a week unless engineers can fix a glitch in a new system to clean up growing pools of contaminated water, officials said. Tokyo Electric Power Co , known as Tepco, has pumped massive amounts of water to cool three reactors at the Fukushima Daiichi plant that went into meltdown after the March 11 earthquake and tsunami disabled cooling systems. But managing the radioactive water has become a major headache as the plant runs out of places to keep it. Around 110,000 tonnes of highly radioactive water -- enough to fill 40 Olympic-size swimming pools -- is stored at the plant.
Financial Times:
  • Eight Large Banks Targeted With 2.5% Capital Surcharge. At least eight banks, three from the U.S. and five from Europe, are being targeted for capital surcharges of 2.5% of their assets, in addition to the Basel III minimum capital requirement of 7% set by regulators last year, citing people familiar with regulator discussions. Citigroup Inc.(C), JPMorgan Chase(JPM), Bank of America(BAC), Deutsche Bank AG, HSBC Holdings Plc, BNP Paribas SA, Royal Bank of Scotland Group Plc and Barclays Plc would need to maintain core tier one capital ratios of 9.5%, if the proposal is adopted.
Philippine Star:
  • The Philippines sent its biggest warship to disputed waters in the South China Sea, a move that may further stock tension with China.
Japan Times:
  • Evacuation Urged for Radioactive Hot Spots. The government said Thursday it will recommend the evacuation of residents living in radioactive hot spots outside the no-entry zone around the Fukushima No. 1 nuclear plant.
Apple Daily:
  • Taiwan's petrochemical industry will be hurt by competition from Singapore as well as tight monetary policy in China, citing Wilfred Wang, chairman of Formosa Petrochemical Corp. Wang's outlook for the industry in the second half of the year is "very bad."
South China Morning Post:
Shanghai Daily:
  • Shanghai Sees Inflation Soar to a 3-Year High in May. Shanghai's inflation rate accelerated to a three-year high of 5.3% last month from 5.1% in April and 4.7% in March, citing the city's statistics bureau. Food costs increased 10.3% in May from a year earlier in the city, with a 15.7% gain in the price of rice, an 18.2% rise for meat, and 20.!% increase for edible oil. "Inflation, especially price jumps of daily necessities like food, will deal a severe blow to ordinary households and make them spend less in other fronts," said Li Maoyu, a Changjiang Securities Co analyst. "It requires policymakers to strengthen efforts and keep monetary policies tightened." Shanghai's industrial production last month edged up 5.5 percent from a year earlier to 261 billion yuan (US$40.2 billion). It was 9.7 percent in April and 12.4 percent in March. Fixed-asset investment in Shanghai fell 6.9 percent annually to 154.5 billion yuan in the first five months. It recovered from a drop of 7.2 percent in the months through April as more investment was pumped into property development.
National Business Daily:
  • China may issue an important yuan policy on June 19 as it is the one-year anniversary of the country's decision to allow the currency to resume appreciating, citing market participants. The State Administration of Foreign Exchange said in its annual report that China will gradually increase the yuan's flexibility, which was interpreted as a signal that the yuan's trading band will be expanded, citing analysts.
Evening Recommendations
  • Reiterated Buy on (NFLX), target $300.
Night Trading
  • Asian equity indices are -1.25% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 118.0 +.5 basis point.
  • Asia Pacific Sovereign CDS Index 121.0 +1.5 basis points.
  • S&P 500 futures -.02%.
  • NASDAQ 100 futures +.05%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
9:55 am EST
  • Preliminary Univ. of Mich. Consumer Confidence for June is estimated to fall to 74.0 versus a reading of 74.3 in May.
10:00 am EST
  • Leading Indicators for May are estimated to rise +.3% versus a -.3% decline in April.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The (ARIA) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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