Friday, June 24, 2011

Friday Watch

Evening Headlines


  • EU Vows to Rescue Greece in Exchange for Cuts. European Union leaders pledged to stabilize the euro-area economy, vowing to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week. “This is not only a green light but also a positive sign for the future of Greece,” Papandreou told reporters after the first session of an EU summit in Brussels late yesterday. Greece’s next hurdle is to shepherd 78 billion euros ($111 billion) of austerity measures through parliament, after yesterday’s endorsement of the program by experts from the European Commission, European Central Bank and International Monetary Fund.
  • Euro Set for Third Weekly Drop Versus Dollar as EU Discusses Greece Rescue. The euro was set for a third weekly decline against the dollar, the longest streak in four months, before European Union leaders conclude a summit in Brussels today on financing needs for debt-saddled Greece. “On a six-month view I’m looking for much lower levels in the euro,” said Michael McCarthy, the Sydney-based chief market strategist at CMC Markets. “On the Greek situation, one of the problems for markets is that the solution is going to take months and years to come through.”
  • China Inflation Will Be 'Under Control': Wen. Premier Wen Jiabao said that China’s efforts to stem inflation have worked and that the pace of consumer-price increases will slow, an assessment that contrasts with some economists advocating further steps. “There is concern as to whether China can rein in inflation and sustain its rapid development -- my answer is an emphatic yes,” Wen wrote in an opinion piece in the Financial Times newspaper. China has paused for 11 weeks in raising interest rates, the longest gap since increases began in October, even as analysts predict inflation will surpass 6 percent for the first time since 2008 in coming months. With one-year bank deposit rates more than 2 percentage points below the pace of consumer- price gains, inflation continues to erode household savings. Wen pointed to evidence of a moderation in lending and money supply, an “oversupply of main industrial products” and “abundant” grain. The National Development and Reform Commission said this week that inflation may accelerate this month and “remain elevated for some months.” The China Securities Journal said in an unsigned front-page editorial this week that consumer prices may jump by more than 6 percent this month after climbing 5.5 percent in May, adding pressure for the People’s Bank of China to increase rates again. The central bank has raised rates four times starting in October and boosted banks’ reserve requirements nine times since November to a record 21.5 percent for the biggest lenders.
  • S&P Assigns CME Group(CME) Negative Outlook on Competitive Threats. Standard & Poor’s affirmed its rating of CME Group Inc. (CME), the world’s largest futures exchange, and said the outlook on the company and its debt was negative after assessing competitive risks from NYSE Euronext. (NYX)
  • Williams(WMB) Offers $4.9 Billion for Southern Union(SUG). Williams Cos. offered to buy pipeline company Southern Union Co. (SUG) for $4.86 billion in cash, topping a bid by Energy Transfer Equity LP. (ETE) The Williams offer values Southern Union at $39 a share, according to a statement today from the Tulsa, Oklahoma-based company. That’s $6 a share, or about $750 million, more than the June 16 sale price announced by Southern Union and Energy Transfer.
  • Emerging-market equity funds reported a third straight week of outflows on concern the global economic recovery will slow amid Europe's debt crisis, according to Citigroup Inc. Funds investing in developing-nation shares saw withdrawals of about $343 million in the week ended June 22, Citigroup analysts led by Markus Rosgen wrote in a report, citing data compiled by EPFR Global. The MSCI Emerging Markets Index has dropped 3.7% this year.
  • Russia May Face Debt Crisis Like Greece. Russia may face a debt crisis similar to the one gripping Greece by 2030 unless the government reduces spending, said Sergei Ulatov, the resident World Bank economist in Moscow. “By 2030 the debt level would be unsustainable like in Greece” if nothing changes, Ulatov said in an interview during the Russia and CIS Capital Markets Forum organized by Euromoney in London today. “Right now, we are mostly helped by oil prices and not by a very prudent macroeconomic policy.” Finance Minister Alexei Kudrin this week urged the government to cap annual spending increases at 4 percent to stabilize public finances and avoid state “paternalism” in running the economy.
  • India Said to Plan Raising Fuel Cost. India may raise fuel prices when a ministers’ panel meets today, seeking to trim fuel subsidies that threatens to exceed the government’s forecast of $5.3 billion this year, an oil ministry official said. An increase in fuel costs may spur inflation in Asia’s second-largest energy consumer, where diesel and cooking-fuel prices are capped to protect livelihoods of three-quarters of the population the World Bank says survives on less than $2 a day. Prime Minister Manmohan Singh’s government is raising prices to keep its pledge of narrowing the budget deficit.
Wall Street Journal:
  • Tax Dispute Stalls Debt Talks. The drive for a major deficit-reduction deal entered a new phase Thursday when Republican negotiators pulled out of bipartisan talks, leaving it to President Barack Obama and House Speaker John Boehner to resolve the toughest issues. House Majority Leader Eric Cantor (R., Va.) said he was backing out of the talks for now because the group had reached an impasse over the question of whether tax increases should be included in the deal.
  • Hacker Group Posts Arizona Police Documents. A group of hackers that has claimed attacks on websites run by the U.S. Senate and the Central Intelligence Agency posted a cache of documents from Arizona police, calling it a protest against a controversial state law. On Thursday, Lulz Security posted files labeled as training manuals, emails, intelligence documents and other material that it says it poached from the Arizona Department of Public Safety. LulzSec, as the group commonly refers to itself, said the posting of the documents was a protest of Arizona's SB1070, controversial state legislation that critics say is anti-immigration.
  • Nader Kindles Fires of Revolt. Ralph Nader, the scourge of American business and onetime presidential candidate, has found his next corporate demon: Cisco Systems Inc.(CSCO) Mr. Nader isn't calling for a router recall or claiming the company's networks are unsafe at any speed. Instead, he wants the tech company to pay a bigger dividend to boost its shares.
  • Providence Equity Nears Deal to Buy Blackboard(BBBB). Buyout firm Providence Equity Partners is in exclusive talks to buy educational-software company Blackboard Inc., and a deal could be announced as early as next week, people familiar with the matter said.
  • Of Wealth and Incomes. Why Americans are so unhappy with this economic recovery. The Federal Reserve is ending its second round of quantitative easing this month, and Chairman Ben Bernanke was asked recently if he thought the $600 billion in bond purchases had worked. Yes, he replied, because the stock market had risen sharply in value. Then this week Mr. Bernanke was asked why the economy was lagging. "We don't have a precise read on why this slower pace of growth is persisting," he said, in a rare and revealing case of modesty. Maybe we can shed a little light, and in a way that also explains why so many Americans feel so unhappy about this economic recovery. The Fed can create new dollars, but it can't determine where those dollars will flow in a global economy that still runs mostly on a dollar standard. And with QE2 piling on near-zero rates, dollars flooded into assets other than stocks. In particular, they flowed into emerging markets like China and Brazil and into commodities nearly across the board. The nearby chart also shows the trend in oil prices as one example of the commodity price move.
  • White House Oil Epiphany. Supposedly a little bit of oil doesn't matter, except when it does. It wasn't long ago that the Obama Administration was trying to drive up the price of fossil fuels to reduce carbon emissions, promote "green jobs" and save the planet from global warming.
  • Fitch: Japan Fiscal Talks Key to Ratings Move. Japan's political landscape has descended further into partisan infighting which is hindering the fiscal consolidation the country needs, a senior official at Fitch Ratings said Friday. Andrew Colquhoun, head of Asia Pacific sovereign ratings, said the partisan bickering has worsened since Fitch's most recent move on Japan affirming its AA minus local currency rating, with particular uncertainty over the future of Prime Minister Kan. "It does move that quickly it seems," Colquhoun told Dow Jones Newswires in Sydney. Fitch has a negative outlook on Japan and there's a risk it could be forced to revisit the rating, with the outcome of talks on fiscal reforms key, Colquhoun said.
  • Oracle(ORCL) Earnings Top Forecasts as Software Demand Rises. Oracle topped forecasts for both earnings and revenue as sales of business software came in at the high end of expectations. But the company said revenue from computer servers and analysts worried that the company's technology spending is slowing down. The stock fell in after-hours trading.
Business Insider:
  • World Bank Hires Ex-Lehman Risk Manager. In the echoes-of-2008 department, the World Bank just hired a former Lehman Brothers risk manager to run its finances. The bank, which lends money to developing countries in a bid to curb poverty, said Madelyn Antoncic will "be responsible for maintaining the World Bank's high standing in financial markets." It is tempting here to make a joke about Antoncic's qualifications for that task. After all, you could hardly have a lower standing in financial markets than Lehman, whose September 2008 collapse nearly brought down the world economy. Antoncic was for a spell the chief risk manager at Lehman, reporting to the peerless perfect-storm skipper Dick Fuld. For whatever reason the firm's success in risk management was, let's say, less than total.
Index Universe:
  • Congressman Cantor: House to Consider Balanced Budget Amendment. Congressman Eric Cantor (VA-07) today issued the following statement regarding House consideration of a balanced budget amendment, H.J. Res. 1, sponsored by Congressman Bob Goodlatte: “We are being asked by the Obama Administration to approve a debt limit increase. While President Obama inherited a bad economy, his overspending and failure to enact pro-growth policies have made it worse and now our national debt is currently more than $14 trillion. House Republicans have made clear that we will not agree to raise the debt limit without real spending cuts and binding budget process reforms to ensure that we don’t continue to max out the credit card. One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution, and I expect to schedule such a measure for the House to consider during the week of July 25th. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order."
  • Analysis: Christmas Gloom for China Toymakers as Orders Shrivel. China may be the world's toy-making capital, but for Cheung Tak Ching the Christmas season is shaping up to be lean and joyless. Sitting in a showroom amid an array of bright smiling toys he makes for Walt Disney Co (DIS.N) and Mattel Inc (MAT.O), the 40-year industry veteran bemoans a 5-10 percent fall in pre-orders. After wrenching change that saw hundreds of toy factories in China shut down in the 2008 financial crisis, hopes were high for a rebound. But Europe's debt crisis and a sluggish U.S. economic recovery are curbing Western demand, while cost and Labor pressures within China are mounting. The attrition has seen net profit margins of Hong Kong toymakers -- which run a sizeable share of toy factories in southern China's Guangdong province and around the Pearl River Delta -- shrink to 3-5 percent from more than 10 percent in the 1990s, said Cheung, who also heads Hong Kong's toy manufacturers association. The gradual appreciation of China's currency, which has risen almost 30 percent against the U.S. dollar since it was revalued in 2005, has also hit hard. Cheung estimates toymaker profit margins will be shaved by 1 percentage point for every 2 percent rise in the yuan against the U.S. dollar. Higher wage bills and a 20 percent rise in materials and input costs for toymakers have already translated into average product prices rising about 10-15 percent this year.
  • JPMorgan(JPM) Slashes Oil Price Forecast After IEA Release. J.P. Morgan slashed its forecasts for crude oil prices in the third quarter after the International Energy Agency on Thursday announced the release of 60 million barrels of oil over the next month to shore up the economic recovery. The bank now foresees the price of Brent crude to average $100 a barrel in the third quarter, down from $130, it said in a note to clients late on Thursday. "If pursued rigorously, the 60 million-barrel sale over 30 days is a sufficient volume to cause a very substantial drop in the oil price," said J.P. Morgan analysts led by Lawrence Eagles. "IEA countries have replaced OPEC as the supplier of the marginal barrel to the market, with significant pricing power conferred to the U.S. by virtue of its large contribution to the release pool."
  • US Fed Balance Sheet Hits Another Record Size. 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 $2.841 trillion in the week ended June 22 from $2.811 trillion the prior week.
  • Greece's Olympic Dream Has Turned Into a Nightmare for Village Residents. The vast glass edifice was once the gleaming entrance where the world's athletes signed in for the 2004 Olympics but it now stands empty, stripped of all assets including copper piping, electricity points and marble tiles. "I don't know why we're here now," said one guard smiling behind his Ray-Bans. "Thieves took everything of value, I guess we're just here to stop the squatters moving in." Seven years after the outpouring of national pride and delight as Athens showcased its new public works to the world, the Olympic Village, 12 miles north west of the capital in the shadow of mount Parnitha, is now a symbol of national shame.
  • Germany should put off its bank levy for three years to encourage lenders to agree voluntarily to Greek debt cuts, citing a state finance minister. The bank levy, intended for bailing out banks in crisis, may generate about $1.4 billion a year, citing Hartmut Moellring, finance minister of Lower Saxony. Lifting it temporarily would make it easier for banks to agree to reduce Greek debt, he said.

The Times of India:
  • Food Inflation Accelerates in Mid-June, Protein Items Maintain Pressure. NEW DELHI: Food inflation accelerated in the week ending June 11 on the back of costly fish, milk, chicken, egg and other items keeping up the pressure, fueling expectations that the Reserve Bank of India (RBI) will maintain its tight monetary policy in the months ahead. Data released by the commerce and industry ministry showed food inflation quickened to an annual 9.13%, in the week to June 11, rising from the previous week's 8.96%. The index for food articles group rose 1.5% to 191.9 from 188.4 for the previous week due to higher prices of fish (5%), milk (4%), tea and chicken (3% each), jowar and egg (2% each) and fruit and vegetables (1% each). Food inflation has remained persistently high for the past several months after showing some signs of moderation. Food articles account for 14% of the wholesale price index. General inflation now stands at 9.06% and economists say the country may face a period of double-digit inflation given the sharp revisions in the data for February, March and April. Reserve Bank of India deputy governor Subir Gokarn said food inflation remained uncomfortably high.
  • The China Banking Regulatory Commission has asked banks to cut lendings to property developers as part of measures to control risk, citing Liao Min, head of the banking regulator's Shanghai branch. Risks for property loans are still "controllable," Liao said.
  • The number of people in the Communist Party of China exceeded 80 million, citing Wang Qinfeng, a deputy head of the organization department at the Party's Central Committee.
China Daily:
  • Poor "social management" was one of the major reasons behind the unrest in a suburb of Guangzhou, citing Zhang Guangning, party chief of the capital of southern Guangdong province. Social management has lagged behind economic growth and that led to the clash in Zengcheng city, Zhang said.
  • China aims to prospect for and find 6.5 billion tons of "geological" crude oil reserves and 3.5 trillion cubic meters of natural gas reserves in the five years through 2015, according to the Ministry of Land and Resource's plan posted to the People's Daily newspaper today. The nation aims to find 300 billion tons of coal reserves and 10 billion tons of iron ore reserves during the five-year period, the plan said. It also aims to find 15 million tons of copper reserves and 1,600 tons of gold reserves in the period.
  • China may continue to tighten its policies in the second half because consumer prices may surge if the policies were loosened too early, citing Chen Dongqi, a deputy head of the National Development and Reform Commission's macroeconomic research institute. The country could expand the yuan's trading band to curb imported inflation, citing Wang Songqi, a researcher with the Chinese Academy of Social Sciences.
Evening Recommendations
  • Reiterated Buy on (K), boosted estimates, raised target to $62.
Night Trading
  • Asian equity indices are -.25% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 118.50 -.5 basis point.
  • Asia Pacific Sovereign CDS Index 127.0 +2.0 basis points.
  • S&P 500 futures +.48%.
  • NASDAQ 100 futures +.56%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
8:30 am EST
  • Durable Goods Orders for May are estimated to rise +1.5% versus a -3.6% decline in April.
  • Durables Ex Transports for May are estimated to rise +.9% versus a -1.5% decline in April.
  • Cap Goods Orders Non-Defense Ex Air for May are estimated to rise +1.0% versus a -2.6% decline in April.
  • Final 1Q GDP is estimated to rise +1.9% versus a prior estimate of a +1.8% gain.
  • Final 1Q Personal Consumption is estimated to rise +2.2% versus a prior estimate of a +2.2% gain.
  • Final 1Q GDP Price Index is estimated to rise +1.9% versus a prior estimate of a +1.9% gain.
  • Final 1Q Core PCE is estimated to rise +1.4% versus a prior estimate of a +1.4% gain.
Upcoming Splits
  • (IIVI) 2-for-1
  • (FLO) 3-for-2
  • (CERN) 2-for-1
  • (SIX) 2-for-1
Other Potential Market Movers
  • None of note
BOTTOM LINE: Asian indices are mostly higher, boosted by consumer discretionary and technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

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