Monday, June 20, 2011

Monday Watch

Weekend Headlines


  • Europe Fails to Agree on Greek Aid Payout. European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition. On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline. “We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg. Decisions on the next payout and a three-year follow-up package were put off until early July, prolonging Greece’s fiscal agony and heightening the brinksmanship that has marked Europe’s handling of the unprecedented debt crisis.
  • Banks, Pension Funds Run Risk on Greek Plan, Wellink Tells NRC. Banks and pension funds run a risk if they contribute on a voluntary basis to another rescue operation for Greece, European Central Bank Governing Council member Nout Wellink said in an interview, NRC reported. “Pension funds have Greek bonds,” Wellink said, according to the Dutch daily newspaper. “They can sell them with a small loss to limit the risks. But they are being asked to keep the bonds. They then run the risk that the damage is three or four times higher.” German Chancellor Angela Merkel said today that aiding Greece is “defensible” because a euro-area sovereign default would be uncontrollable. European Union officials moved closer to hammering out a new aid package for Greece after Germany agreed to work with the ECB to make sure plans to include private investors in a rescue don’t trigger a default. “There’s a chance that a compulsory contribution will lead to a writedown of Greek bonds and with that a bankruptcy of the Greek banking sector,” NRC cited Wellink as saying. “At the moment we’re financing because of monetary reasons the Greek banking sector and indirectly the Greek state. But that will stop. Politicians need to be aware of that.” “There are other ways the private sector can contribute,” Wellink said, according to NRC. “They can help privatize Greek state companies or make direct investments in Greece.”
  • Juncker Warns of Contagion on Greek Bondholder Role, Libre Says. Luxembourg’s Jean-Claude Juncker said bondholder involvement in a new Greek aid package must be structured carefully amid concerns about “substantial” contagion effects, La Libre Belgique reported, citing an interview. Policy makers must reach agreement “on the form and scope” of private-sector involvement in the next rescue package for Greece, Juncker, who leads the group of euro-area finance ministers, told the newspaper. “This is one of the most difficult questions because the contagion effects that are feared are substantial.” Juncker said finance ministers must craft a package that is acceptable to the European Central Bank, the credit-rating companies and the financial markets, according to Le Libre. “If we made a move that would be rejected by the ECB, by the rating agencies and therefore the financial markets, we risk setting the euro area aflame,” he said.
  • Schaeuble Says Investors Needed for Greek Aid, Boersen Reports. Germany Finance Minister Wolfgang Schaeuble said private investors need to take part in any aid package for Greece, Boersen-Zeitung reported. Private investors’ participation needs to be voluntary, substantial, quantifiable and reliable, Schaeuble told the German newspaper in an interview published today. European member states are willing to give Greece more time to recover financially if the country makes additional efforts including boosting tax revenue and speeding up privatization, Schaeuble said. The burden of an aid package should not fall solely on taxpayers, the newspaper said.
  • Funds Trim Bullish Commodity Bets as Global Growth May Fall, Curb Demand. Funds reduced bullish bets on commodity prices for the first time in four weeks as Greek’s debt crisis spurred speculation that global growth will decline, curbing demand for raw materials. Speculators cut their net-long positions in 18 U.S. commodities by 0.9 percent to 1.3 million futures and options contracts in the week ended June 14, government data compiled by Bloomberg show. That’s the first drop since May 17. Declines were led by a 63 percent plunge in bets on rising wheat prices. Natural gas holdings tumbled 41 percent. Investors pulled $973 million out of commodity funds in the week ended June 15, according to EPFR Global, a Cambridge, Massachusetts-based researcher. That’s the biggest outflow since mid-May, EPFR said.
  • Oil Declines for Second Day on Concerns Over European Debt, Global Economy. Oil declined a second day in New York on speculation a slow global economy and Greece’s debt crisis will lead to lower fuel demand. Futures fell as much as 0.4 percent today after the biggest weekly decline in six weeks. Crude for July delivery fell as much as 38 cents to $92.63 a barrel in electronic trading on the New York Mercantile Exchange and was at $92.69 at 10:05 a.m. Sydney time. Oil may decrease this week on signals that economic growth in the U.S. and China will slow, curbing fuel use in the world’s biggest crude-consuming countries, a Bloomberg News survey showed. Eighteen of 38 analysts, or 47 percent, forecast prices will decline through June 24.
  • Euro Weakens as Greece Debates Budget Cuts, Government Confidence Motion. The euro fell against the dollar for the first time in three days as calls for new elections in Greece dimmed prospects for austerity measures needed to ensure an aid package to prevent the currency union’s first default.
  • Italy's Bond Ratings May Be Downgraded by Moody's Amid 'Growth Challenges'. Italy’s credit ratings may be reduced by Moody’s Investors Service because of economic growth challenges, risks associated with efforts to reduce debt and the potential for higher borrowing costs. The nation’s third-ranked Aa2 local and foreign-currency government bond ratings were placed under review for a possible downgrade, Moody’s said in a statement yesterday. Italy may have trouble reducing its public debt to more affordable levels as borrowing costs rise and support for the government of Prime Minister Silvio Berlusconi weakens, Moody’s said. Investor speculation about a possible Greek default has focused attention on the finances of Italy and other high-debt euro area nations. Italy had to offer 3.9 percent to sell five- year bonds this week, matching March’s 2 1/2-year high. “There are some potential contagion problems going on now in Europe,” Jay Bryson, a senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview. Italy’s “debt dynamics look a little shaky as well. They also have a growth problem there.”
  • China Home Primes Cool on Government Curbs. China’s effort to cool home prices is damping the market for existing homes, with prices in May falling from the previous month in 23 of 70 cities measured. That’s more than the 16 cities that posted declines in April, data from the National Bureau of Statistics posted to its website June 18 showed. Existing home prices in Beijing fell 0.2 percent from April while those in Shanghai increased 0.2 percent. The price of new homes, typically sold by developers, rose last month in 67 of the 70 cities monitored. Authorities in China and Hong Kong are stepping up property curbs amid concern prices are becoming unaffordable. “Government measures work better in the existing home market because the strict home purchase restrictions effectively restrain some purchasing power,” Jeffrey Gao, a Shanghai-based property analyst at Royal Bank of Scotland Plc, said in a phone interview. “Developers on the other hand are not in a rush to cut home prices as they watch the direction of government policies.”
  • China May Raise Rates Within 10 Days on Prices, Nomura Says. China is likely to raise interest rates within the next 10 days as price pressures encourage the government to end the longest pause since increases began in October, Nomura Holdings Inc. says.
  • Apple(AAPL) is Said to Bid in Auction for Nortel Networks Patents. Apple Inc. (AAPL) has joined the bidders for a trove of patents from Nortel Networks Corp., the bankrupt maker of phone equipment, two people familiar with knowledge of the matter said. Nortel, based in Mississauga, Ontario, said this week it has received “significant level of interest” in the technology portfolio and will delay the auction by a week until June 27 to accommodate demand. The people familiar with Apple’s plan didn’t want to be identified because the bidding isn’t public.
  • Boehner Criticizes Obama on Libya Rationale in 'Robust' War-Powers Debate. House Speaker John Boehner is accusing the White House of deciding to “conceal” a Justice Department opinion that contradicts President Barack Obama’s argument that the U.S. mission in Libya doesn’t need congressional authorization to continue. The Ohio Republican released a statement last night after Obama declined in a letter to Boehner to address the Justice Department’s Office of Legal Counsel’s views on whether the War Powers Resolution of 1973 applies to the mission.
  • Tepco Says Failure at Decontamination Efforts Won't Delay Nuclear Solution. Tokyo Electric Power Co. played down concern a solution to its nuclear crisis may be delayed, one day after finding more radiation than expected must be removed from millions of gallons of water before other work can proceed. Decontamination efforts at the Fukushima Dai-ichi plant were halted June 18 after a filter expected to remove the radioactive element cesium for several weeks exceeded capacity in just five hours. Oil and sludge in the water contained more radiation than expected, Junichi Matsumoto, a spokesman for the utility said yesterday at a press briefing. Work on a self-contained cooling system has been suspended while the company solves this problem, Matsumoto said, adding that the setback won’t delay achievement of a stable cooling status by mid-July.
  • Zegna Warns of Luxury Slowdown in 2012. Ermenegildo Zegna SpA, the Italian maker of $2,645 wool suits, warned of a possible slowdown in sales of luxury goods in 2012 even as it forecast revenue will grow at least 10 percent this year. While “cautiously optimistic” about 2011, “I am more worried about 2012,” Chief Executive Officer Ermenegildo Zegna said June 18 in an interview before the Trivero, Italy-based company’s spring-summer 2012 runway show in Milan. “I see shadows in Europe, I see a question mark in the United States, a relative slowdown in China.”
  • Short Sellers Hammer 'Solarcoaster' as Glut of Chinese Panels Sinks Prices. Short sellers are flocking to solar power, dumping record levels of stock in First Solar Inc. (FSLR) of the U.S. and competing equipment makers in a bet that profit will be hurt by a glut of Chinese panels and shrinking demand in Europe. A surge in Chinese competition and solar subsidy cuts in the world’s biggest markets of Germany and Italy have attracted short sellers and helped push down the 37-member Bloomberg Global Leaders Solar Index by 22 percent this quarter. The drop reflects a 21 percent price decline this year for solar cells, the devices that are fastened onto panels to convert sunlight into power, according to Bloomberg New Energy Finance. “The stocks look cheap, but 2012 still has massive and potentially overwhelming challenges,” said Shawn Kravetz, chief executive officer of Esplanade Capital.
  • Japan's Exports Declined More Than Expected. Japan’s exports fell more than economists esimated in May, adding to signs the world’s third- largest economy may struggle to recover from the March 11 earthquake and tsunami. Exports decreased 10.3 percent from a year earlier after April’s revised 12.4 percent drop, the Finance Ministry said today. The median estimate of 25 economists surveyed by Bloomberg News was for an 8.4 percent decline.
  • Hong Kong Home Primes to Fall Up to 15%: Kwok. Hong Kong property prices may fall as much as 15 percent by the end of the year, said Walter Kwok, former chairman of Sun Hung Kai Properties Ltd. (16), the world’s biggest developer by market value.
Wall Street Journal:
  • Europe Wrangles Over Greece. European finance ministers meeting Sunday in Luxembourg moved toward approving a fresh quarterly installment of Greece's €110 billion ($157 billion) bailout loan, but they remained divided over the details of a far harder task—extending Greece a giant new package that would support it for years to come. Meanwhile, finance ministers and central bankers from the Group of Seven industrialized countries held a conference call late Sunday to discuss the crisis, according to people familiar with the matter. Natalie Wyeth, a spokeswoman for the U.S. Treasury Department, confirmed a G-7 conference call was held but declined to provide any details. A senior euro-zone official said the U.S. urged a fast resolution of the Greek issue.
  • Beijing Stages South China Sea Military Drills. China said it staged maritime defense exercises in the South China Sea, just four days after Vietnam conducted live-fire drills in the same disputed waters, the latest development in an escalating confrontation between Beijing and two of its Southeast Asian neighbors. The announcement came as Philippine President Benigno Aquino III warned China, in an interview with the Associated Press, not to intrude into waters claimed by Manila, saying his country wouldn't be bullied by Beijing in the dispute centered on the potentially oil-rich Spratly Islands.
  • Goldman(GS) Warns About Bullish Yuan Bet. Goldman Sachs Group Inc. is telling hedge funds to close out a bet that China's currency will strengthen against the U.S. dollar, the latest sign of increased jitters about the strength of China's economy.
  • Venture Bets on Chance Online Gambling Comes to U.S. U.S. Digital Gaming, a venture backed by prominent casino executives, on Monday is expected to name Jon Richmond, a former entertainment industry executive, as its new CEO—placing a bet that online gambling will become legal in the U.S.
  • The Accountable Care Fiasco. Even the models for health reform hate the new HHS rule. The Obama Administration is handing out waivers far and wide for its health-care bill, but behind the scenes the bureaucracy is grinding ahead writing new regulations. The latest example is the rule for Accountable Care Organizations that are supposed to be the crown jewel of cost-saving reform. One problem: The draft rule is so awful that even the models for it say they won't participate.
  • Permal Says It Won't Have Trouble Paying Investors in Market Crash. A $23 billion hedge-fund firm is seeking to reassure investors as two securities brokerages question its ability to meet redemptions quickly in two funds during a market crunch. New York-based Permal Group on June 8 sent a letter to clients at Bank of America Merrill Lynch seeking to calm them after Citigroup Inc.'s private bank recommended its bankers put no new client money into one of its hedge funds and pull clients' money from a second, people familiar with the matter said. Morgan Stanley Smith Barney on Thursday put one of the same Permal funds on its watch list, discouraging new investors from putting money into it, people familiar with the action said. The brokerages' concerns involve whether some fund holdings could be difficult to sell quickly should large numbers of investors request to redeem money at the same time, the people said. Permal, part of money-management firm Legg Mason Inc., is a large fund-of-hedge-funds manager, which means its funds invest in other firms' hedge funds.
Bloomberg Businessweek:
  • Stocks Cheapest in 26 Years as S&P 500 Falls, Earnings Rise 18%. Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010, according to the average estimate of more than 9,000 analysts compiled by Bloomberg. Higher profits haven’t stopped the gauge from falling 6.8 percent since April 29, pushing valuations to the cheapest levels in 26 years. Even if companies posted no growth, price-earnings ratios would be lower than on 96 percent of days in the past two decades.
  • China's Divergent Insider Assets Markets. One problem, however, is with this degree of control it becomes hard to get a true picture, with so few assets accurately marked to market. According to SG, China is building up a system prone to instability and potential breakdown. They do not forecast when this will happen, but do say ‘the longer it goes on, the more emphatic the release will be.’ And taking its TARP analogy ones step further, SG concludes China has one-and-a-half-times the financial crises of 2008 ahead of it. Small wonder so many connected insiders look to be taking their wealth out of China.
NY Times:
  • 2 Top Lawyers Lost to Obama in Libya War Policy Debate. President Obama rejected the views of top lawyers at the Pentagon and the Justice Department when he decided that he had the legal authority to continue American military participation in the air war in Libya without Congressional authorization, according to officials familiar with internal administration deliberations.
  • Workers Reject Union at Target Store(TGT). The nation’s main union for retail workers lost a unionization vote on Friday at a Target store in Valley Stream, N.Y., in what was an effort to make it the first of Target’s 1,750 stores in the United States to be unionized.
  • Companies Push for Tax Break on Foreign Cash. Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home. Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion. Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.
NY Post:
  • A for Spending, D for Results. New York City taxpayers spend more than almost anyone for schools — but our students still lag. Figures released last week from the 2009-10 school year show a record number of New York City high school students graduated in four years — 61%. But just 21.4% of the grads were “college or career ready,” the state found. The dismal results are frustrating, considering that New York state spends more per pupil — $18,126 — than any other state in the nation. In New York City, we spend $17,928 per student — more than any other city except Boston. Why have costs continued to skyrocket while performance lags?
Business Insider:
Zero Hedge:
Washington Post:
International Oil Daily:
  • Iran is importing about 200,000 metric tons a month of gasoline, mostly from the Asia-Pacific region, amid U.S. sanctions, citing shipping sources in the Persian Gulf area.
Daily Caller:
  • Obamacare Waivers Get Axe in Last-Minute Friday Night News Dump. In what’s appearing to be a last-minute move to avoid scrutiny, President Barack Obama’s administration announced late Friday that it is doing away with Obamacare waivers. Obama administration official Steve Larsen said no new applications, or waiver renewal applications, will be accepted after Sept. 22 this year. Larsen said politics was “absolutely not” a part of the decision to do away with the controversial program, but it certainly looks that way with the decision to dump the news on Friday.
  • Tens of Thousands March Against Euro Pact in Spain. Tens of thousands of Spaniards abandoned their customary quiet day with families and friends on Sunday to march against the so-called "Euro Pact" and the handling of the economic crisis. In Madrid, marches began at six locations around the city, one at 6 am from Leganes, 13 kilometres from the centre, before convening at the Neptune plaza in front of the Prado art museum, a stone's throw from parliament. At 1200 GMT, police put estimates in Madrid at between 35,000 and 45,000 protestors.
  • UK Banks Abandon Eurozone Over Greek Default Fears. UK banks have pulled billions of pounds of funding from the eurozone as fears grow about the impact of a “Lehman-style” event connected to a Greek default. Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks. Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.
  • Biggest Strike for 100 Years - Union Chief. The leader of the largest public sector union in the UK promises to mount the most sustained campaign of industrial action the country has seen since the general strike of 1926, vowing not to back down until the government has dropped its controversial pension changes. Dave Prentis, general secretary of Unison – which has 1.4 million members employed by the state – described plans for waves of strike action, with public services shut down on a daily basis, rolling from one region to the next and from sector to sector.
Il Sole 24 Ore:
  • Greece and Portugal may abandon the euro currency in the next five years if growth isn't restored, economist Nouriel Roubini said in an interview.
Globe and Mail:
  • Key Partner Casts Doubt on Sino-Forest Claim. Embattled Sino-Forest Corp., once Canada’s biggest publicly-traded timber company, appears to have substantially overstated the size and value of its forestry holdings in China’s Yunnan province, according to figures provided by senior forestry officials and a key business partner there. During two weeks of on-the-ground reporting that included interviews with Chinese government officials, forestry experts, local business operators and brokers, The Globe and Mail uncovered a number of glaring inconsistencies that raise doubts about the company’s public statements regarding the value of the assets that lie at the centre of the company’s core business of buying and selling Chinese timber rights.
Financial News:
  • Most of China's new lendings in the past few years were invested in rail and highway construction projects which may have potential credit risks, Liao Youming, a vice commissioner of discipline inspection at the China Banking Regulatory Commission, wrote in a commentary. Liao also warned of risks from loans to government financing vehicles and property loans.
China Daily:
  • China's imports growth will probably slow in the second half of this year as a result of the government's tightening measures, citing Vice Commerce Minister Zhong Shan.
Securities Daily:
  • China's reserve requirement ratio is close to the limit, and there won't be such frequent increases in the second half as was in the first half of this year, citing Zhang Chenghui, a researcher at the State Council's Development Research Center. There may be two to three more interest rate increases this year, as the government's goal to curb inflation is unchanged, citing Zhang.
Weekend Recommendations
  • Made positive comments on (CBS), (ROSE) and (VFC).
Night Trading
  • Asian indices are -1.50% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 116.0 -2.0 basis points.
  • Asia Pacific Sovereign CDS Index 118.0 -3.0 basis points.
  • S&P 500 futures -.46%.
  • NASDAQ 100 futures -.42%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The 3-Month/6-Month Treasury Bill Auctions, Lazard Med Tech/Healthcare Services Conference and the (AGU) Investor Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the week.

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