Tuesday, June 07, 2011

Tuesday Watch

Evening Headlines


  • European Banks' Capital Shortfall Means Greece Debt Default Not an Option. A failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.
  • Fed Said to Back 3% Surcharge for Big Banks. The Federal Reserve supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of 3 percentage points on the largest global banks, according to a person familiar with the discussions. International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as 7 percentage points. “A 7 percentage-point surcharge for the largest banks would be a disaster,” said Jason Goldberg, senior analyst at Barclays Capital Inc. in New York. “It will certainly restrict lending and curb economic growth if true.”
  • Crude Declines for a Third Day on Speculation OPEC Will Increase Quotas. Oil dropped for a third day in New York amid speculation OPEC may increase output quotas when it meets in Vienna tomorrow. Futures slipped as much as 0.6 percent today after falling to the lowest in two weeks yesterday. The Organization of Petroleum Exporting Countries may raise production limits, Barclays Plc said June 6. The International Energy Agency said on May 19 it saw “an urgent need” for more oil to help bring down high prices threatening economies. Crude also slid on signs fuel demand is faltering along with economic growth. Options traders increased bets that oil prices will fall further. The most-active option was the July $95 put, which rose 17 cents to 79 cents. The second-most active contract was the August $90 put, which climbed 13 cents to $1.05. “There is speculation that OPEC may raise production targets this week, on concerns from some OPEC members that higher oil prices are curbing demand,” economists at Australia & New Zealand Banking Group Ltd., led by Warren Hogan, wrote in a note today. A “recalibration” of OPEC’s output target closer to actual output is expected, Barclays analysts led by London-based Paul Horsnell said in yesterday’s report.
  • Regional Fiscal Revolt in Spain Risks Spreading: Euro Credit. Catalonia's refusal to meet Spain's deficit target risks encouraging other regions to join in rebellion just as Prime Minister Jose Luis Rodriguez Zapatero's authority may be weakened by the approach of general elections. Catalonia, Spain's largest region with an economy the size of Portugal's, plans a 2011 deficit twice as wide as its target, in a move Moody's Investors Service said yesterday was "credit negative" for Spain. Zapatero will have to decide between allowing Catalonia to sell enough debt to fund the shortfall or antagonizing a state that has traditionally backed Socialists in national voting.
  • Frontline(FRO) Billionaire Fredriksen Bets Tankers Collapsing: Freight Markets. The most bearish investor in the oil- tanker market right now may be the one with the most at stake. At a time when analysts covering Frontline Ltd. expect shares of the world’s biggest supertanker operator to gain 1.7 percent in 12 months, its Chairman John Fredriksen says the biggest crash in the cost of ships has yet to happen. It will be within “a year or two” that the market “collapses,” the 67-year- old said in an interview in Oslo last month. For Fredriksen, whose fortune was valued by Forbes magazine at $10.7 billion in March, that will be an opportunity to buy more vessels at a discount, he said. For other investors, it may mean that the more than doubling in freight rates predicted for next year by forward freight agreements, traded by brokers and used to bet on future shipping costs, is too optimistic. “Betting against John Fredriksen tends to be a bad idea,” said Erik Nikolai Stavseth of Arctic Securities ASA in Oslo, whose recommendations on the shares of shipping companies returned 16 percent in three months. “He’s been a bellwether and he’s always been able to spot the cycle early,” said the analyst, who has a “sell” rating on Frontline and expects the U.S. shares to drop about 32 percent in a year. The industry is contending with a glut of capacity as the fleet expands twice as fast as demand.
  • Fisher Says Central Bank Has 'Done Enough if Not Too Much' to Help Economy. Federal Reserve Bank of Dallas President Richard Fisher said the central bank has “done enough if not too much” to stimulate the economy and “one has to question the efficacy” of doing more. While “it’s going to be a very slow slog” for the economy, the U.S. should grow at more than a 3 percent annual rate in the second half of this year, Fisher, 62, said today in response to audience questions after a speech in New York. The Fed is set to complete its second round of large-scale bond purchases this month, and Fisher has said he will be among the first policy makers to push for a reversal of policy as needed.
  • Peruvian Stocks' Biggest Plunge in 30 Years Forces Trading Suspension. Peru’s stock exchange halted trading after the benchmark index plunged a record 12 percent as investors speculated Ollanta Humala will seek more state control of the economy as the nation’s next president. Mining companies led the Lima General Index lower after Humala, who during the campaign pledged to raise royalties on the industry, claimed victory in yesterday’s election. The currency and bonds also fell. The bourse twice suspended trading today, ending the session three hours early, as Alturas Minerals Corp. (ALT) and Minera IRL Ltd. (MIRL) dropped more than 20 percent.
  • Goldberg: Iran Wants the Bomb, and It's Well on Its Way. The Iranian government, which is known neither for transparency nor candor, has insisted for many years that the goal of its nuclear program is entirely peaceful. And for many years, the International Atomic Energy Agency, whose motto is “Atoms for Peace,” has tended to give the ayatollahs the benefit of the doubt on this question. The agency’s former chairman, Mohamed ElBaradei, now a candidate for the presidency of Egypt, seemed to take the attitude that anxiety about Iran’s nuclear objectives was motivated by the strategic self-interest, even the paranoia, of the U.S., Israel and the Arab states near Iran, rather than by the reality-based worry that bloody-minded mullahs bent on dominating the Middle East aren’t the sort of people who should have the bomb. The new chairman of the IAEA, Yukiya Amano of Japan, seems more skeptical of Iran’s claim of nuclear virginity. He is, by many accounts, preparing a comprehensive indictment of Iran’s nuclear program to be issued later this year.
  • Ex-Met Dykstra Charged With Grand Theft, Drug Possession in Los Angeles. Lenny Dykstra, a former New York Mets and Philadelphia Phillies outfielder, was charged with grand theft for allegedly trying to lease cars using phony business and credit information and with drug possession. Dykstra, 48, who was indicted on a separate federal bankruptcy fraud charge May 5, tried to lease high-end cars from several dealerships by providing fraudulent information and claiming credit through a phony business, Home Free Systems, Los Angeles Deputy District Attorney Alex Karkanen said today in a statement. The ex-ballplayer was charged with five counts of attempted grand theft auto, eight counts of filing false financial statements, four counts of identity theft, three counts of grand theft auto and three counts of possession of a controlled substance, according to the e-mailed statement. Police found cocaine, the drug Ecstasy and Somatropin, a synthetic human growth hormone, during a search of his home in Encino, California, prosecutors said.
  • N. Korea Setting Up Economic Zone Near China. North Korea said it will set up a new economic zone near its border with China, signaling the nation’s deepening dependence on its economic benefactor after leader Kim Jong Il’s three visits there in the past year. The Hwanggumphyong and Wihwa Islands Economic Zone will be set up to “boost friendship with China and expand and develop external economic relations,” North Korea’s state-run Korean Central News Agency said late yesterday, citing a parliamentary decree.
  • Muddy Waters to Release More Sino-Forest Research After Sparking 71% Slump.
  • Google(GOOG) Reports on Hacker Attacks 'Defamed' China, People's Daily Says. Google Inc. (GOOG)’s reports that Chinese hackers may have organized attacks on U.S. and Asian government officials using the company’s Gmail service “defamed China,” the official People’s Daily said in an editorial. Google was “strongly insinuating” without evidence that the Chinese government directed the alleged cyber attacks, the editorial said. The U.S. company’s accusations were “very serious” and reinforced the “western world’s negative perceptions of China,” according to the Chinese Communist Party-affiliated newspaper. Internet hackers tried to steal passwords from hundreds of users of Google’s Gmail e-mail service, targeting the accounts of government officials in the U.S. and Asia, the Mountain View, California-based company said last week.
Wall Street Journal:
  • Weiner Now Says He Sent Photos. Rep. Anthony Weiner on Monday admitted sending sexually suggestive photographs or messages to six women online over three years, but said he wouldn't resign over his behavior or the lies he told to cover it up. The New York Democrat's effort to control the damage caused by disclosures about his secret online life didn't satisfy his party's leaders. House Minority Leader Nancy Pelosi (D., Calif.) called for a congressional ethics investigation of Mr. Weiner, a request that was immediately seconded by Rep. Steve Israel, head of the House Democrats' campaign arm and a fellow New York lawmaker. Ms Pelosi said an investigation was needed "to determine whether any official resources were used or any other violation of House rules occurred.''
  • Obama to Lose Top Economic Adviser. Austan Goolsbee, chairman of the White House Council of Economic Advisers, will leave his position by the end of the summer, marking the latest shake-up in President Barack Obama's economic team. Mr. Goolsbee, who assumed the top job at the economic council last September, will return this fall to his position as a professor at the University of Chicago, the White House announced on Monday.
  • Pimco Takes Bath on Lehman. Losses on certain Lehman bonds traded by Mr. Gross's firm, Pacific Investment Management Co., exceed $3.4 billion, according to a Wall Street Journal analysis of liquidation plans and investment disclosures filed in a federal bankruptcy court in New York.
  • Hacker Group Says It Hit A Sony Unit Computer Network Again. A group of hackers said they hit a Sony Corp. (SNE, 6758.TO) unit computer network on Monday, the latest in a string of attacks on the Japanese technology-and-media giant.
  • Japan Concedes Severity of Blast.
  • May Storms Caused Up to $7 Billion in Insured Losses. The thunderstorms and tornadoes that struck the U.S. at the end of May caused insured losses of $4 billion to $7 billion, according to a disaster-modeling firm.
  • SecurIDs Come Under Siege. Security Breach Forces RSA to Offer to Replace Nearly All of Its Millions of 'Tokens'.
  • Goldman(GS) Ex-Director Sued Over Alleged Tips in Galleon Case. A Goldman Sachs Group Inc. shareholder sued a former Goldman director on Monday over tips the one-time board member allegedly gave hedge-fund founder Raj Rajaratnam about the investment bank. The lawsuit, filed in federal court in Manhattan, is seeking to recover "short-swing" profits the shareholder contends Rajat Gupta, a former Goldman director, likely made as a result of trading by Mr. Rajaratnam, the founder of Galleon Group.
  • ObamaCare's Next Constitutional Challenge. The Medicaid provision of the health law spells the death knell for competition among the states.
  • A Merciless May for Many Hedge Funds. May was a painful month for many hedge funds, as the market struggled with the double whammy of a slowing economy and the final throes of the Fed’s current quantitative easing program. In the macro space, where funds trade everything from currencies to stocks, the damage was widespread. Moore, Caxton, and Fortress, all multibillion-dollar global players, each saw declines of at least a few percentage points in their flagship macro funds, according to hedge-fund reports and people familiar with the matter.
  • Saudis Raise Oil Production to Curb Prices. Saudi Arabia has been quietly increasing its crude oil production ahead of Wednesday’s meeting of the Opec oil cartel, in a sign that Riyadh is trying to bring oil prices down to more comfortable levels for consumers in the US, Europe and China. The kingdom boosted production in May by about 200,000 barrels a day and it is on course to increase it by another 200,000-300,000 b/d this month, taking its output above the critical 9m b/d level for the first time since mid-2008.
Business Insider:
Zero Hedge:
  • Weiner: 'I apologize to Andrew Breitbart'. Rep. Anthony Weiner (D-NY) doled out his first apologies to his wife and his constituents, but also apologized to the media and to Andrew Breitbart specifically during a long and rambling press conference in which he seemed determined to answer every last reporter’s question. Breitbart had demanded an apology a few minutes before from the same podium, where he climbed after Weiner did not show up on time to his own press conference. “I’d like an apology from him,” Breitbart said. “This was his strategy, to blame me…so I’m here for some vindication.”
The Hill:
  • When Hedge Funds Drive Educational Policy, Who Profits? With more than two trillion dollars of debt put on the backs of American taxpayers over the last two years, it is not surprising that Washington's spending spree also produced a bumper crop of waste, fraud and abuse. With the publication of the “Gainful Employment” rule this past Thursday, we bear witness to one of the most egregious (albeit inventive) examples of the unseemly intersection of special interests and big government. Fraud and corruption take on a new face in the intersection of Wall Street, the not-for profit world, and the U.S. Department of Education (DoED). The process which produced “Gainful Employment” demonstrates a new tactic: hedge fund short-sellers seeking to enrich themselves by a campaign which benefitted from a Senatorial hearing, a flawed GAO study and a one-sided government regulation. Is this any way for educational policy to be made?
  • European Central Bank Risks Being 'Wiped Out' by Bail-Outs. The European Central Bank is "looking increasingly vulnerable" and may face "hefty losses" as a result of propping up indebted eurozone countries, a leading think-tank has warned. The International Monetary Fund's partner in the recent international bail-out missions is itself in danger of becoming a liability, Open Europe has argued. In a report published on Monday entitled A House Built on Sand?, Open Europe has calculated that the ECB has a total exposure of about €444bn (£397bn) to "struggling eurozone economies". The bank is now "23 to 24 times levered" as a result of bailing out Greece, Ireland, Portugal and Spain. The London-based think tank argued: "Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out." Open Europe said: "Hefty losses for the ECB are no longer a remote risk." It added: "The ECB is ultimately underwritten by taxpayers which means there is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB's books."

Economic Information Daily:
  • China's central bank may raise interest rates by 25 basis points this weekend and may increase banks' reserve requirement ratios by 50 basis points next week after inflation, investment and some of the other economic indicators for May are released, citing analysts.
China Daily:
  • Chinese airlines won't join the European Union's emissions trading scheme and will accept the consequences, citing Chai Haibo, deputy secretary-general of the China Air Transport Association. The group and Air China Ltd. will jointly file a lawsuit in Germany against the scheme at a future date, Chai said at a meeting of the Intl. Air Transport Assoc. in Singapore. Chai called the EU scheme "radically unreasonable." Carriers that do not participate in the scheme face possible fines and flight suspensions.
  • China supports Ban Ki-moon's bid for re-election as secretary-general of the United Nations, Hong Lei, a spokesman for the China Ministry of Foreign Affairs, said in a statement.
China Business:
  • China's restrictions on the number of homes citizens can buy in 105 cities may expand to small cities to thwart speculative property demand, citing a person close to the Ministry of Housing and Urban-Rural Development.
Evening Recommendations
Barclays Capital:
  • Rated (HD) Overweight, target $41.
  • Rated (ORLY) Overweight, target $71.
  • Rated (PETM) Overweight, target $51.
  • Rated (PIR) Overweight, target $13.
  • Rated (WSM) Overweight, target $45.
  • Rated (BBBY) Overweight, target $63.
  • Rated (TSCO) Overweight, target $70.
  • Rated (AZO) Overweight, target $336.
  • Rated (ODP) Underweight, target $4.
  • Rated (OMX) Underweight, target $7.
  • Rated (RSH) Underweight, target $13.
  • Rated (BKS) Underweight, target $17.
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 112.0 +2.0 basis points.
  • Asia Pacific Sovereign CDS Index 116.0 +.25 basis point.
  • S&P 500 futures +.18%.
  • NASDAQ 100 futures +.11%.
Morning Preview Links

Earnings of Note
  • (NAV)/1.17
  • (TLB)/.03
  • (BAH)/.28
  • (ABM)/.27
  • (ALOG)/.44
  • (BOBE)/.66
  • (CMTL)/.39
  • (HOV)/-.51
  • (LDK)/.86
  • (OXM)/1.00
  • (ULTA)/.31
Economic Releases
3:00 pm EST
  • Consumer Credit for April is estimated to fall to $5.0B versus $6.016B in March.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, JOLTs Job Opendings for April, IBD/TIPP Economic Optimism Index for June, 3-Year Treasury Note Auction, weekly retail sales reports, RBC Tech/Media/Communications Conference, CSFB Aerospace/Defense Conference, Wells Fargo Financial Services Conference, Needham's Internet/Digital Media Conference, Deutsche Bank Financial Services Conference, Keefe Bruyette Woods Investment/Specialty Finance Conference, JPMorgan Industries Conference, (PLCE) Analyst Day, (F) Investor Day, (G) Investor Day, (VRNM) Investor Day and the (ENOC) Investor Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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