Tuesday, June 14, 2011

Tuesday Watch

Evening Headlines


  • China's Inflation Accelerates at Fastest Pace Since 2008. China’s inflation accelerated to 5.5 percent in May, the fastest pace in almost three years, and industrial output grew more than economists forecast. The annual gain in consumer prices matched the median estimate in a Bloomberg News survey of economists. Production rose 13.3 percent last month, the statistics bureau said in Beijing today. That compared with a median 13.1 percent forecast. “The central bank needs to persist with the inflation fight as price gains are proving stickier than previously thought,” Yao Wei, a Hong Kong-based economist with Societe Generale SA, said before today’s release. “Any let-up would see a rebound.” Yao sees inflation peaking at 6.5 percent this month before moderating. Producer prices jumped 6.8 percent in May, the statistics bureau said. Retail sales, which are boosted by inflation, rose 16.9 percent after a 17.1 percent gain in April. Fixed-asset investment excluding rural households expanded 25.8 percent in the first five months, compared with analysts’ 25.2 percent median forecast.
  • Fed's Fisher Reiterates Central Bank Has Done Enough to Help U.S. Economy. Federal Reserve Bank of Dallas President Richard Fisher reiterated his view that the central bank has done enough to support the U.S. economy and indicated he won’t support a third round of quantitative easing. “The worst outcome of all would be for the Fed to continue monetizing the debt,” Fisher, 62, said today during a speech in Dallas. “We’ve been doing that since November.” “We’ve done enough,” Fisher said in a speech to the Certified Financial Analysts Society of Dallas-Fort Worth. “I will not support our doing more.” Fisher said it’s “highly unlikely” that the yuan will displace the dollar as the world’s main reserve currency in a “reasonable time frame,” and that it will take a long time for the U.S. housing market to work off its excess inventory.
  • Crude Oil Declines for a Third Day in New York on Signals Demand Weakening. Oil declined for a third day in New York as signs that the global economy is slowing stoked speculation that fuel demand may falter. Prices dropped to a four-week low yesterday after government data showed China’s oil-product consumption slid 4 percent in May and Standard & Poor’s cut Greece’s credit rating to the lowest held by a country. Crude for July delivery declined as much as 52 cents to $96.78 a barrel in electronic trading on the New York Mercantile Exchange, and was at $96.85 at 9:49 a.m. Sydney time. The contract yesterday slid $1.99, or 2 percent, to $97.30, the lowest since May 17. Prices are 29 percent higher the past year.
  • Fannie Mae, Freddie Mac Remain Risks to Taxpayers, U.S. Regulator Reports. Fannie Mae and Freddie Mac, the mortgage companies operating under U.S. control, are improving their financial condition but remain a risk to taxpayers, the companies’ regulator reported. In its third annual report to Congress released today, the Federal Housing Finance Agency said improved underwriting on the loans that the companies package into mortgage-backed securities helped slow the agencies’ losses to $28 billion in 2010, from $93.6 billion a year earlier.
  • China's worst power shortage in seven years may trump policies to battle inflation, as the first government-approved electricity-rate increase on farmers and businesses since November 2009 gets passed along to consumers. "All these retailers who are now playing higher overheads will all of a sudden say, 'Yeah, we'll hike our prices,'" said Ben Simpfendorfer, Hong Kong-based publisher of China Insider, an online newsletter, and former chief China economist at Royal Bank of Scotland Group Plc.
  • Volcanic Ash Disrupts Air Travel. Flights across the Southern Hemisphere were disrupted as a cloud of volcanic ash from an eruption in southern Chile widened from Argentina to Australia. United Nations Secretary-General Ban Ki-moon’s plane was diverted from its planned landing today in Buenos Aires to the central province of Cordoba after the capital city closed its two biggest airports, canceling 144 flights by companies including Santiago-based Lan Airlines SA (LAN) and Qantas Airways Ltd. (QAN), Australia’s biggest carrier. “There are ashes throughout the first 9,000 meters of the atmosphere,” said Alejandro Tome, a spokesman at the Argentine civil aviation office, adding that the flight disruptions in the region were “unprecedented.”
  • Systemic Firms May Have to Restructure: FDIC. Systemically important financial institutions in the U.S. may have to simplify their business if they can’t provide viable plans for unwinding themselves in a crisis, a senior Federal Deposit Insurance Corp. official said. “Ultimately, a SIFI could be required to restructure its operations if it cannot demonstrate it is resolvable in an orderly manner under the Bankruptcy Code,” Michael Krimminger, the FDIC’s chief counsel, will tell a House Financial Services subcommittee tomorrow at a hearing in Washington.
  • Tepco Faces Radioactive Sludge Crisis. Tokyo Electric Power Co., which is struggling to contain the worst nuclear disaster in 25 years has another crisis on its hands: finding storage for enough radioactive sludge to fill an Olympic-sized swimming pool. The utility known as Tepco plans to start decontaminating millions of liters of water poured over melting reactors to keep them from exploding after the March 11 earthquake and tsunami knocked out cooling systems. By the end of the year it expects to have 2,000 cubic meters of highly radioactive sludge separated from the water, said Teruaki Kobayashi, a nuclear facility management official at Tepco. “We haven’t determined a final disposal site for the waste,” Kobayashi said in an interview yesterday.
  • IMF Rules Out Fischer as Candidate for Director. The International Monetary Fund said that French Finance Minister Christine Lagarde and Mexican central bank Governor Agustin Carstens are the two candidates to become managing director of the group. In an e-mailed statement, the Washington-based lender omitted mention of Israeli central bank chief Stanley Fischer, who had declared his candidacy last week.
  • Tepco Rises 24% After Short Sale, Margin Rule Changes. Tokyo Electric Power Co., which has lost about 90 percent of its value since the March 11 tsunami that crippled its Fukushima Dai-Ichi nuclear plant, gained the most since at least 1974 after the stock exchange clamped down on short-selling of the shares. The stock rose as much as 24 percent to 247 yen, the highest since June 3, and traded at 245 yen as of 12:47 p.m. in Tokyo.
  • Tea Party Favorite Bachmann Enters 2012 Race. U.S. Representative Michele Bachmann, a Minnesota Republican known for her uncompromising views and firebrand style, said today that she plans to run for the 2012 Republican presidential nomination.
Wall Street Journal:
  • Wave of Unrest Rocks China. Threats to Social Order Increasingly Hit Cities, Bringing Iron-Fist Response. A wave of violent unrest in urban areas of China over the past three weeks is testing the Communist Party's efforts to maintain control over an increasingly complex and fractious society, forcing it to repeatedly deploy its massive security forces to contain public anger over economic and political grievances. The simultaneous challenge to social order in several cities from the industrial north to the export-oriented south represents a new threat for China's leaders in the politically sensitive run-up to a once-a-decade leadership change next year, even though for now the violence doesn't appear to be coordinated. In the latest disturbance, armed police were struggling to restore order in a manufacturing town in southern China Monday after deploying tear gas and armored vehicles against hundreds of migrant workers who overturned police cars, smashed windows and torched government buildings there the night before. The protests, which began Friday night in Zengcheng, in the southern province of Guangdong, followed serious rioting in another city in central China last week, plus bomb attacks on government facilities in two other cities in the past three weeks, and ethnic unrest in the northern region of Inner Mongolia last month. The latest unrest involves violent protests from individuals and large crowds in China's cities, where public anger is growing over issues including corruption and police abuses. The recent violence has exposed the limits of the government's ability to control the urban population using a sophisticated array of tools from Internet censorship to surveillance—part of what party leaders refer to as "social management." Authorities have turned to displays of raw power, deploying paramilitary police and armored vehicles in at least three cities in as many weeks, to prevent the violence from spiraling further as protesters have repeatedly directed their anger at government buildings, often ostentatious symbols of power.
  • ECRI's Achuthan: Prolonged U.S. Slowdown Underway. The U.S. economy is “not yet” headed for a double-dip recession, but a sharp and prolonged downturn is underway and may make jobs growth even tougher to come by, an influential analyst said Monday. In an interview with The Wall Street Journal, Lakshman Achuthan, the co-founder of the Economic Cycle Research Institute, said that over the last few months key indicators of long-term economic growth have all begun pointing in one direction: downward. “We’re talking about a cyclical turn that’s pronounced pervasive and persistent, not a one or two month affair,” Achuthan said. He added that the slowdown is likely to last a couple of quarters at least — even as he stopped short of calling it a formal recession, which is defined by two quarters of economic contraction. “This isn’t a story about one country driving [growth] down: China didn’t do this, and the U.S. didn’t’ do this,” he said. “It’s very big…and not something you can deny.” “The broad economy is going to slow alongside the industrial sector starting in the middle of this year, so in that sense it may feel like last year,” Achuthan said, adding that closely watched gauges of economic growth will all begin slowing at the same time. “It’s all going to be synchronized.” ECRI sees jobs growth as “slower” in the months to come, Achuthan says. “You’re not going to see the quarter of a million jobs [created] on average anytime soon,” the economist said, referring to the figure of employment growth that many analysts cite as a benchmark for sufficient growth in employment. “We’re going to get back into that 100 plus or minus range through the summer.”
  • GOP Candidates Run Against Regulation. Republican presidential hopefuls on Monday pressed for the dismantling of government regulations drawn up over 40 years, using a candidates' debate here to call for the scaling back or elimination of environmental, labor, financial and health-care rules. The seven candidates on stage at Saint Anselm College avoided challenging each other, a benefit for front-runner Mitt Romney, former governor of Massachusetts.
  • Forex Hedge Fund Assets Likely Shrink After May Losses - HFN. Losses at foreign-exchange-focused hedge funds in May might lead to further investor withdrawals from the funds, HedgeFund.net said Monday. The hedge-fund data provider, which tracks about 200 forex funds, said investors pulled $700 million from forex hedge funds in the nine months ended March 31, more than offsetting $580 million in asset appreciation during the period. It estimates a total $51.6 billion in hedge-fund assets were invested in forex strategies at the end of the first quarter. The outflow contrasted with a $110 billion inflow into other types of hedge funds in the nine months ended March 31, HFN said. May was a volatile month for investments in commodities and currencies. The U.S. dollar surged last month as investors dumped currencies of emerging economies and big commodity producers, reversing trades they had engaged in for months. The dollar's appreciation spooked many funds that had been betting against the currency. "Performance from FX strategies in April and May indicate the aggregated positions from the group were negative on the U.S. dollar," HFN said in a report. The correlation of monthly returns of forex strategies to an index measuring the U.S. dollar against a basket of currencies was -0.62 in the last two years.
  • Bank CDS Wider, Even as Stocks Rise. Financials are the best-performing sector in the market today, up more than 1%, but Tim Backshall at Capital Context points out that their credit indicators are telling a far different story. Their CDS spreads have been widening and bond yields rising all day, notes Mr. Backshall. According to Markit data, Bank of America and Citi’s one-year CDS spreads are up 3% each, Morgan Stanley’s is up about 4% and Goldman’s is up 1.5%. J.P. Morgan’s two-year spread is up 4.5%.
  • High Hopes at Miracle-Gro(SMG) in Medical Marijuana Field. Scotts Miracle-Gro Co. has long sold weed killer. Now, it's hoping to help people grow killer weed.
  • Is This the China Bubble Bursting? That sound you hear? It may be the deflating bubble in some Chinese stocks. The market scribblers at Standard & Poor’s crunched the numbers on Chinese Internet and solar companies with more than $100 million in market value. They found that on average, their collection of once-hot companies have lost half their value in the past year, after increasing in price by one-and-a-half-times over the past year. S&P wrote:
  • CIA Plans Yemen Drone Strikes. The Central Intelligence Agency is preparing to launch a secret program to kill al Qaeda militants in Yemen, where months of antigovernment protests, an armed revolt and the attempted assassination of the president have left a power vacuum, U.S. officials say.
  • Why ObamaCare Is Losing in the Courts. The government's lawyers keep changing their arguments as each one is exposed as constitutionally suspect.
  • Uncertainty Is Not The Problem by Clifford S. Asness. It's not the policies we don't know about that are retarding the economy. It's the bad policies we have. Many commentators blame our continuing economic woes on "uncertainty." They allege that recent and anticipated dramatic policy changes make business planning difficult, and that this is retarding growth and employment. This view is not wrong—but our main problem is not the uncertainty surrounding new policies. It is the policies.
  • US Phone Taps Convict Three More of Insider Trading.
  • Hackers Break Into U.S. Senate Computers. The U.S. Senate's website was hacked over the weekend, leading to a review of all of its websites, in the latest embarrassing breach of security to hit a major U.S.-based institution. The loosely organized hacker group Lulz Security broke into a public portion of the Senate website but did not reach behind a firewall into a more sensitive portion of the network, Martina Bradford, the deputy Senate sergeant at arms, said on Monday. Despite the breach, the Sergeant at Arms Office, which provides security for the Senate, said that the breach had not compromised any individual senator's information.
Business Insider:
Zero Hedge:
LA Times:
  • Southern California Home Prices Continue to Dip in May. The median price falls 8.2% from a year earlier to $280,000, the region's 11th consecutive decline. Sales drop 17.4% to 18,394, a three-year low for May. Southern California's housing market weakened in May, with prices and sales dropping in all of the region's counties, providing further evidence of a sluggish spring shopping season.
  • Poll: Only 1 in 4 Support Libya Mission. Just 26 percent of likely U.S. voters approve of continuing military action in Libya and 59 percent believe President Barack Obama should get congressional approval for the mission, according to a Rasmussen poll released Monday. The poll of 1,000 likely voters on Friday and Saturday found 42 percent oppose American action against Muammar Qadhafi, while 32 percent are undecided. The results represent a 12 percentage increase in support for a congressional authorization for the NATO-led Libya effort since a March Rasmussen poll.
  • Japan Big Manufacturers' Mood Worsens Sharply in Q2 - Govt. Big Japanese manufacturers grew more pessimistic about business conditions in the three months to June compared with the previous quarter, a survey showed on Tuesday, as the March earthquake and tsunami and subsequent nuclear crisis damaged confidence. The business survey index (BSI) of sentiment at large manufacturers stood at minus 23.3 in April-June, compared with minus 3.2 in January-March, according to the joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office. The quarterly survey excludes some companies in the northeast directly hit by the March disaster.
  • Rates Must Rise Even If Recovery Falters, Says Bank of England Policymaker Martin Weale. Interest rates should rise now to address soaring inflation even though doing so would hurt the already weak recovery, Bank of England policymaker Martin Weale has urged.
  • Duabai's Financial Crisis Laid Bare as 217 New Properties Axed. Dubai's total value of real estate transactions dropped to 119.4 billion dirhams (£20bn) last year compared with 152.9 billion dirhams in 2009. The property sector has been hit hard by the downturn, with projects worth billions of dollars put on hold or cancelled, while property prices slumped as much as 60pc. Land sales fell by 14.9pc in the last year, according to data from Dubai's Department of Land and Properties. The prospectus said only 129 projects have been completed since the beginning of 2009.

Kyodo News:
  • Japan's Fukushima prefecture will start distributing radiation-measuring equipment in September to about 34,000 schoolchildren under 15 years of age.
Financial News:
  • China should maintain its prudent monetary policy as rising production costs and power shortages indicate the economy is still "hot," citing a central bank adviser. The Asian nation should accelerate the pace of interest rate liberalization, the report said, citing Zhou Qiren, an adviser to the People's Bank of China.
China National Radio:
  • China may raise interest rates in late June or early July because of estimates for high consumer prices increases in June. The country's consumer price index may be 5.5% in May, citing market estimates.
China Daily:
  • China's food safety crisis is largely because of intentional contamination by producers and processors, citing Yu Jun, an official with the Food Safety Commission under the State Council.
Evening Recommendations
RBC Capital Markets:
  • Rated (MS) Underperform, target $24.
  • Rated (GS) Underperform, target $132.
Night Trading
  • Asian equity indices are unch. to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 116.0 +1.0 basis point.
  • Asia Pacific Sovereign CDS Index 120.25 +1.75 basis points.
  • S&P 500 futures +.64%.
  • NASDAQ 100 futures +.56%.
Morning Preview Links

Earnings of Note
  • (FDS)/.92
  • (BBY)/.33
  • (CLC)/.56
Economic Releases
7:30 am EST
  • The NFIB Small Business Optimism Index for May is estimated to fall to 90.5 versus 91.2 in April.
8:30 am EST
  • The Producer Price Index for May is estimated to rise +.1% versus a +.8% gain in April.
  • The PPI Ex Food & Energy for May is estimated to rise +.2% versus a +.3% gain in April.
  • Advance Retail Sales for May are estimated to fall -.5% versus a +.5% gain in April.
  • Retail Sales Less Autos for May are estimated to rise +.2% versus a +.6% gain in April.
  • Retail Sales Ex Auto & Gas for May are estimated to rise +.2% versus a +.2% gain in April.
10:00 am EST
  • Business Inventories for April are estimated to rise +.9% versus a +1.0% gain in March.
Upcoming Splits
  • (CSX) 3-for-1
  • (ALC) 2-for-1
Other Potential Market Movers
  • The Fed's Bernanke speaking on Debt Ceiling/Budget, weekly retail sales reports, William Blair Growth Stock Conference, Deutsche Bank Industrial/Basic Materials Conference, Deutsche Bank Consumer Conference, (CNC) investor day and the (SRZ) investor conference could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by automaker and real estate shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

No comments: