Tuesday, June 21, 2011

Tuesday Watch

Evening Headlines


  • Papandreou Faces Confidence Vote. Greek Prime Minister George Papandreou faces a confidence vote in his government today that may determine whether Greece becomes the first euro-area country to default. Tonight’s vote caps a week of turmoil for Papandreou, who fended off a revolt from the ranks of his ruling socialist Pasok party in parliament last week. That came after opposition parties rejected his call for a national unity government. European Union leaders have insisted Papandreou secure multi- party support for austerity measures that are a condition of the aid needed to avoid default as soon as next month. “Pasok now knows it has to close ranks,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. “The situation is volatile. A negative vote by the Greek parliament could trigger a serious crisis in Europe.” The International Monetary Fund, contributor of a third of the bailout money for Greece, Ireland and Portugal, has warned European leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.” At the same time, Papandreou is struggling to convince Greeks to accept a 78 billion-euro ($112 billion) package of state-asset sales and budget cuts, which include a “crisis levy” on wages.
  • Crude Oil Gains for Second Day as Concerns Over European Debt Crisis Ease. Crude oil advanced for a second day in New York as concern eased that Greece will default on its debt and disrupt the region’s economy. Futures advanced as much as 0.8 percent after Luxembourg’s prime minister, Jean-Claude Juncker, said Greek Prime Minister George Papandreou assured him the government would do everything to ensure financial aid. Oil also rose after technical indicators signaled prices may have declined too far. An Energy Department report tomorrow may show U.S. crude inventories fell for a third week. “There’s a little bit of optimism leading back into the market and the chances are that the Greece concerns will probably be solved some way,” said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted oil will average $100 a barrel this year. “We feel oil is due for a bit of a bounce.” Oil for July delivery rose as much as 74 cents to $94 a barrel in electronic trading on the New York Mercantile Exchange and was at $93.77 at 11:12 a.m. Sydney time.
  • Refined copper imports by China, the biggest user, are estimated to fall 32% this year from 2010, according to metals researcher Beijing Antaike Information Development Co. "We have cut our forecast from 2.4 million tons made at the beginning of this year to 2 million tons," said Antaike copper analyst Li Yusheng in a phone interview. "We think the destocking will continue." "Imports failed to climb up in a pickup of seasonal demand in April and May, and this isn't a good sign," Li said. "We think inventories at bonded and exchange warehouses can be further tapped to meet demand in the fall." Stockpiles at the bonded warehouse in Shanghai have fallen to around 400,000 tons from as much as 600,000 tons two months ago, while the historical average was around 200,000 tons, according to Li. Imports of refined copper fell 29% from a year ago to 756,199 tons in the first four months this year, customs data showed.
  • Nuclear-Plant Operators May Be Tapped to Cover Safety Costs, IAEA Says. The United Nations nuclear watchdog is weighing whether nuclear-plant operators should be tapped to fill budget shortfalls needed to finance tougher atomic-safety reviews in the wake of Japan’s Fukushima Dai-Ichi meltdown.
  • China stocks are likely to post a record stretch of monthly declines after government measures to fight inflation pushed down financial companies on the benchmark index to an all-time low relative to earnings. Banks and developers slid to a record 8.8 times estimated earnings in the week ended June 3, and were at 9.14 on June 17, Bloomberg data show. Non-financials are valued at 19.2 times estimated earnings, compared with a record low of 14.8 reached in October 2008. "When you rule out financial companies, Chinese stocks are actually not cheap and most of them are still way above their valuation bottoms," siad Li Jun, a strategist at Central China Securities Co. in Shanghai. "On the back drop of the government tightening liquidity, it's hard for valuations to expand so high-valuation stocks risk converging with low-valuation ones."
  • China Money Rate Jumps to 4-Month High on Lull in Bills Due. The seven-day repurchase rate gained 83 basis points to 8.33 percent as of 11:32 a.m. in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It touched 8.50 percent earlier, the highest level since Jan. 31.
  • More of the U.S. corn crop will be used to fuel cars than feed animals for the first time during the marketing year that starts in September, the Agriculture Department projects. The proportion of the harvest going to ethanol has almost quadrupled since 2002. The share will reach 40% in the current marketing year and be close to that level in 2011-2012. "For egg, poultry and beef producers, their largest cost has doubled because of this policy," Coburn, an Oklahoma Republican, said on June 16.
  • Ponnuru: Too Much FDA Intervention Means Too Few Drugs. The Food and Drug Administration reports that the U.S. has shortages of 246 drugs -- a record number. Oncologists and anesthesiologists are increasingly concerned, with more than 90 percent of the latter saying they have experienced shortages. In a September 2010 survey, by the Institute for Safe Medication Practices, one in four respondents reported that shortages had caused medical errors during the previous year. More alarmingly, one in five reported adverse patient outcomes. Doctors have had to respond to shortages by substituting drugs that are not as effective, and by making wrenching decisions about which patients get access to which drugs. The consequences can be dire. Cytarabine is a drug that is effective in the treatment of leukemia and lymphoma -- but it has to be administered quickly, and it’s one of the drugs in short supply. One middle-aged woman reportedly fell into a persistent vegetative state because anesthesiologists ran out of epinephrine. There are also anecdotal reports of “gray markets,” which charge high prices for the affected drugs. What’s behind this shortage? Blame a combination of low profit margins and government activism.
Wall Street Journal:
  • Change in China Hits U.S. Purse. For more than a decade starting in the early 1990s, U.S. inflation declined as low-wage workers in China and other developing nations joined the global economy and produced a tide of cheap goods that washed onto U.S. shores. The trend made American consumers feel better off and, by restraining the upward crawl of consumer prices, helped enable the Federal Reserve to fuel the U.S. economy with low interest rates. That epoch appears to be over. Prices of imported goods are climbing, becoming a source of inflationary pressure. A wide variety of common products made abroad, from shoes to auto parts to jewelry, are landing on U.S. docks with higher price tags. U.S. import prices, excluding oil, rose 8% over the past two years, a historic shift from their downward drift for two decades. The increase is bigger still when including oil
  • SEC Scrutinizes Conoco(COP), Occidental(OXY). ConocoPhillips and Occidental Petroleum Corp. said they have received inquiries from the Securities and Exchange Commission related to their operations in Libya. ConocoPhillips spokesman John McLemore said the Houston oil company has received a request for information from the SEC and is cooperating fully. Occidental spokesman Richard Kline said in an email the company was "among the companies which received an information request regarding Libya from the SEC." The SEC declined to comment. A person familiar with the inquiries said the SEC is asking oil companies for any type of communications they held with the government of Col. Moammar Gadhafi since 2008. "It's a very broad inquiry for communications with the Libyan government," the person said.
  • 'Guilty' for Expert Consultant. Another Win for Prosecutors as Jury Convicts Ex-Primary Global Worker of Fraud and Conspiracy.
  • Fed Swap Lines Could Rise to Fore if Greek Contagion Spreads. Euro-zone banks could seek dollar funding from the Federal Reserve if the Greek debt crisis were to spread contagion throughout the financial system. In an echo of the 2008 global financial crisis, banks could need extra help from abroad and existing swap lines would be a useful backstop for banks to have, analysts said. Many bigger banks are presumed to be implicitly backstopped by their governments or central banks--and hence "too-big-to-fail." But the financial system as a whole may still need extra dollars to keep functioning smoothly. The European Central Bank has a swap line open with the Federal Reserve that allows it to borrow dollars from the U.S. central bank that can then be lent to euro-zone banks. The spread between three-month LIBOR and the Overnight Indexed Swaps (OIS) rate is the key data point in indicating stress and increased odds of that the ECB would have to tap the Fed swap line. A widening spread would signal that banks are increasingly unwilling to lend money to each other. Stone noted the spread is narrow at the moment, at about 13 basis points. That's well off the peak in the heart of the 2008 financial crisis of around 360 basis points, he said.
  • Feds Sue Bankers Over Fall in Bonds. Federal regulators accused J.P. Morgan Chase & Co.(JPM) and Royal Bank of Scotland Group PLC of duping five large credit unions into buying more than $3 billion in mortgage bonds that were "destined to perform poorly," and that quickly sank the credit unions. The two civil lawsuits filed Monday in U.S. District Court in Kansas City, Kan., by the National Credit Union Administration are the most aggressive move yet by U.S. regulators to recover losses from Wall Street firms for alleged wrongdoing before and during the financial crisis.
  • Lending Battle is Risky Business. Banks and other lenders are engaged in an increasingly pitched fight for some corporate borrowers, raising concerns among analysts and regulators that the banks aren't charging enough to cover the risk they are taking on. The battle to make loans, in contrast to the credit squeeze of recent years, is being driven by two factors: demand by investors for these loans and desire by banks to boost their revenues, which they have struggled to do recently.
  • The Fiscal Pledge We Need: Cut, Cap, Balance. The U.S. debt is now above its current limit of $14.3 trillion, a figure so large that it is nearly impossible for the average American to comprehend. Under the budget proposed by President Obama for 2012, the debt would rise to $15.7 trillion in 2021. The annual interest alone would be about $700 billion, and that would only increase with inflation. President Obama's proposed budget was so excessive and fiscally irresponsible that it was voted down in the Senate 97-0. In spite of these facts, President Obama and Democratic leaders in Congress still want to increase the national debt limit without making meaningful spending cuts or reforms. This plan, a so-called "clean" increase in the debt limit, recently failed a House vote of 318-97. Every Republican and 82 Democrats voted against.
Business Insider:
  • John Paulson Just Dumped All His Sino-Forest After Taking a Gigantic Bath. John Paulson, the billionaire hedge fund manager, has sold all his shares of Sino-Forest, the Chinese timber company whose shares have collapsed in the wake of fraud allegations, according to Bloomberg. Paulson had a huge holding that has scorched his returns for June -- he's reportedly down 13% this month alone (also in part due to wrongway bets on financials). Originally, Paulson defended the stock in the wake of allegations from short-selling research firm Muddy Waters, but the negatives keep piling up. This weekend a Canadian newspaper basically corroborated the claims made by Muddy Waters.
Zero Hedge:
  • House GOP Considers New Limits on Libya.
  • Obama's 30th Fundraiser Tonight. The White House says President Obama isn't focused on his reelection campaign, but tonight he will headline his 29th and 30th fundraisers for the year. Mark Knoller of CBS News, tabulator of White House statistics, said Obama so far this year has raised money in six states plus Washington, D.C. and Puerto Rico. At the same point in former President George W. Bush's reelection cycle, he had done only three fundraisers, Knoller said.
USA Today:
  • UK Treasury Plans for Greece to Go Bust. Treasury ministers have admitted that the Government is drawing up contingency plans for a Greek bankruptcy after being warned by a former foreign secretary that the euro “cannot last”.
La Tribune:
  • European Union Energy Commissioner Guenther Oettinger said nuclear power will continue to play an important role in Europe's energy production in the coming decades, citing an interview.
Yonhap News:
  • North Korea has recently bought tear gas, helmets and shields in volume from China.
Hong Kong Economic Times:
  • U.S.-listed Chinese companies have fundamental flaws and suffer from mismanagement that have come to light because the credit system of their home country is "backward," Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, wrote in a commentary. These problems were exposed after the companies moved to a credit system that is based on the rule of law, he wrote.
China Finance:
  • China should stick to a prudent monetary policy at the moment because consumer and asset prices may rebound if policy gets any looser, China Finance magazine said in an editorial. The nation still faces liquidity risks as banks' off-balance sheet businesses are growing rapidly, the editorial said. China should stay on high alert for imported inflation triggered by loose monetary policies in the world's major economies.
China Daily:
  • The price of pork and live pigs rose to a record this month due to the rising cost of corn and labor, citing Feng Yonghui, chief analyst at Soozhu.com, a website that monitors the market. The price for live pigs rose to 18.57 yuan a kilogram by the end of the third week of June, exceeding the previous record set in April 2008, citing Feng. The price of pork rose to 27.67 yuan a kilogram last week, also exceeding a record set in 2008. Prices for pork and live pigs will continue rising until the end of this year, citing Zhu Baoliang, deputy director of the economic forecasting department at the State Information Center as saying. The price of corn, which makes up 60% of pig feed, is the "biggest force" fueling pork prices, citing Feng. Rising wages for workers also contributed.
  • Industrial Bank Co. economist Lu Zhengwei said he expects China to raise interest rates in July. China should avoid an economic "hard landing," he said.
Evening Recommendations
  • Reiterated Outperform on (AAPL), target $500.
Night Trading
  • Asian equity indices are +.50% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 116.0 unch.
  • Asia Pacific Sovereign CDS Index 119.0 +1.0 basis point.
  • S&P 500 futures -.11%.
  • NASDAQ 100 futures -.07%.
Morning Preview Links

Earnings of Note
  • (CMC)/.20
  • (BKS)/-1.00
  • (GRB)/.04
  • (WAG)/.63
  • (JEF)/.40
  • (CCL)/.24
  • (JBL)/.57
  • (ADBE)/.51
  • (AVAV)/.69
Economic Releases
10:00 am EST
  • Existing Home Sales for May are estimated to fall to 4.8M versus 5.05M in April.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The weekly retail sales reports, Jeffries Consumer Conference, RBC Capital Mining/Materials Conference, Goldman Sachs dot Commerce Day and the (CBT) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

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