Wednesday, June 08, 2011

Wednesday Watch

Evening Headlines


  • Germany Seeks Extending Greece Bond Maturities 7 Years in Clash With ECB. German Finance Minister Wolfgang Schaeuble said bondholders must contribute a “substantial” share of a second aid package for Greece, proposing a swap that credit-rating companies may term a default. Schaeuble told European Central Bank President Jean-Claude Trichet and fellow euro finance ministers in a June 6 letter that maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy. Any agreement on aid at a ministers’ meeting on June 20 “has to include a clear mandate -- given to Greece possibly together with the IMF -- to initiate the process of involving holders of Greek bonds,” Schaeuble wrote in the letter. The German position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area’s first sovereign default. A swap offering investors terms that are “worse” than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said this week. With a return to capital markets in 2012 “more than unrealistic,” Greece needs more aid to avert “the real risk of the first unorderly default within the euro zone,” Schaeuble wrote.
  • Emerging Markets Must Speed Up Rate Increases, World Bank Says. Emerging-market economies need to speed spending cuts and interest-rate increases as they fight inflation and overheating, the World Bank said. Real interest rates are low or negative in many countries even as policy makers from India to Peru raise borrowing costs because of inflation, according to the bank. Developing nations also need to allow more exchange rate flexibility, the World Bank’s Global Economic Prospects report said. Emerging markets now account for almost half of global crude-oil demand and China absorbs 40 percent of the world’s metal supplies, contributing to the increase in prices observed since the recovery, the bank said in the report. The rise in commodity prices and strong capital inflows have contributed to faster inflation, which in developing countries was close to 7 percent in April from a year earlier, more than 3 percentage points higher than in July 2009, according to the report. Policy makers “will need to make fuller use of all the tools at their disposal to keep inflation under control,” the World Bank said. “While the more unstable capital inflows that characterized the third quarter of 2010 have abated, many of the underlying conditions that attracted those flows remain in place.” The World Bank also estimated that domestic food prices in developing countries may increase this year and next, even if international prices decline. Risks to the global economy also include continued turmoil in Arab countries, where civil unrest has lifted oil prices. Higher energy costs could also push food prices further, the bank said.
  • Greek Bailouts Risk More EU Nations Being Junked: Euro Credit. European Union plans to include private investors in a second Greek bailout are a threat to the creditworthiness of Ireland and Portugal, and risk driving up both nations' borrowing costs. Ratings companies warn that they may consider any duress or worsening terms for bondholders in a debt deal to be a default, and that they would cut Greece's credit rank accordingly. Irish and Portuguese securities, teetering on the brink of junk ratings, risk removal from government bond indexes that would force fund managers with a mandate to track the benchmarks to offload their holdings.
  • Dimon Asks Bernanke If Regulators Went Too Far. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon asked Federal Reserve Chairman Ben S. Bernanke whether regulators have gone too far by reining in the U.S. banking system and are slowing economic growth. Dimon asked whether the central banker has measured the cumulative effects of new capital requirements, mortgage standards and other rules imposed on the system in the wake of the U.S. financial crisis. Dimon, 55, spoke yesterday in a question-and-answer session after Bernanke addressed a conference of bankers in Atlanta. Dimon asked Bernanke if he “has a fear like I do” that overzealous regulation “will be the reason it took so long that our banks, our credit, our businesses and most importantly job creation to start going again. Is this holding us back at this point?” Banks have tightened lending standards to what they were 30 years ago, Dimon said. “There’s no more subprime, there’s no more Alt-A, there’s no more mortgages being packaged, the CMBS market has been completely reformed,” he said, referring to commercial mortgage-backed securities. “I have a great fear someone’s going to try to write a book in 20 years and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery.” Dimon’s points are valid, Bernanke said at the American Bankers Association’s International Monetary Conference. The central bank doesn’t have the quantitative tools to study the net impact of all the regulatory and market changes over the last three years, he said.
  • China Building Ability for Border Conflicts: Panetta. CIA director Leon Panetta, who has been nominated to succeed Defense Secretary Robert Gates, said China appears to be building the capability “to fight and win short-duration, high-intensity conflicts” along its borders. “Its near-term focus appears to be on preparing for potential contingencies involving Taiwan, including possible U.S. military intervention,” Panetta said in a 79-page set of answers to questions from the Senate Armed Services Committee in advance of his confirmation hearing, scheduled for June 9. China’s efforts to modernize its military “emphasize anti- access and area capabilities,” Panetta said in his written answers. China also is modernizing its nuclear forces and improving its space and counter-space operations as well as its computer network operations, Panetta said.
  • Corn Costlier Than Wheat in Chicago for First Time Since 1984. Corn futures are more expensive than wheat futures on the Chicago Board of Trade for the first time since 1984, according to data compiled by Bloomberg. Corn for July delivery, the most active contract, traded at $7.43 a bushel at 7:25 a.m. in Singapore while wheat for delivery in the same month traded at $7.3875 a bushel.
  • Treasury Said to Be Reluctant to Sell Part of GM(GM) Holding at Current Price. The U.S. Treasury Department is reluctant to sell part of its 33 percent stake in General Motors Co. (GM) to the company at this point because the price is too low, a person familiar with the matter said. The Treasury doesn’t want to sell GM while the shares are trading at 13 percent less than the $33 initial public offering price, the person said.
  • Swap Exemption May Pose Risk to U.S. Financial System, Exchange Group Says. A U.S. Treasury Department proposal exempting foreign exchange swaps and forwards from Dodd-Frank Act regulations could increase risk in the financial system and undermine the regulatory overhaul, a trade association for exchanges and users of the derivatives market said. The proposed exemption, released on April 29, doesn’t account for the credit risk that buyers and sellers face in the $4 trillion global daily foreign exchange market, the Washington-based Commodity Markets Council said in a letter yesterday to the Treasury Department. The council’s 40 members include the CME Group Inc. (CME), Kansas City Board of Trade and Archer-Daniels-Midland Co. (ADM). The council “believes exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,” according to the letter, which was submitted in response to the Treasury’s proposal. “Our concern is the creation of a loophole,” Christine M. Cochran, president of the association, said in an interview.
  • After India, Lagarde Takes IMF Campaign to China. Christine Lagarde is due in China today to seek the government’s backing for her bid to become the next managing director of the International Monetary Fund after failing to secure an endorsement from India. The French finance minister’s two-day trip, which will include a press briefing tomorrow in Beijing, is part of a tour that has also included Brazil.
  • Clinton to Discuss With NATO Libya Outlook After Qaddafi as Yemen Unravels. Secretary of State Hillary Clinton heads to Abu Dhabi to discuss with NATO allies the outlook for Libya without Muammar Qaddafi even as the focus may shift further east to Yemen, which is on the brink of civil war. With North Atlantic Treaty Organization jets stepping up daytime strikes on the Libyan capital of Tripoli, the United Arab Emirates will host Clinton and other members of the 22- nation Libya Contact Group on June 9. Qaddafi yesterday said “martyrdom is a million times better” than surrender, in his first broadcast comments in more than three weeks. President Barack Obama renewed his demand that Qaddafi leave as a growing chorus of world leaders predicted the demise of the Libyan dictator, who after a 42-year rule has failed to crush a popular uprising that began mid-February.
Wall Street Journal:
  • Companies Seen Cutting Health Plans. A report by McKinsey & Co. has found that 30% of employers are likely to stop offering workers health insurance after the bulk of the Obama administration's health overhaul takes effect in 2014. The findings come as a growing number of employers are seeking waivers from an early provision in the overhaul that requires them to enrich their benefits this year. At the end of April, the administration had granted 1,372 employers, unions and insurance companies one-year waivers to the law's requirement that they not cap annual benefit payouts below $750,000 a year. The law doesn't allow for such exemptions starting in 2014, leaving all those entities—and other employers whose plans don't meet the requirement—to change their offerings or drop coverage. Previous research has suggested that the number of employers who opt to drop coverage altogether in 2014 would be minimal. But the McKinsey study predicts a more dramatic shift away from employer-sponsored health plans once the new marketplace takes effect. Starting in 2014, all but the smallest employers will be required to provide insurance or pay a fine, while most Americans will have to carry coverage or pay a different fine. Lower earners will get subsidies to help them pay for plans. In surveying 1,300 employers earlier this year, McKinsey found that 30% said they would "definitely or probably" stop offering employer coverage in the years after 2014. That figure increased to more than 50% among employers with a high awareness of the overhaul law.
  • Office Owners Seek to Cash In. Owners of big-name office buildings in some U.S. cities are racing to put them up for sale to exploit surging prices before it is too late.
  • Tripped Up by the Margin. Commodity investors have long been used to wild market swings driven by wars and hurricanes. But recently a new risk has been added to their list: margin requirements. Margins, the amount of collateral investors must post against their trades, are designed to help reduce the risk to exchanges and calm overheated markets. But recently that safety valve is being blamed by some for wreaking havoc on markets such as silver, gasoline and cotton.
  • FCC Backs Away From Aiding Media. Two years ago, the FCC and FTC launched reviews of the media industry with an eye toward changes in laws or tax code that could help struggling traditional media companies. Since then, the federal government's interest in helping the newspaper industry appears to be waning. On Thursday, the Federal Communications Commission will release its long-awaited report on the "Future of Media," but according to people who have seen the voluminous document, it holds little more than minor suggestions for rule changes, such as requiring broadcasters to put more information online. The report will also suggest that the Internal Revenue Service consider helping struggling media companies get an easier path to becoming non-profits. The report's recommendations aren't binding.
  • Hedge Funds Less Bearish On Yen Despite Intervention Threat. Some big hedge funds are becoming less convinced the yen will weaken despite growing speculation Japanese officials will intervene in the foreign exchange market to curb the currency's strength.
  • Former Hedge-Fund Manager Cites at Least 18 Illicit Trades. A former portfolio manager at hedge-fund firm SAC Capital Advisors LP testified Tuesday that he was involved in at least 18 instances of insider trading while at SAC and another firm.
  • California Investigating Unusual Move in Muni-Bond CDS Price. California's state treasurer is looking into what he believes were erroneous prices reported last month for credit-default swaps tied to the state's debt. The annual cost of protecting $10 million of California debt against default over the next five years fell by $45,000 from one day to the next last month, an extraordinarily big overnight move. Tom Dresslar, a spokesman for Treasurer Bill Lockyer, said that CMA DataVision provided the prices to Bloomberg's fixed-income data service. Lockyer suspects the cost of credit-default swaps, which are expressed as a percentage of the amount of debt covered, was artificially high before the adjustment. "To the extent our prices are wrong, particularly if they are on the high side, that presents an inaccurate picture of our creditworthiness, at least in some corners," said Dresslar in an interview Tuesday.
  • Pawlenty's Growth Market. Among GOP Presidential contenders, Tim Pawlenty is offering the most ambitious reform agenda so far, and his economic address yesterday continued the trend. While details remain to be filled in, the former Minnesota Governor is rightly focusing on a growth revival that ought to define the 2012 campaign.
  • Expect more bad news until someone enacts a plan to bring deficits under control without raising taxes.
  • Fed Easing 'Miserable Failure' That Risks Depression: Bove. The Federal Reserve is risking a second Great Depression by putting pressure on banks to raise more capital, banking analyst Dick Bove writes in a scathing note that accuses the central bank of losing “all sense of reality.” Among other charges, the Rochdale Securities analyst says the Fed’s quantitative easing program was a “miserable failure,” primarily because all it did was raise asset prices but injected little new money into the economy. Much of the venom is directed at an idea that Bove acknowledges is unlikely to go anywhere: Recent suggestions from Fed Governor Daniel Tarullo that banks could raise another 20 to 100 percent in capital beyond Basel III requirements. “I unfortunately believe these people may have lost their minds just as the US Congress did when it passed the Dodd/Frank Act,” he says. “However, the proposal may be taken seriously by investors. If so it spells dangers for bank stocks. This is because it is likely that some form of this inane proposal may actually be put into place.” Bove breaks down the cause of the crisis and Washington’s reaction as such: Too much money in the economy helped create the crisis at a time when the Fed should have been clamping down on banks. Now, he says, the banks need to be given room to lend money and conduct business to reinvigorate the economy but instead are being handcuffed by onerous capital restrictions.
  • Geithner Triggers Asian Backlash on Regulation. Tim Geithner’s warning that the world could face another global financial crisis unless Asia adopts US regulations on derivatives transactions triggered a largely critical response in the region.
Business Insider:
Zero Hedge:
NY Post:
  • GE Capital Eyes Subprime Loans. General Electric(GE), which is still paying back a $60 billion government guaranteed loan, is gearing up for the first time to start selling what are essentially subprime corporate loans, The Post has learned. The company's huge finance arm, GE Capital, is asking private-equity firms to invest $600 million in a new venture that will work alongside GE when it makes corporate loans, mostly to midsize companies.
  • Higher Copper Prices Are Driving Users Away From The Metal. Copper consumers are increasingly seeking to substitute away from the expensive red metal to more cheaper materials as copper prices remain high, a panel of copper product makers said at the Metal Bulletin Copper Markets Forum in New York.
Credit Writedowns:
  • Brokerage Bans Borrowing to Buy Some China Stocks. Interactive Brokers Group Inc(IBKR) is banning clients from borrowing money to buy some Chinese stocks, according to the brokerage firm's website. The ban comes amid a rash of Chinese accounting scandals and inquiries by U.S. regulators that have resulted in auditor resignations, sharp stock declines and some delistings. Interactive Brokers' ban applies to about 160 Chinese securities and cites "elevated risk concerns" as the reason for the action. The brokerage began enforcing the ban on Monday and will phase it in over the course of this week.
  • Solar Price Drop to Weigh on SuPower(SPWRA), LDK(LDK). Steep declines in prices for solar products will shrink profit margins for SunPower Corp (SPWRA.O) and LDK Solar Co Ltd (LDK.N) this year, the companies said on Tuesday. Germany and Italy, the world's two largest solar markets, both have cut subsidies for the renewable energy source in recent months, though manufacturers have ramped up output of the modules that turn sunlight into electricity. SunPower Chief Executive Tom Werner said the industry was seeing intense competition for sales that could drive prices for solar modules down 20 percent this year. "You are seeing points where it's not economically viable for some (of our) competition to produce product," he told Reuters.
  • Ulta Salon(ULTA) Q1 Trumps Wall Street, Shares Jump. Ulta Salon, Cosmetics & Fragrance Inc posted quarterly results above market estimates as more beauty conscious people visited its stores, and the beauty retailer forecast stronger-than-expected second-quarter earnings. The strong earnings and outlook lifted the company's shares 12 percent in after-market trade.
Market News International:
  • China's current inflation pressure remains large, citing an official with the National Development and Reform Commission.
Financial Times:
  • Dissent Lands Chinese Blogger in Labor Camp. A blogger from Chongqing has been sent to a labour camp for posting a political joke on the municipality’s ambitious Communist party chief on his microblog. The dire consequences of mocking Bo Xilai shed more light on the strict regime the high-profile politician runs in Chongqing, seen by many as his springboard to one of the coveted spots in the country’s new leadership, which will be chosen late next year.
  • Obama Fears Greece Default. Barack Obama, the US president, weighed into Europe’s debate about whether to restructure Greek debt on Tuesday saying it would be “disastrous” for the US if the crisis led to “an uncontrolled spiral and default in Europe”.
National Business Daily:
  • China should raise interest rates now as current deposit rates make people unwilling to save their money at banks, citing Chen Daofu, a researcher with the State Council's Development Research Center.
Evening Recommendations
  • Reiterated Buy on (F), target $18.
Night Trading
  • Asian equity indices are -1.25% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 110.0 -2.0 basis points.
  • Asia Pacific Sovereign CDS Index 115.0 -1.0 basis point.
  • S&P 500 futures -.08%.
  • NASDAQ 100 futures -.31%.
Morning Preview Links

Earnings of Note
  • (VRNT)/.56
  • (CIEN)/-.11
  • (PNY)/.67
  • (MW)/.50
  • (GEF)/.96
  • (PLL)/.71
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,375,000 barrels versus a +2,878,000 barrel gain the prior week. Distillate inventories are expected to rise by +125,000 barrels versus a -976,000 barrel decline the prior week. Gasoline supplies are expected to rise by +1,050,000 barrels versus a +2,553,000 barrel gain the prior week. Finally, Refinery Utilization is estimated unch. versus a -.3% decline the prior week.
2:00 pm EST
  • Fed's Beige Book
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Hoenig speaking, 10-Year Treasury Note Auction, weekly MBA Mortgage Applications report, (TXN) Mid-Quarter Update and the (NSC) 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 mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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