Thursday, July 21, 2011

Thursday Watch


Evening Headlines


Bloomberg:

  • Merkel, Sarkozy Find Position on Greek Debt. German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed on a joint position to solve Greece’s debt crisis on the eve of a summit convened to stamp out contagion in European bond markets. Details will be released today when euro region leaders meet in Brussels, the governments said in a statement after seven hours of talks in Merkel’s Chancellery in Berlin. The discussions also included European Central Bank President Jean- Claude Trichet and European Union President Herman van Rompuy, who participated by telephone. Merkel and Sarkozy “listened” to the views of Trichet, the statement said, without saying whether Trichet, who opposes any Greek default, shares their agreed stance.
  • Euro Reaches Week High on German-French Accord on Greek Debt; Aussie Falls. The euro rose to a one-week high against the greenback after Germany and France reached an agreement on addressing Greece’s debt crisis before a summit convened to prevent contagion in Europe’s bond markets.
  • Rice Prices Up 70% Make Asian Inflation Tough for Central Banks to Digest. Asian cuisine may be too much of a good thing for some of the region’s central banks as policy makers grapple with the challenge of responding to spikes in the cost of staples from rice and pork to onions and chilies. Pork prices jumped 57 percent in June in China, leading Premier Wen Jiabao to vow to curb inflation even as growth slows. Rice, the staple food for more than half of the world population, has surged about 70 percent in the past year. A wider variety of diet and greater purchasing power for non-food items leave wealthier nations less vulnerable to food-cost spikes. Food makes up more than 30 percent of inflation indexes on average in Asia, compared with about 15 percent in Europe and less than 10 percent in the U.S., according to Rabobank Groep NV. The sensitivity of their economies to swings in meat and vegetable costs means emerging-market policy makers need to raise interest rates more to stem inflation when global agriculture prices soar. “People can’t change their diets overnight,” said Song Seng Wun, an economist at CIMB Research Pte in Singapore who has analyzed Asian economies for more than two decades. “All monetary policy can do is to try to contain what is perhaps a supply disruption issue from broadening to the wider economy.”
  • The price of rice, the staple food for half the world, may jump to a three-year high after U.S. farmers slashed the amount of land sown with the grain by the most in more than a quarter century. The U.S. Dept. of Agriculture reported a 26% year-on-year plunge in rice acreage on June 30th. Futures traded on the Chicago Board of Trade will reach $22 per 100 pounds by Dec. 31, Jack Scoville a commodities analyst at Price Futures Group Inc. who spent a decade working on the floor of the bourse, said.
  • Brazil's Central Bank Raises Rate to 12.5% as Inflation Outlook Worsens. Brazil’s central bank raised its benchmark interest rate for a fifth straight meeting today after inflation accelerated to its fastest pace in six years. Policy makers, led by central bank President Alexandre Tombini, increased the Selic rate by a quarter point to 12.50 percent, as expected by all 57 analysts surveyed by Bloomberg. “Evaluating the prospective scenario and balance of risks for inflation, the monetary policy committee decided unanimously, at this time, to raise the Selic rate to 12.50 percent a year, without a bias,” policy makers said in the statement accompanying their decision. Inflation in the world’s seventh-biggest economy has accelerated every month since August, and breached the upper limit of the bank’s annual target range in April. Economist expectations for future price rises have worsened since the start of the year as unemployment hovers near a record-low and credit expands at a faster pace than Tombini considers prudent. “The economy is cooling, but it’s still far from being clear and unequivocal that it’s enough to bring inflation to the target in 2012,” Marina Santos, chief economist at Squanto Investments in Sao Paulo, said in a telephone interview before the rate decision was announced. Consumer prices, as measured by the IPCA-15 index, rose 6.75 percent in the year through mid-July, the national statistics agency reported today. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.
  • European Bank Bets Crush Returns for Herro, Fellow Top Managers. David Herro, a Morningstar Inc. manager of the decade, Fidelity International’s Sanjeev Shah and Marc Halperin of Federated Investors Inc. beat 80 percent of rivals over five years. Then they bet on European banks. The investments on lenders including BNP Paribas (BNP) SA, Intesa Sanpaolo SpA (ISP) and Lloyds Banking Group Plc (LLOY) have plunged the three managers into the bottom third of their peer-group rankings, according to data compiled by Bloomberg.
  • Carmakers Blitz U.S. Lawmakers Amid Fight for 56 MPG Fuel Standard by 2025. The U.S. auto industry, rejuvenated after the government’s $80 billion bailout of General Motors Co. (GM) and Chrysler Group LLC, is stepping up its lobbying and spending on political donations as the White House moves to boost fuel economy standards. GM spent $5.5 million during the first six months of 2011 to try to influence Congress and federal agencies, up from $4.1 million in the same period a year earlier, according to lobbying disclosures released yesterday. Chrysler, controlled by Fiat SpA (F), more than doubled its lobbying spending to $2.4 million from $1.1 million. Auto companies’ political action committees also gave more to federal campaigns, Federal Election Commission reports show. “It is a life-or-death issue” for the automakers, James Burnley, a former U.S. transportation secretary, said in a telephone interview. “They have to use the usual tools to educate decision-makers.” The new miles-per-gallon mandate is the most important issue for the companies since the first federal fuel-economy standards took effect in 1977 because the requirements could force them to build cars that consumers may not want to pay for, said Rebecca Lindland, an analyst with consultant IHS Automotive in Lexington, Massachusetts.
  • Solar Earnings Mirage Bring Muddy Waters Concerns to China's Panel Makers. Investors are starting to doubt profit estimates for China’s solar manufacturers as concerns about accounting practices first spotted at a forestry company spread nationwide. Directors leading audit committees quit LDK Solar Co. on July 18 and at its rival Trina Solar Ltd. (TSL) on July 12. Moody’s Investors Service on July 11 cited “accounting risks” at five Chinese companies including LDK. Muddy Waters LLC, a Hong Kong researcher, on June 2 accused Sino-Forest Corp. (TRE) of inflating its timber production. Those events widened doubts about the solar industry, which already was struggling with falling demand and prices, said Shawn Kravetz, chief executive officer at Esplanade Capital. Eight Chinese companies in the 17-member Bloomberg Large Solar Index have declined 13 percent since the Muddy Waters note, depressing share valuations to less than half the average Hong Kong’s benchmark share index. “There is a little bit of the Muddy Waters phenomenon here, be careful of all Chinese companies,” Kravetz said by phone from Boston. “Some multiples are so low because they are mirages. If you get up close, the reason the earnings look so cheap is because the earnings won’t be there.”
Wall Street Journal:
  • Obama Open to Debt-Cap Deal. The White House encouraged congressional leaders to reach a major deficit-reduction deal by offering them a little more time, as they scrambled to find a way to prevent a government default in less than two weeks. President Barack Obama would accept a short-term increase in the federal government's $14.29 trillion borrowing limit if congressional leaders reach agreement on a "significant" deficit-reduction plan before Aug. 2 but need more time to pass legislation, a White House spokesman said Wednesday.
  • What Slump? Blackstone(BX) Raises $3 Billion for Real Estate Fund. Blackstone Group has raised about $3 billion for a new real-estate fund, another sign that the private-equity industry’s dominant players are attracting new capital while many of the smaller funds struggle to attract new money. Blackstone, which reports second-quarter earnings Thursday morning, expects a first closing for its seventh real-estate fund in the third quarter, according to people familiar with the matter. Overall, the firm has indicated, it is targeting about $10 billion for the fund.
  • Business Blasts Ozone Limits. Trade Groups Warn White House That New EPA Curbs Would Choke Off Growth. Business groups are stepping up pressure on the Obama administration to stop the Environmental Protection Agency from enacting tougher limits on smog-forming ozone, saying a new rule pending White House approval would damp the fragile economic recovery.
  • Layoffs Deepen Gloom. Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery. Cisco Systems Inc., Lockheed Martin Corp. and troubled bookstore chain Borders Group Inc. are among those that have recently announced hefty cuts, while recent government numbers underscore how companies have shifted toward cutting jobs. The increase in layoffs is a key reason why the U.S. recorded an average of only 21,500 new jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2%.
  • IMF Urges Boosting of Yuan. Inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in China, and Beijing should boost the value of its currency to combat those threats, the International Monetary Fund said. The IMF used its annual review of China's economy to lay out a broad agenda of change for China—including a stronger currency, higher interest rates, reduced advantages for big state-owned enterprises and a liberalized financial sector. Such changes were necessary, the IMF argued to improve Chinese living standards and reduce conflict with its trading partners. The IMF declared the yuan to be "substantially" undervalued. An IMF panel estimated the yuan is undervalued between 3% and 23%, depending on the methodology used.
  • The Gang of Six Play. A conceptual breakthrough that has too few details.
  • The End of the Growth Consensus by John B. Taylor. America added 44 million jobs in the 1980s and '90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.
MarketWatch:
CNBC:
  • Cramer: Apple(AAPL) to $500. Cramer on Wednesday raised his price target on Apple from $400 to $500 a share. Yet at the $500 level, the technology stock will be selling at just 11.5 times his estimates for next fiscal year's earnings, only three quarters of what the average company in the S&P 500 index sells for.
  • Investors Warned of Chinese Bond Risks. It is well known that international bond investors have loaned tens of billions of dollars to Chinese companies in recent years and that some of those companies, notably Sino Forest and China Forestry, are now in distress. Less well known, however, is the fact that almost every Chinese borrower that has tapped the international markets for funds has done so through a circuitous route that exposes investors to considerable risk. Distressed debt specialists and insolvency experts say many investors have failed to appreciate the dangers and are likely to suffer big losses when these bonds come due in the next few years.
Zero Hedge:
IBD:
LA Times:
  • Carl Icahn Boosts Offer for Clorox(CLX) to $80 a Share. Billionaire investor Carl Icahn is staying the course. The hedge fund manager increased his offer for Clorox Co. almost 5% to $10.7 billion on Wednesday, two days after the consumer products maker rejected his initial bid.
Rasmussen Reports:
  • 21% Say U.S. Heading In Right Direction. Twenty-one percent (21%) of Likely U.S. Voters now say the country is heading in the right direction, according to a new Rasmussen Reports national telephone survey taken the week ending Sunday, July 17. This matches the lowest level measured of Obama’s presidency.
Reuters:
  • U.S. Judge Allows Lawsuit Over China Audits. The fourth time was the charm for shareholders suing the auditors of Shenzhen-based China Expert Technology. China Expert shareholders have been trying unsuccessfully to sue the company's accounting firms for failing to detect an alleged $132 million fraud.
  • Exclusive: Google(GOOG) Offers Credit Card to Advertisers. Google Inc is introducing a credit card for its advertising customers, offering its clients a credit line to try and drum up business as competition in the online ad market heats up. Google is offering the card to select U.S. clients with what it calls a competitive interest rate, an ample credit line and no annual fee. The catch: it can only be used to buy search advertising on the world's No.1 Internet search engine.
  • Explaining Obama's Tax-Hike Obsession by James Pethokoukis. It’s the great mystery of the debt ceiling debate: Why is President Barack Obama so darn adamant about raising taxes? “This may bring my presidency down, but I will not yield on this,” Obama told Republicans before dramatically exiting their budget meeting last week. But why insist on higher taxes in the middle of weakest economic recovery in the post-World War II era?
  • Intel(INTC) Backs Off PC Market Outlook, Shares Slide. Intel Corp (INTC.O) trimmed its forecast for 2011 personal computer unit sales, warning of softness in mature markets and sending its shares down more than 1 percent even as its revenue outlook beat estimates.
  • Qualcomm(QCOM) Weak Shipment Forecast Worries Investors. Qualcomm Inc (QCOM.O) said it will ship fewer cellphone chips than expected this quarter because its customers are shaving product inventories, sending its shares down almost 3 percent as investors worried the move could signal weakening demand due to an economic slowdown.
  • American Express(AXP) Posts Higher Quarterly Earnings. American Express Co (AXP.N) posted a 31 percent increase in second quarter profits, beating analysts' expectations, as customers spent more on their cards and the company's processing revenue jumped.
Telegraph:
Bangkok Post:
  • Rice Snapped Up Amid Price Fears. Consumers fear rerun of palm oil shortage. Shoppers at some hypermarkets are beginning to stock up on rice, as concern grows about a possible rerun of the palm oil fiasco earlier this year.
The Australian:
  • Treasury's Warning On China as IMF Fears Eurozone Debt Crisis Will Infect Global Economy. TREASURY has warned the Gillard government about emerging threats to the Chinese economy, which shielded Australia from the global recession and continues to underpin its resilience in the face of global economic weakness. The warning about China's runaway inflation, contained in a working paper posted on Treasury's website yesterday, could have ramifications for Australia's resources-rich economy, which is dependent on the highest terms of trade in 140 years. Although the paper is understood to have been prepared in May, the situation has worsened and China's efforts to control inflation have become more urgent in the past two months. On the weekend, Mr Swan and Julia Gillard said they would continue to press ahead with Australia's plans to put a price on carbon despite industry groups and leading business figures warning that international economic instability meant now was the worst time to introduce a $23-a-tonne carbon tax. Opposition finance spokesman Andrew Robb said Labor's budget was a "house of cards". "Any readjustment or belt tightening by China to temper growth would have major ramifications for our budget because of the Pollyanna assumptions which underpin it," Mr Robb said. "If China's demand for our commodities slows, the (Business Council of Australia) has forecast a hit to the budget of up to $36 billion by 2013-14. This would happen even with our terms of trade remaining a third higher than their 50-year average." UBS chief Asian economist Duncan Wooldridge said a Chinese growth slowdown would have major implications for the Australian economy, given its reliance on commodities demand out of China.
Shanghai Securities News:
  • Up to 20 More China Cities May Limit Home Purchases. Cities, including Zhuhai, Yangzhou, Yantai, Zhanjiang may add to 40 cities that have already done so, citing SouFun.
Financial News:
  • Beijing-based companies have higher expectations the economy will cool, citing the results of a survey carried out by the People's Bank of China's operations office in the second quarter.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (LHO), target $34.
  • Reiterated Buy on (EBAY), boosted estimates, raised target to $39.
Dahlman Rose:
  • Rated (CRR) Buy, target $215.
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 119.0 -3.0 basis points.
  • Asia Pacific Sovereign CDS Index 123.0 -2.0 basis points.
  • S&P 500 futures +.06%.
  • NASDAQ 100 futures -.28%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (GR)/1.32
  • (ALXN)/.27
  • (MHS)/.94
  • (ADS)/1.67
  • (MAN)/.79
  • (TIN)/.17
  • (BBT)/.43
  • (LH)/1.62
  • (PPG)/2.01
  • (CBE)/.95
  • (FCX)/1.33
  • (ESI)/2.64
  • (DHR)/.67
  • (WHR)/2.74
  • (LLY)/1.18
  • (PEP)/1.21
  • (MS)/-.61
  • (UNP)/1.57
  • (SHW)/1.76
  • (T)/.60
  • (CY)/.30
  • (CRUS)/.24
  • (BCR)/1.57
  • (CB)/.99
  • (GPN)/.73
  • (APKT)/.27
  • (MSFT)/.58
  • (SNDK)/.99
  • (HGSI)/-.40
  • (WDC)/.67
  • (AMD)/.08
  • (UAL)/1.43
  • (CYMI)/.71
  • (RT)/.31
  • (BAX)/1.02
  • (SWY)/.39
  • (LCC)/.53
  • (ALK)/2.43
  • (GNTX)/.27
  • (VFC)/1.02
  • (DO)/1.90
  • (NUE)/.82
Economic Releases
8:30 am EST
  • Initial Jobless Claims for last week are estimated to rise to 410K versus 405K the prior week. Continuing Claims are estimated to fall to 3705K versus 3727K prior.
10:00 am EST
  • The House Price Index for May is estimated to rise +.1% versus a +.8% gain in April.
  • Leading Indicators for June are estimated to rise +.2% versus a +.8% gain in May.
  • Philly Fed for July is estimated to rise to 2.0 versus -7.7 in June.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The EU Summit to discuss debt deal, Fed's Bernanke speaking on Dodd-Frank, Fed's Evans speaking, 10-yr Treasury TIPS auction, Fed's weekly balance sheet/M1, M2 reports, Bloomberg Economic Expectations Index for July, weekly Bloomberg Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

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