Tuesday, July 19, 2011

Tuesday Watch


Evening Headlines


Bloomberg:

  • Euro Trades Near One-Week Low Before Debt Summit, Australian Dollar Gains. The euro was 0.7 percent from its lowest level in a week against the dollar on concern European leaders will be unable to agree on steps to contain the region’s debt crisis at a summit this week. The yen traded 0.9 percent from a one-week high versus the euro before Spain and Greece sell as much as 5.75 billion euros ($8.1 billion) of bills today amid concern surging bond yields threaten to boost financing costs. Australia’s dollar pared earlier gains after minutes of the July policy meeting showed the Reserve Bank has scope to extend an interest-rate pause partly because of risks posed by Europe’s debt crisis. “These sovereign issues continue to move from one stumbling block to the next,” said Richard Grace, chief currency strategist and head of international economics in Sydney at Commonwealth Bank of Australia. “The euro is probably going to head back down and test $1.40 again.” European Central Bank President Jean-Claude Trichet reiterated that the ECB rejects any solution to Greece’s debt crisis that involves default, selective default or a credit event in a joint interview with Estonian, Slovakian and Slovenian newspapers. Yields on Spanish and Greek bonds hit euro-era records yesterday. Spanish 10-year yields rose 25 basis points to 6.32 percent, taking the spread over German bunds to 367 basis points. Greek two-year yields surged 291 basis points to 36 percent. Italy’s 10-year yield increased 21 basis points to 5.97 percent. “Europe’s debt problem is getting very serious,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest listed bank. “We can’t really expect concrete measures to come out from the summit. That will likely continue weighing on the euro and accelerating flows into safe haven currencies.”
  • Banks Face Tripling of Capital Levels as EU Moves on Basel III Regulations. Banks face demands from the European Union to more than triple the minimum levels of core capital they must hold to stave off insolvency under proposals that some lenders complain will hamper the region’s economic recovery. Michel Barnier, the EU’s financial-services chief, will propose tomorrow a law to implement global rules approved by the Basel Committee on Banking Supervision aimed at bolstering banks resilience to shocks. Lenders will need to raise about 423 billion euros ($595.5 billion) by 2019 to comply with the EU’s version of the Basel III rules, according to a draft of the EU proposals obtained by Bloomberg News. “A lot of existing capital will need to be replaced, it will not count any longer,” said Markus Heidinger, a partner dealing with financial regulation at law firm Wolf Theiss in Vienna. “At best, 10 percent of the work is done. It is just the beginning.”
  • Accounting 'Red Flags' Drive Bond Spreads to Record Levels: China Credit. Borrowing costs have risen to record levels for Chinese companies marked with “red flags” by ratings firms for unclear financial reporting and high levels of private ownership. The extra yield investors demand to own the bonds of Nine Dragons Paper Holdings Ltd. (2689), LDK Solar Co. and Road King Infrastructure Ltd. (1098) instead of similar-maturity government debt widened to all-time highs after they were named by Fitch Ratings or Moody’s Investors Service for issues such as having changeable profit margins or long-serving independent directors. The bookkeeping of Chinese corporations has come under scrutiny after short sellers said companies from Longtop Financial Technologies Ltd. to Sino-Forest Corp. (TRE) were overstating profit margins or exaggerating asset holdings. Spreads on the nation’s company bonds widened 23 basis points this year to 146 basis points, compared with a one basis-point advance for company debt in the U.S., Bank of America Merrill Lynch indexes show. “No one knows everything about what’s really going on at some of these companies,” said Scott Bennett, Aberdeen Asset Management Asia Ltd.’s Singapore-based regional head of credit.
  • BofA(BAC) Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms. Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds. Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares. “They are likely to be in capital-building mode for longer than previously anticipated,” Jason Goldberg, a Barclays Capital analyst, said in an interview. For now, he said, “I’m hard-pressed to see meaningful capital redeployment.”
  • Cisco(CSCO) Cuts 6,500 Workers, Record $1.3B in Costs. Cisco Systems Inc. (CSCO), the largest networking-equipment maker, plans to eliminate about 6,500 jobs, or 9 percent of its full-time workforce, to help trim $1 billion in annual costs and step up profit growth.
  • Deutsche Bank(DB), SocGen, RBS(RBS) Face Pressure to Boost Funds After Stress Tests. Deutsche Bank AG (DBK), Royal Bank of Scotland Group Plc (RBS), Societe Generale SA and UniCredit SpA (UCG) may face pressure from investors to boost capital after scraping through Europe’s banking stress tests. Deutsche Bank, Germany’s largest bank, had a core Tier 1 capital ratio of 6.5 percent under the test’s adverse scenario. While that surpassed the 5 percent fail rate, it ranked eighth among the 12 German banks that participated and 57th overall among the 90 banks tested. Edinburgh-based RBS had a ratio of 6.3 percent, Societe Generale of Paris 6.6 percent and Milan- based UniCredit 6.7 percent.
  • India Government Sees Growth Imperiled With Rising Greek-Like Tax Evasion. As Rama Murthy completes the sale of his three-bedroom apartment in the southern Indian city of Hyderabad, he accepts from the buyer a bag full of rupees -- a part of the purchase price the tax man will never see. “Almost 40 percent of the sale price I got in hard cash,” said Murthy, 39, who works at a software maker. “It’s illegal, but it’s rampant in India to avoid paying tax.”
  • Apple(AAPL) Supplier Catcher Surges in Taipei as Citigroup(C) Raises Price Target. Catcher Technology Co., which makes metal casings for Apple Inc. computers, surged to the highest in four years in Taipei after Citigroup Inc. and Macquarie Group Ltd. both raised their share price estimate 22 percent. The stock jumped by the 6.9 percent daily limit to NT$224.50 as of 10:35 a.m. local time, the highest intraday price since July 13, 2007.
Wall Street Journal:
  • Debt Worries Roil Markets. Worries about government debt rocked capital markets on both sides of the Atlantic Monday, as fears that the Greek crisis will spread combined with concerns at the standoff over the U.S. debt ceiling. The selloff started in Europe, hitting bonds and stocks in countries regarded as vulnerable to contagion from Greece, and spread to the U.S. where the Dow Jones Industrial Average ended at its lowest level since late June after a wild session.
  • News of the World vs. WikiLeaks. Only one placed at risk 'the lives of countless innocent individuals.' How does this year's phone hacking scandal at the now-defunct British tabloid News of the World—owned, I hardly need add, by News Corp., the Journal's parent company—compare with last year's contretemps over the release of classified information by Julian Assange's WikiLeaks and his partners at the New York Times, the Guardian and other newspapers? At bottom, they're largely the same story.
CNBC:
  • Special Report: Banks Continue Robo-Signing.
  • IBM(IBM) Beats, Raises Forecast, Sending Shares Higher. IBM beat earnings expectations and raised its full-year guidance, helped by strong sales of its computers and software. Its shares rebounded in after-hours trading. The tech company reported earnings excluding items rose to $3.09 from $2.61 a share in the year-earlier period. The company also said signings of new business at its services division surged more than expected during the second quarter, and raised its full-year guidance by 10 cents to $13.25 a share; analysts had expected $13.22 a share.
Business Insider:
Zero Hedge:
CNNMoney:
  • Borders Liquidates: 10,700 Jobs Lost. Borders Group will liquidate its remaining assets after efforts to find a buyer fell through, the bookstore chain announced Monday. The nation's second largest book seller, which filed for bankruptcy protection earlier this year, currently operates 399 stores and employs approximately 10,700 workers.
  • Why Are Market Bears So Sleepy? The level of short interest, or number of shares being held by investors who borrow stocks and quickly sell them with the hopes of buying them back later at a lower price, is surprisingly low. According to research from Brockhouse Cooper, a Montreal-based brokerage firm, short interest on the New York Stock Exchange is just 3.4% of overall shares. That's about where this level was in December 2007 before the Great Recession began. And it's off sharply from the peak of 4.9% during the height of the 2008-2009 bear market panic.
Rasmussen Reports:
Reuters:
  • Wynn(WYNN) Profit Tops Street as Vegas Recovers. Wynn Resorts Ltd posted second-quarter profit and revenue that handily topped Wall Street estimates as revenue at its Wynn Macau unit soared 36.7 percent and business in Las Vegas improved.
  • High Fertilizer Prices Help Mosaic(MOS) Beat Street. Rising fertilizer prices and robust food demand helped Mosaic Co post a better-than-expected quarterly profit on Monday. Shares of Mosaic rose 1.6 percent to $67.50 in after-hours trading.
  • Murdoch Has Board Backing. News Corp independent directors are fully behind Rupert Murdoch, a board member told Reuters on Monday, as his iron grip on his vast media empire came under question because of the hacking scandal that already has consumed his London newspaper company.
Asahi:
  • Cattle shipped from Japan's Yamagata and Niigata prefectures, as well as from Fukushima, may be contaminated with radioactive cesium, citing reports from the local governments. Farmers in the three prefectures have shipped a total of 648 cows fed with straw that contained high levels of cesium, the report said.
Xinhua:
  • China's central government called for a crackdown on the "infiltration and sabotage" activities of separatist forces in Tibet. China needs to firmly safeguard national unification and stability in Tibet, citing a message by the Chinese central government.
  • Chinese Vice President Xi Jinping vowed to fight against separatist activities by the "Dalai group," and "completely destroy" any attempt to undermine stability in Tibet and unity in China, citing Xi who made the comments during a speech in Lhasa.
South China Morning Post:
  • Investors Steering Clear of Property. Confidence among investors in Hong Kong housing drops 58pc, more than any other asset class, as soaring values price people out of the market.
21st Century Business Herald:
  • The southern Chinese city of Shenzhen will from Aug. 1 not allow home prices to rise on a month-to-month basis. Authorities from the districts of Baoan and Longgang are notifying property companies that home-price targets for the second half of this year will limit month-on-month price increases to zero. The previous target had capped home-price gains to below the economic growth rate, according to the report.
People's Daily:
  • Chinese central bank adviser Zhou Qiren suggested contracting money supply and increasing the supply of goods to manage inflation. It is hard to expect good results if authorities only curb inflation by cracking down on high prices, Zhou said, according to the report.
  • The Chinese Academy of Social Sciences called on the city of Beijing to use strict measures to rein in population growth in the nation's capital.
Evening Recommendations
Citigroup:
  • Reiterated Buy on (HAL), raised estimates, boosted target to $70.
CSFB:
  • Reiterated Outperform on (MOS), target $85.
RBC Capital:
  • Rated (F) Outperform, target $19.
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 127.0 +4.0 basis points.
  • Asia Pacific Sovereign CDS Index 128.75 +3.25 basis points.
  • S&P 500 futures +.26%.
  • NASDAQ 100 futures +.26%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (CMA)/.54
  • (HOG)/.72
  • (KEY)/.20
  • (KO)/1.16
  • (BTU)/1.06
  • (MMR)/-.14
  • (STT)/.97
  • (UNH)/.89
  • (BK)/.56
  • (BAC)/.29
  • (OMC)/.92
  • (AMTD)/.29
  • (JNJ)/1.24
  • (GWW)/2.11
  • (WFC)/.69
  • (FRX)/.96
  • (GS)/2.30
  • (SYK)/.90
  • (CMG)/1.67
  • (ALTR)/.64
  • (ISRG)/2.71
  • (RVBD)/.21
  • (YHOO)/.18
  • (CTAS)/.43
  • (VMW)/.47
  • (CSX)/.44
  • (AAPL)/5.87
  • (FTNT)/.08
Economic Releases
8:30 am EST
  • Housing Starts for June are estimated to rise to 575K versus 560K in May.
  • Building Permits for June are estimated to fall to 595K versus 612K in May.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Hoenig speaking and the weekly retail sales reports could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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