Wednesday, September 28, 2011

Thursday Watch


Evening Headlines

Bloomb
erg:
  • Germany to Vote on Euro Rescue Fund, Set Stage for Next Steps. German lawmakers are set to back an expansion of the euro-area rescue fund’s firepower as European officials turn to look at what next steps may be needed to stem the debt crisis. The plan before the lower house in Berlin today would allow the fund to buy bonds of distressed states and offer emergency loans to governments, raising Germany’s guarantees to 211 billion euros ($287 billion) from 123 billion euros. The main opposition Social Democrats and Greens have said they will vote with Chancellor Angela Merkel’s government, assuring passage. Lawmakers vote from about 11 a.m. Berlin time as government officials weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks yesterday. Options include seeking further writedowns on Greek sovereign bonds, adding yet more firepower to the rescue fund and a “plan B” for banks. “The German parliament is voting for too little, too late,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone. “Merkel can’t possibly believe this is the final point in a rescue package that will calm global markets and lead us out of the crisis.”
  • Ernst & Young Says Greek Default Inevitable as Risk of Recession Rises. A Greek default is inevitable and there is 35 percent chance of the euro-area economy slipping back into recession, Ernst & Young said. “The euro zone sovereign-debt crisis shows no sign of abating,” E&Y said in an e-mailed report in London today. “A default on Greek government debt now seems unavoidable. The key question is when this default will occur and how it will be managed.” European leaders have struggled to allay investor concerns that a potential debt restructuring in Greece will plunge the region’s economy into a recession. Greek bonds have tumbled and insurance against default has soared as markets put the probability of insolvency at more than 90 percent. Former European Central Bank chief economist Otmar Issing told Germany’s Stern magazine that the country “won’t get back on its feet without a drastic debt restructuring.” Experts from the European Commission, the European Central Bank and International Monetary Fund will return to Athens today as officials try to put in place a package of measures that will ring-fence Greece and prevent the turmoil from spreading to countries such as Italy and Spain. “Authorities have been slow in trying to tackle the problems facing Greece, Ireland and Portugal,” E&Y said. “It was hoped that the rescue package for Greece announced in July would bring to an end the long period of indecision and uncertainty.”
  • Euro is 'Burning Building,' EU Has Too Much Power, Hague Tells Spectator. U.K. Foreign Secretary William Hague said his 1998 comment that the euro area was “a burning building with no exits” has been proved right and that member countries will have to live with the consequences for decades. Hague first described the euro in those terms when he was leading the Conservative Party in opposition and Prime Minister Tony Blair favored joining the single currency. In a 1998 speech in Fontainebleau, near Paris, Hague warned that the single currency could damage the stability of Europe by tying together economies that were too different.
  • Euro Area's Rescue Options Are Shrinking Fast: Anil K Kashyap.
  • EU Governments Said to Be Close to Deal on OTC Derivatives Law. European Union governments are close to a deal on rules for trading of over-the-counter derivatives in the region following a negotiation meeting yesterday, said two people familiar with the discussions.
  • Sony(SNE) Says It Expects 'Huge Impact' on Earnings From Euro Slump. Sony Corp., Japan’s largest exporter of consumer electronics, said it expects a “huge impact” on earnings from the weaker euro, underscoring the company’s vulnerability to the European debt crisis. While the company hedged risks against the U.S. currency by hiring Asian contract manufacturers that settle orders in dollars, Sony can’t use that tactic with the euro, Hiroshi Kurihara, corporate treasurer at Sony, said in an interview in Tokyo yesterday. The electronics maker also doesn’t purchase many components from the region, limiting its ability to benefit from a weaker European currency, he said. “There is a huge impact on our earnings,” he said. “There are no countermeasures that we can take for the moment.”
  • China Stocks Sink to 14-Month Low as Investors Predict Slowdown. China’s stocks fell, sending the benchmark index to a 14-month low, on concern economic growth will slow as the government maintains measures to curb inflation and demand for exports falters in Europe and the U.S. PetroChina Co. and Jiangxi Copper Co. paced declines by commodity producers after oil and metal prices dropped. China Vanke Co. and Gemdale Corp. retreated among developers after Vice Premier Li Keqiang said the top priority will continue to be stabilizing prices. Most global investors predict Chinese growth will slow to less than 5 percent by 2016, a Bloomberg poll showed. “The European debt problem will remain hanging over the market as there’s no possibility of solving it in the near future,” said Zhang Ling, general manager at Shanghai River Fund Management Co. “That’ll continue to bring turmoil to global financial markets as the appetite for risky assets is falling.” The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 13.11 points, or 0.6 percent, to 2,378.95 at 9:36 a.m. local time, set for its lowest close since July 5, 2010.
  • Solar-Panel Makers Said to Plan China Trade Complaint. Solar manufacturers including the U.S. unit of SolarWorld AG (SWV) are preparing a trade complaint against imports from China, as they seek help from President Barack Obama to counter subsidies to their competitors, according to people familiar with the matter. The case, which would be filed at the Department of Commerce and the U.S. International Trade Commission in Washington, would be one of the largest targeting China, with political implications as both nations race to develop clean- energy technologies. The companies argue that China’s subsidies to solar companies violate global trade rules and provide those manufacturers with an unfair advantage, according to the people, who spoke on condition of anonymity because no complaint has yet been filed.
  • Morgan Stanley Cuts 2012 Brent Forecast to $100 from $130. Morgan Stanley said Brent oil will average $100 next year, down from a previous projection of $130, because of increasing supply and a weaker demand outlook. Production capacity in the Organization of Petroleum Exporting Countries will climb almost 800,000 barrels a day in 2012, led by the return of Libyan fields, Morgan Stanley analysts led by New York-based Hussein Allidina said in a report today. Non-OPEC output will rise 225,000 barrels. Slowing global economic growth will result in reducing demand growth, the analysts said. Consumption will advance 600,000 barrels a day in 2012, down from a 950,000 gain this year and 2.7 million barrel advance in 2010. Brent oil for November settlement fell $3.33, or 3.1 percent, to end the session at $103.81 a barrel on the London- based ICE Futures Europe exchange today.
  • AMD(AMD) Cuts Q3 Sales Forecast; Shares Slump. Advanced Micro Devices Inc. (AMD), the second-largest maker of processors for personal computers, cut its forecasts for third-quarter sales and profitability, citing manufacturing glitches. Shares dropped as much as 11 percent.
  • Commodities Head for Biggest Quarterly Drop Since 2008 on Economy's Woes. Commodities fell, heading for the biggest quarterly slump since 2008, as Europe’s sovereign-debt crisis threatened to derail the global economy, slashing raw- material demand. The Standard & Poor’s GSCI index of 24 raw materials slid 2.7 percent to settle at 603.55 at 3:46 p.m. New York time. Since June 30, the gauge has slumped 9.8 percent, the most since the last quarter of 2008 during the most-severe recession since the 1930s. Copper closed at the lowest price in 13 months, and crude oil fell almost 4 percent.
Wall Street Journal:
  • H-P(HPQ) Banker In Defense Move. Hewlett-Packard Co. has hired Goldman Sachs Group Inc. to help the company defend itself against possible activist investors who could push for change at H-P, people familiar with the matter said.
  • Private Equity Bribery Risk Grows As Tax Shelters Clamp Down. The private equity industry will be at a higher risk of violating foreign bribery laws as a result of money barred from tax shelters, according to one expert. The world of capital flight has shrunk, as countries like Switzerland try to shed the image of being havens for tax evaders and heads of state to park stolen assets, said Daniel Karson, the Americas chairman of Kroll, who spoke on a panel at the Dow Jones Private Equity Analyst Conference in New York. The possibility of such assets ending up in private equity funds represents an “added peril” to private equity, he said. With many firms now in the market hunting down new backers for new funds, there’s also a risk of violating anti-bribery laws by inadvertently taking capital from a government-connected source, said both Karson and James Gaven, senior compliance counsel for Welsh Carson Anderson & Stowe. As a firm grows and raises money globally, it may need to deal with placement agents in new markets, exposing it to another risk if those agents have government connections, Gaven said. Private equity firms are among financial firms reportedly being examined by the U.S. Justice Department over dealings with employees of sovereign-wealth funds.
  • Health Law Heads to Justices. The Obama administration asked the Supreme Court to decide the fate of its health-care overhaul, setting the stage for arguments at the high court and a likely ruling in the thick of the 2012 presidential campaign.
  • Copper Fall Hints At Broader Pains. In little more than a month, copper has careened into a bear market, catching commodities traders off guard and triggering alarm bells across financial markets. Copper prices have plunged 23% this month—a decline of 20% or more is commonly considered a bear market.
  • 'Earned American Exceptionalism'. Christie's critique of the Obama era.
Business Insider:
Zero Hedge:
CNBC:
  • Greece Faces Auditor Verdict, Fresh Aid at Stake. International auditors return to Athens on Thursday to deliver a verdict on whether Greece's tougher austerity measures qualify for aid to avert a default that would plunge the country into bankruptcy.
  • Bernanke Tells US to Learn From Emerging Economies. The U.S. can learn how to boost long-run growth from successful emerging economies, U.S. Federal Reserve chairman Ben Bernanke said in a speech on Wednesday that will delight developing countries more used to admonishment than admiration from Washington.
  • Equity Rout May Force Shift in SWF Strategy. Sovereign wealth funds may be shifting towards alternative investments such as infrastructure and property as they reconsider their investment strategies after a decade of equity underperformance against low-yielding fixed income.
LA Times:
Women's Wear Daily:
AppleInsider:
cnet:
  • E-Voting Machines Vulnerable to Remote Vote Changing. U.S. government researchers are warning that someone could sneak an inexpensive piece of electronics into e-voting machines like those to be used in the next national election and then remotely change votes after they have been cast. The Vulnerability Assessment Team at Argonne Laboratory, which is a division of the Department of Energy, discovered this summer that Diebold touch-screen e-voting machines could be hijacked remotely, according to team leader Roger Johnston. Salon reported on it today, noting that as many as a quarter of American voters are expected to be using machines that are vulnerable to such attacks in the 2012 election.
Baltimore Sun:
  • Exclusive: CFTC Lacks Votes on Position-Limit Plan. The U.S. futures regulator delayed a final vote on controversial measures to crack down on excessive speculation in commodity markets because it lacks the three votes needed for approval, sources familiar with the situation told Reuters on Wednesday. The U.S. Commodity Futures Trading Commission announced on Tuesday it was delaying by another two weeks to October 18 its meeting to consider the long-awaited rule on position limits. It was the second time a vote had been postponed.
Boston Globe:
  • Federal Agents Charge Ashland Man With Targeting Pentagon, Capitol With Aerial Explosives. Federal authorities today arrested and charged a 26-year-old Ashland man with plotting to damage the Pentagon and US Capitol with a remote-controlled aircraft filled with C-4 plastic explosives. Rezwan Ferdaus, a US citizen, was also charged with attempting to provide material support and resources to a foreign terrorist organization, specifically to al-Qaida, in order to carry out attacks on US soldiers stationed overseas, the US attorney’s office said in a statement.
Gallup:
Reuters:
  • Worthington(WOR) Q1 Lags Street View. Worthington Industries Inc's first-quarter profit lagged analysts' estimates, hurt by raw material costs that outpaced selling prices. "The stalled economy, and the uncertainty surrounding it, has hindered a quicker and more robust recovery which has an impact on our customers," Chief Executive John McConnell said in a statement.
Financial Times:
  • Greece Creditors in Bail-Out Backlash. Greece’s private creditors have reacted angrily to suggestions that some eurozone countries want bondholders to suffer bigger losses than those agreed in the second bail-out of Athens. Banks and other bondholders are resisting the idea by lobbying countries such as Germany and the Netherlands, where hardliners are pushing for private creditors to write down more than the current 21 per cent agreed in July’s €109bn Greek rescue, according to people close to the deal.
  • SEC Probes Banks Over Mortgage Loans. The Securities and Exchange Commission is investigating Royal Bank of Scotland, Credit Suisse and other financial institutions for their handling of problem mortgage loans, according to public disclosures and people familiar with the matter. The SEC is examining whether banks misled shareholders about the number of loans they might be forced to buy back because of early defaults – known as loan repurchase requests – and set aside sufficient reserves to fund those purchases or handle related litigation, people familiar with the matter said.
Telegraph:
  • Debt Crunch Threatens China and Emerging Markets. Europe's banking woes have begun to set off a funding crunch in the emerging markets of Asia, Latin America, and Eastern Europe, leaving them nakedly exposed as the rich world slides into a double-dip downturn. Contagion has spread to Chinese "Dim Sum" bonds issued in yuan on the offshore market in Hong Kong, where companies linked to China's property market and building sectors have taken a beating. Yields on Dim Sum bonds jumped by 105 basis points to 5.85pc in August, the worst month since the instruments were created.
  • Debt Crisis: Live.
The Independent:
  • Syria Slips Towards Civil War as Sanctions Bid Fails. UN resolution diluted after veto threat from China and Russia. Fears are mounting that Syria may be on the verge of civil war as reports emerged yesterday that hundreds of army deserters were battling Bashar al-Assad's forces in the first major confrontation against the regime.
AFP:
  • Muslim Brotherhood-Led Bloc Threatens Egypt Vote Boycott. Egypt's first democratic elections since the overthrow of Hosni Mubarak have been called into question after an electoral coalition led by the Muslim Brotherhood threatened a boycott. The coalition said in a statement it would not take part in November's legislative elections if a controversial article in the new electoral law was not amended. The bloc objected to Article Five of the electoral law, which bans political parties from running in a third of the seats in parliament, which are reserved for independent candidates. "We refuse to take part in elections if Article Five of the electoral law is not cancelled," said the statement, issued late Wednesday.

Macro Business:
  • CDS Signaling Trouble for Chinese Banks. (graph) There is a widespread belief that Chinese banks are a safe investment because they can’t possibly go bankrupt. After all, the government will be there to back-stop. I don’t disagree with the judgment, but have often joked that we will probably see an outcome similar to RBS, with Chinese banks still around but equity holders wiped out. Credit markets are also now showing distrust in Chinese banks. Credit default swaps spreads for Bank of China and China Development Bank have surged according to Société Générale, and they are rising at much faster rates than the rest of Asia ex. Japan:
Sydney Morning Herald:
  • Suburbs in 'Ring of Fire' Feeling the Heat. Sydney is surrounded by the mortgage belt equivalent of a ring of fire, as what seems to be Australia's own version of the euphemistically named sub-prime lending crisis emerges in specific regions. An analysis of mortgage-backed securities by Moody's Investor Services indicates a dramatic shift in the number of regions in Australia where people are struggling to keep up with their home loan payments. Although Moody's data only covers about 10 per cent of the total $1.1 trillion mortgage market, the ratings agency reckons that is a more than solid sample of trends around the country. Scratch beneath the surface data on the ''delinquencies'' - where borrowers are more than 30 days behind in their repayments - and some ugly trends emerge.
Evening Recommendations
CSFB:
  • Upgraded (OKS) to Outperform, target raised to $54.
Night Trading
  • Asian equity indices are -1.25% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 239.0 +12.5 basis points.
  • Asia Pacific Sovereign CDS Index 157.50 -3.5 basis points.
  • FTSE-100 futures -1.41%.
  • S&P 500 futures -.24%.
  • NASDAQ 100 futures -.16%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (MU)/.02
Economic Releases
8:30 am EST
  • Final 2Q GDP is estimated to rise +1.2% versus a prior estimate of a +1.0% gain.
  • Final 2Q Personal Consumption is estimated to rise +.4% versus a prior estimate of a +.4% gain.
  • Final 2Q GDP Price Index is estimated to rise +2.4% versus a prior estimate of a +2.4% gain.
  • Final 2Q Core PCE is estimated to rise +2.2% versus a prior estimate of a +2.2% gain.
  • Initial Jobless Claims for last week are estimated to fall to 420K versus 423K the prior week.
  • Continuing Claims are estimated to fall to 3730K versus 3727K prior.
10:00 am EST
  • Pending Home Sales for August are estimated to fall -2.0% versus a -1.3% decline in July.
11:00 am EST
  • The Kansas City Fed Manufacturing Activity Index for September is estimated at 3.0 versus a reading of 3.0 in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, Fed's Rosengren speaking, Fed's Plosser speaking, German Parliament's EFSF vote, 7-Year Treasury Note Auction, 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 commodity and financial 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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