Friday, October 21, 2011

Friday Watch

Evening Headlines

  • EU Officials Said to See Risks Amid Call for Talks on Debt Swap. European Union officials weighing deeper losses for Greek bondholders in a revamped bailout are concerned that any investor involvement risks further roiling markets, say people familiar with the EU’s deliberations. Greece has accumulated at least 20 billion euros ($27 billion) in additional financing needs since a 159 billion-euro package was set in July, because of a deepening recession and delays in enacting the plan, said the people, who declined to be identified because euro-area leaders have yet to agree on their strategy. French President Nicolas Sarkozy and German Chancellor Angela Merkel yesterday demanded “immediate talks” with investors to reduce Greece’s debt load. The EU is considering five scenarios, ranging from sticking with July’s voluntary swap to a so-called hard restructuring, where investors could be forced to exchange Greek bonds for new ones at 50 percent of their value, the people said. “Debt sustainability has effectively deteriorated, given delays in the recovery, in fiscal consolidation and in the privatization plan, as well as the perspective of bank recapitalizations,” according to a draft report by the European Commission, the European Central Bank and the International Monetary Fund, a group known as the troika. Further writedowns of Greek debt, which the government in Athens forecasts at 172 percent of gross domestic product next year, may be part of a strategy set at an Oct. 23 summit that includes a bank-recapitalization plan and an expansion of the euro’s 440 billion-euro rescue fund. Wrangling over the details forced the scheduling of another summit three days later. Finance ministers, who kick off the marathon deliberations today in Brussels, are divided over how to increase the fund’s firepower. The wrangling forced the scheduled of a second summit three days after the scheduled leaders’ meeting. Euro-area brinkmanship indicates a “risk that the post- summit announcements will suggest an ambitious program at a high level but lack concrete detail on implementation,” said Huw Pill, London-based chief European economist at Goldman Sachs Group Inc. “Given previous experience, markets are unlikely to be very tolerant of such an outcome.” Officials are concerned that any kind of debt swap would worsen financing conditions for the other nations. This kind of contagion also adds pressure on non-Greek banks because of their exposure to this wider set of countries. Banks are resisting taking losses deeper than those agreed to in July. One option involves a swap with no collateral of any kind in the hard restructuring. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either EFSF bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value. Creditors’ participation needs to remain voluntary, Austrian Finance Minister Maria Fekter told reporters Oct. 18. “A forced restructuring means default, in which credit default swaps are triggered, and that means billions around the world that have to be financed,” she said. “Everybody wants to avoid that.” The scenarios being discussed don’t specify how long the program will last and the pace of other elements of Greece’s rescue, like budget reforms and a privatization plan to raise money by selling state assets, the people said.
  • France Likely to Lose Top Rating: S&P. France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, according to Standard & Poor’s. The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report dated today. These assume low economic growth and a double-dip recession in the first set of circumstances, and add an interest-rate shock to the recession in the second. “Ballooning budget deficits and bank recapitalization costs would likely send government borrowings significantly higher under both scenarios,” S&P analysts led by Chief Credit Officer Blaise Ganguin in Paris wrote in the report. “Credit metrics would deteriorate sharply as a result.” S&P is seeking to take account of the economic slowdown that hit Europe in the second quarter and which has led the ratings company to trim 2012 growth forecasts to an average of between 1 percent and 1.5 percent. France would follow the so- called peripheral euro-region nations that have already been downgraded, with Moody’s Investors Service saying earlier this week that its top rating was under threat. A double-dip recession would result from falling industrial investment and declining consumer confidence in the first scenario, according to S&P. Under these cirscumstances, the Tier 1 ratios of 20 banks in S&P’s 47-strong sample may fall below 6 percent, forcing governments put in about 80 billion euros ($109 billion) of new capital to return them to at least 7 percent, according to S&P. The bill to recapitalize the banking system across the euro region would amount to about 115 billion euros in the less- stressed scenario and about 130 billion euros in the more- stressed situation, S&P found. The analysts assume that the European Central Bank and governments would support the banks because failure to do so “could yield even more dire consequences,” according to the report. Speculative-grade corporate defaults would probably rise to 9 percent to 13 percent under the scenarios, S&P said.
  • Commerzbank CEO Says Greece Should Declare Insolvency, Bild Said. Commerzbank AG Chief Executive Officer Martin Blessing said Greece should declare insolvency and restructure its debt to calm down financial markets, German mass circulation daily Bild reported. “It has to become clear that states have only two options: Either they service their debt as agreed or they declare insolvency with all the tough consequences”, the newspaper quoted Blessing as saying. Banks would require more capital to be able to handle a Greek insolvency, Blessing said according to Bild. For this, governments have to quickly put up clear rules that apply to all banks. Blessing said if given 18 months to comply with new capital requirements, banks would try to meet them by cutting business, which in turn would hold back private sector lending and hurt the ecomomy.
  • CDS Traders Raise French Bets as EU Debates Greece: Euro Credit. Credit-default swaps traders are scaling back bets on Europe's most indebted countries to focus on France and Germany as leaders of the region's two biggest economist wrangle over a solution to the debt crisis. The net amount of swaps protecting French debt climbed 41% since the start of the year to $24.6 billion, making it the world's most-insured government, according to the Depository Trust & Clearing Corp. Contracts on Germany rose 28% to $19.3 billion in the same period, while CDS outstanding on Greece tumbled 42% to $3.7 billion. Investors are speculating French President Nicolas Sarkozy and German Chancellor Angela Merkel will have to increase the firepower of the $604 billion European Financial Stability Facility.
  • Half the Groundwater of 182 China Cities Not Drinkable, Daily Says. More than half of the groundwater monitored in 182 Chinese cities by the Ministry of Land and Resources was classified as bad, meaning the health of individuals could be harmed, the China Daily reported, citing a report by the ministry.
  • SEC to Weigh Hedge Fund Rule on Systemic Risk Data Analysis. Hedge funds and private-equity funds will be asked to deliver “extraordinary amounts” of new data to the U.S. Securities and Exchange Commission under a rule set for a vote next week, said SEC Chairman Mary Schapiro. Under the version of the rule proposed by the SEC on Jan. 26, firms managing more than $1 billion would have to file quarterly information on fund assets, leverage, investment positions, valuation and trading practices on a new Form PF. That added oversight would also come with routine inspections. “We have high hopes for the Form PF data,” Schapiro said today at a Managed Funds Association meeting in New York. The form was a requirement in last year’s Dodd-Frank Act, and Schapiro said the information will help her agency and the Financial Stability Oversight Council “understand where the risks are in the financial system.”
  • Ban on Muni Bond Sales Ended Amid Bad Debt Concern: China Credit. China will allow some local governments to issue bonds independently, ending a 17-year ban that prompted authorities to set up thousands of companies that racked up $1.7 trillion of liabilities by the end of 2010. The cities of Shanghai and Shenzhen, and the Zhejiang and Guangdong provinces will be able to sell debt themselves instead of going through the central government, according to a Finance Ministry statement yesterday. Nine of China’s 10 worst- performing corporate bonds in the past month were issued by local-government financing arms, with the 11.5 percent slide in Inner Mongolia Nailun Group’s 2018 notes leading declines.
  • World cotton consumption will be 1.9% lower than previously expected in the current season as demand declines in China, the world's largest buyer, according to Cotlook Ltd., a research company in Birkenhead, England.
  • Sugar Traders Most Bearish in Three Months on Expanding Glut: Commodities. Sugar traders and analysts are the most bearish in almost three months on mounting speculation that supply will outpace demand for the first time in four years, creating a glut that may persist through 2013. Nine of 13 people surveyed by Bloomberg expect raw sugar to drop on the ICE Futures U.S. exchange next week, the highest proportion since the end of July. The last time they were that bearish, prices fell 7.6 percent the following week. Speculators cut their bets on higher prices by 49 percent since the end of July, Commodity Futures Trading Commission data show.
  • Japan May Add Extra $52B Aid on Strong Yen. Japan is preparing to unveil plans to spend an extra 4 trillion yen ($52 billion) to help its exporters cope with a surging yen and spur job creation, according to documents obtained by Bloomberg News.
  • Japan Shipyards Demand Lower Steel Prices. Japanese shipbuilders will ask local steel mills to cut prices for plate used to construct vessels or be replaced by rivals from South Korea or China as the yen strengthens, three people familiar with the matter said.
  • Two Iranians Indicted by U.S. for Murder Plot. Two Iranian men were indicted on charges they attempted to use a weapon of mass destruction to assassinate Saudi Arabia’s ambassador in Washington. Manssor Arbabsiar, 56, an Iranian-American car salesman living in Texas, and Gholam Shakuri, who the U.S. said was an Iran-based member of that country’s “Qods Force,” attempted to recruit a man posing as a member of a violent Mexican drug cartel as their assassin, according to a five-count indictment filed today in U.S. District Court in Manhattan. The recruited assassin was secretly working for the U.S. Drug Enforcement Agency, prosecutors said when charges were announced Oct. 11. Others from the Qods Force in Iran were also involved and helped bankroll the plot, which was to have cost $1.5 million, according to a criminal complaint filed at the same time. Both are accused by the federal grand jury of conspiring to commit a terrorist act that would “kill and maim persons within the United States and create a substantial risk of serious bodily injury to others by destroying and damaging structures, conveyances and other real and personal property.”
  • Mobile Phones Don't Raise Brain Tumor Risk, Danish Study Says. Mobile telephones don’t raise the chance of developing central nervous system cancers, according to a study of Danish mobile-phone subscribers published today in the British Medical Journal.
Wall Street Journal:
  • Gadhafi's Death Ushers In New Era. Deposed Libyan leader Moammar Gadhafi was shot and killed as Libyan forces overtook the city of his birth and last remaining stronghold, setting the stage for the nation to reinvent itself after a 42-year dictatorship. The dramatic victory by Libyan revolutionaries at the city of Sirte appeared to mark the end of major ground combat in the eight-month armed uprising and the imminent conclusion of the international air campaign that helped rebel forces defeat Col. Gadhafi's army. Yet Gadhafi's demise starts a new, uncertain chapter in Libya's revolution and poses fresh challenges to the various powers that have been vying to fill the vacuum left when Gadhafi was driven from the capital in late August.
  • U.S. Probe of Sands Comes Into Focus. An internal memo from the general counsel for Las Vegas Sands Corp. shows that it is seeking to secure a list of government officials who have gambled at the company's Macau casinos—indicating a possible focus of the U.S. government's bribery probe into the company.
  • Struggling French Banks Fought to Avoid Oversight. Two years ago, a French banker flew to Washington on an emergency mission: Persuade International Monetary Fund chief Dominique Strauss-Kahn that his concerns about the health of the European banking sector were unfounded. The trip was a success. Mr. Strauss-Kahn agreed to keep his fears under wraps to avoid causing market panic, according to people familiar with the matter. Today, that appears to have been a missed opportunity—one of many in the years leading up to Europe's current banking woes.
  • For Bank in Spain, Links Aren't Plain. Spanish banking giant Banco Santander SA frequently says that it doesn't shuttle money among its far-flung units, a declaration meant to assure investors that its parent won't raid those units for cash in a pinch. The bank has "a model of subsidiaries which are autonomous in funding and capital," Chairman Emilio Botín said in a speech here last month. The same day, Santander's chief executive delivered a slide presentation that said "Each subsidiary is responsible for its own capitalization and funding needs... no cross border funding."
Business Insider:
  • Fed Considering New Mortgage-Buying Stimulus Scheme. See, just a second ago, it was being reported that Bernanke was telling Senators that there would be no more stimulus, and that the ball was in Congress' court to use fiscal stimulus. But now WSJ is reporting that the Fed IS considering a scheme to buy more mortgage bonds, with the idea of lowering rates and stimulating housing some more. It's a bit odd, and hard to imagine it working that well, since mortgage rates are famously low already, and nobody seems to care. In fact, mortgage applications have been plunging lately -- obviously rates are not the problem.
  • Steve Jobs to Obama: You're A One-Term President. Steve Jobs told President Obama he probably would not be re-elected, Walter Isaacson wrote in Jobs' soon-to-be-released biography. That's because regulations and unions in the United States were crippling its ability to remain competitive with emerging powerhouses like China.
  • China is Full of Stunning State-Of-The-Art Sports Stadiums That Never Get Used.
Zero Hedge:
  • Why Investors Can't Trust Anything Coming From Europe. A market tethered to hopes for a European debt crisis solution is likely to remain in a state of confusion, even if two upcoming summits exceed muted expectations. As a result, market volatility will continue until there are some signs that the EU is finally getting its debt crisis under control. And the betting is now that it could take months or more for the situation to get resolved. "Even if the Europeans come up with something very robust that shows they're going to try to deal with the crisis, this is going to be a long slog," says Bill Isaac, head of financial institutions practice at FTI Consulting in Vienna Va. "The problem is a bunch of countries are way overextended and somebody's going to have to take some losses."
  • How Does Europe Borrow Dollars From The Fed?
NY Times:
  • Perry Capital Cuts Staff and Closes Hong Kong Office. The hedge fund Perry Capital is retrenching, according to two people with knowledge of the situation. The firm has cut about 30 portfolio managers and analysts and three partners, these people said. It is also shuttering its Hong Kong office, as it redirects its resources to investments in Europe and the United States.
  • Hedge Fund Manager Expected to Plead Guilty to Insider Trading. A hedge fund manager from a prominent Denver family is expected to plead guilty on Friday to insider trading charges. Bo K. Brownstein, the head of Big 5 Asset Management and a former banker at Credit Suisse in New York, is expected to appear in Federal District Court in Manhattan and admit to making illegal profits by trading on a confidential stock tip about a corporate merger, according to two people briefed on the case who requested anonymity because they were not authorized to discuss it.
  • Libya Set to Get Back $37 Billion From U.S. Even before Moammar Gadhafi's death Thursday, the Treasury Department was already starting to thaw some $37 billion worth of frozen Libyan assets to make them available to the new government in Tripoli.The new Libyan government will get all the money.
LA Times:
ABC News:
  • Al Gore-Connected Car Company Gets $529 Million U.S. Loan, Builds Cars In Finland. With the approval of the Obama administration, an electric car company that received a $529 million federal government loan guarantee is assembling its first line of cars in Finland, saying it could not find a facility in the United States capable of doing the work. Vice President Joseph Biden heralded the Energy Department's $529 million loan to the start-up electric car company called Fisker as a bright new path to thousands of American manufacturing jobs. But two years after the loan was announced, the job of assembling the flashy electric Fisker Karma sports car has been outsourced to Finland.
Absolute Return+Alpha:
Crain's Chicago Business:
  • Legislature Readies Corporate Tax Cuts for CME(CME), CBOE(CBOE). Leaders of the Illinois General Assembly plan to take up a legislative proposal next week that would cut corporate taxes for the state's giant financial exchanges, CME Group Inc. and CBOE Holdings Inc., to keep them from fleeing the state. The proposal, which leaders want to push during the veto session that starts Tuesday, would rewrite state law to tax the exchanges only on trades or sales that occur in Illinois, Senate President John Cullerton said. Today, they must pay taxes on all trades, regardless of where the seller or buyer is located. The proposal thus would exclude the many electronic trades that pass through the exchanges from out-of-state parties.
  • Exclusive: Nasdaq Hackers Spied on Company Boards. Hackers who infiltrated the Nasdaq's computer systems last year installed malicious software that allowed them to spy on the directors of publicly held companies, according to two people familiar with an investigation into the matter. The new details showed the cyber attack was more serious than previously thought, as Nasdaq OMX Group had said in February that there was no evidence the hackers accessed customer information. It was not known what information the hackers might have stolen. The investigation into the attack, involving the FBI and National Security Agency, is ongoing. "God knows exactly what they have done. The long term impact of such attack is still unknown," said Tom Kellermann, a well-known cyber security expert with years of experience protecting central banks and other high-profile financial institutions from attack.
  • SanDisk's(SNDK) Quarterly Outlook a Relative Bright Spot. Flash memory supplier SanDisk forecast quarterly revenue near analysts' expectations thanks to growth in tablets and smartphones, but other chipmakers warned that a lackluster economy is hurting demand.
  • North America September Chip-Gear Orders Fall 15.3% vs. August - SEMI.
  • Acme Packet(APKT) Q3 Misses Street, Backs FY Outlook. Acme Packet Inc , which provides communication infrastructure for telecoms, reported a quarterly profit below estimates, days after it forecast weak results citing delayed orders from key customer AT&T .
Financial Times:
  • Banks Face Penalties in Return for Bail-Outs. Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs. The stance – on the agenda at this weekend’s EU summit – has emerged after intense debate between European officials and bankers over whether the plan for forced recapitalisations should be exempt from normal state-aid rules.
  • European Debt Crisis Talks Plunged Into Chaos as Leaders Announce Another Summit. Plans to "decisively address" the debt crisis this weekend were plunged into chaos on Thursday night as European leaders were forced to announce another "summit" next week amid political deadlock between France and Germany. A statement released by the Elysee Palace said that Nicolas Sarkozy and Angela Merkel would meet to discuss their "ambitious and comprehensive response" to the crisis ahead of the European Council summit on Sunday. But in a tacit admission of the gulf between them, the statement added that resolutions would be "finally adopted" at a "second meeting no later than Wednesday". Insiders said the weekend's summit of European leaders came close to being cancelled altogether, with the French president Mr Sarkozy having to beg German Chancellor Mrs Merkel not to pull the plug during frantic telephone calls. The news came as US President Barack Obama praised Mr Sarkozy and Mrs Merkel for working "diligently" for a "politically sustainable" solution to the eurozone crisis in a video conference with the two leaders and UK Prime Minister David Cameron.
  • Italian Bond Yields Reach Point of No Return. As the UK discovered to its cost during its ill-fated membership of the ERM, it is tough to impossible to be in any form of currency union with Germany.
  • Europe's debt crisis may spread "fast" across the single currency area, ECB council member Erkki Liikanen said. "Everyone who monitors the financial markets knows the contagion risk now is considerable," Liikanen said in an interview.
Le Figaro:
  • France is preparing to cut its 2012 growth forecast. A cut to below 1.5% would leave the government needing to either cut spending or raise taxes in order to meet 2012 budget deficit target of 4.5% of GDP. The government may announce new spending cuts by year-end.
National Business Daily:
  • China's economy may continue to slow in the last quarter of the year and in the first half of next, deputy director of the National Development and Reform Commission's Chinese Academy of Macroeconomic Research, as saying at a forum. The country's consumer price index this year won't likely fall below 5%, Chen said.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 208.0 +2.0 basis points.
  • Asia Pacific Sovereign CDS Index 155.0 +2.0 basis points.
  • FTSE-100 futures +.64%.
  • S&P 500 futures +.21%.
  • NASDAQ 100 futures +.20%.
Morning Preview Links

Earnings of Note
  • (AOS)/.48
  • (APD)/1.52
  • (GE)/.31
  • (HON)/.96
  • (IDXX)/.65
  • (MAN)/.93
  • (MCD)/1.43
  • (SLB)/1.01
  • (STI)/.36
  • (VZ)/.56
  • (HAR)/.49
Economic Releases
  • None of note
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Yellen speaking, Fed's Kocherlakota speaking and the ECB's Trichet speaking could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by mining and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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