Monday, October 31, 2011

Monday Watch

Weekend Headlines


  • EU May Struggle to Keep Euphoria as Scrutiny Deepens Following Debt Summit. European leaders may struggle to maintain the euphoria that drove the euro to its biggest one-day gain in more than a year as scrutiny deepens on their latest attempt to stem the region’s turmoil. European Central Bank President Jean-Claude Trichet called for “swift implementation” if financial stability is to be restored, Germany’s Bild Zeitung reported in an extract of an interview to be published tomorrow. The weaknesses of Europe’s common currency area, ranging from its design to a persisting dearth of bank funding and anemic economic growth, weren’t properly addressed in this week’s accord to stem investor panic, said Harvard University economist Kenneth Rogoff and Jonathan Loynes at Capital Economics Ltd. in London. “My read of this is that the markets are cheered that they’re still alive,” Rogoff, a former International Monetary Fund chief economist, said as a compensated speaker at the Bloomberg FX11 Summit in New York Oct. 27. “Even in a fairly short period, doubts will start to grow again.”
  • Europe Seeking Crisis-Fighting Funds Faces Resistance Before Cannes G-20. European governments are running into initial resistance as they seek to use this week’s Group of 20 summit to turn early praise for their revamped crisis- fighting strategy into financial support. The G-20 leaders convene Nov. 3-4 in Cannes, France, a week after euro-area authorities pledged to magnify the capacity of their rescue fund to 1 trillion euros ($1.4 trillion) and look beyond their borders for help in doing so as they combat the debt turmoil posing the biggest threat to global growth. While the help of China and cooperation of the International Monetary Fund were immediately sought, pledges of hard cash are proving hard to come by as G-20 members press for more details of the plan. In an indication Europe may eventually prevail, an official in Brazil’s government said it’s in talks with Russia, India, China and South Africa -- the so-called BRICS -- about possible joint assistance. “Unless European leaders can flesh out some of these details very quickly, it’s hard to see the rest of the G-20 coming on board with very great enthusiasm,” said Eswar Prasad, a senior fellow at the Brookings Institution in Washington and a former IMF economist.
  • Europe Might Have Blown Last Chance to End Its Crisis: View. The euphoria over Europe’s latest rescue package faded quickly. Now the question is whether European leaders will ever agree on measures needed to end the sovereign debt crisis, and whether they will get another chance. The magnitude is all wrong. Even if put in place, the plan would reduce Greece’s debt by less than 50 percent, raise about 100 billion euros in new capital and boost the guarantee capacity of the European Financial Stability Facility to about 1 trillion euros. As Bloomberg View has pointed out, sovereign writedowns should be much steeper. And Europe needs a war chest of at least 3 trillion euros to ensure recapitalizations and cover the financing needs of euro-area governments.
  • EU Pact Changes Possible Within a Year, German Minister Says. The European Union should be able to construct a new stability agreement within 12 months, German Foreign Minister Guido Westerwelle said in an interview published in the Frankfurter Rundschau and Berliner Zeitung today. The current design of the Economic and Monetary Union is a “toothless tiger” and changes must be made to avoid a new debt crisis every few years, the newspapers quoted Westerwelle as saying. The changes can be made within the next year, he said in the interview.
  • China to Demand Concessions for Europe Bailout Fund, NYT Reports. China will probably demand significant concessions from European countries in return for investment in the region’s bailout fund, according to the New York Times, without saying where it got the information. These may include financial guarantees and limits on trade policies, the newspaper reported. China may ask Europe to drop its criticism of its currency valuation policies, according to the report.
  • Canada May Boost Asia Oil Sales If Keystone Blocked, Globe Says. Canada will look to boost oil exports to Asian countries such as China if the U.S. blocks TransCanada Corp. (TRP)’s proposed Keystone XL pipeline, the Globe and Mail newspaper reported, citing Canadian Natural Resources Minister Joe Oliver. The $7 billion pipeline would deliver crude from the oil sands of Canada to refineries on the U.S. Gulf Coast. The State Department, which has jurisdiction because the project would cross an international boundary, plans to decide whether to grant approval by year-end. Canada wants to diversify its customer base and China could be a “key” customer in the future, the Globe and Mail reported. “China has emerged as the largest consumer of energy in the world, so it is utterly obvious what we must do,” the newspaper cited Oliver as saying in an interview yesterday. Keystone could be “modified” if it fails to get U.S. approval, or other projects to ship oil to the U.S. could emerge, the newspaper cited Oliver as saying. Oliver will “soon” travel to China to take part in a mining conference, and will discuss energy while he is there, the newspaper reported.
  • Funds Lift Bullish Bets Amid Best Rally Since 2009: Commodities. Speculators boosted wagers on higher commodity prices by the most since August as improving prospects for growth in the U.S. and Europe sent prices toward their biggest rally in more than two years. Money managers boosted combined net-long positions across 18 U.S. futures and options by 13 percent to 831,421 contracts in the week ended Oct. 25, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Index of 24 raw materials has jumped 10 percent in October, on track for the biggest gain since May 2009.
  • Yahoo(YHOO) Said to Lean Toward Dividend, Buyback Instead of Sale. Yahoo! Inc. is leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers, according to five people familiar with the situation.
  • Syria Clashes Kill 30, Assad Warns West. In Syria, clashes over the weekend in Syria killed 31 civilians and 30 soldiers, Al Jazeera reported. Any move by the West to interfere in Syria would create “another Afghanistan” Syrian President Bashar al-Assad said in an interview with the U.K.’s Sunday Telegraph newspaper as Arab League foreign ministers called for an end to violence in the country. Foreign intervention in Syria would “burn the entire region,” Assad told the newspaper. “Do you want to see another Afghanistan, or tens of Afghanistans?”
  • China to 'Firmly' Maintain Property Curbs: Wen. China will “firmly” maintain its property curbs and “fine tune” other economic policies at an appropriate time, according to a statement following a State Council meeting chaired by Premier Wen Jiabao. Local authorities should continue to strictly implement the central government’s real-estate policies in the coming months to let the citizens see the results of the curbs, according to the statement on Oct. 29. The government will “fine tune” its economic policies by “an appropriate degree and at an appropriate time,” it said. “It demonstrates to local governments and developers the central government’s determination to tighten the property market,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “Property curbs are at the critical stage now, so the policies shouldn’t and wouldn’t be relaxed, because there has been no concrete data showing home prices dropped a lot,” said Shen Jianguang a Hong Kong-based economist at Mizuho Securities Asia Ltd. “But everything else from money supply to investment has fallen a lot.” China’s inflation rate remained above 6 percent for a fourth month in September.
  • Sarkozy Attacked in France for Seeking China's Help for Europe. French President Nicolas Sarkozy came under fire from opposition leaders for seeking China's help to resolve the euro area's debt crisis. "It's shocking," Martine Aubry, the general secretary of the Socialist Party, said in the Sunday newspaper, Journal du Dimanche. "The Europeans, by turning to the Chinese, are showing their weakness. How will Europe be able to ask China to stop undervaluing its currency or to accept reciprocal commercial accords?"
  • Profits Beat Estimates for 11th Quarter as Analysts See Rally. American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years. A total of 220 out of 295 Standard & Poor’s 500 Index companies that reported results since Oct. 11 have exceeded forecasts for the third quarter, according to data compiled by Bloomberg. Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year.
  • China Shuffles Financial, Securities Regulators. China moved its securities regulator Shang Fulin to head the nation’s banking watchdog, overseeing a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s 10 largest lenders by market value. Shang’s appointment as chairman of the China Banking Regulatory Commission to replace Liu Mingkang is part of the biggest reshuffle of financial officials in a decade. China Construction Bank Corp. Chairman Guo Shuqing will become head of the securities watchdog and Agricultural Bank of China Ltd. Chairman Xiang Junbo will take the top job at the insurance regulator, the government said on Oct. 29.
  • MF Global(MF) Faces Pivotal Days as Firm Mulls Sale. MF Global Holdings Ltd., the company run by Jon Corzine that last week reported a record loss, had two of its credit ratings cut to junk and drained bank lines, faces a pivotal few days as the futures broker pitches itself to potential buyers to avert failure.
Wall Street Journal:
  • German Finance Minister Plays Down Summit Success. German Finance Minister Wolfgang Schaeuble played down the impact of the European Union's latest deal on stemming the euro-zone debt crisis, according to a pre-release of an interview he gave to Der Spiegel magazine. "The summit last week brought us a good bit further," Schaeuble was quoted as saying. "But it will not have been the last meeting on this issue." Europe still has a long way to go before all of the problems related to the euro-zone debt crisis will be solved, he said. Schaeuble also urged the Italian government to quickly implement the reforms it has announced. "Italy has announced that it is prepared to execute reform, now (these words) must be carried out. Announcements alone don't help," Schaeuble was quoted as saying. He said Italy must reduce its budget deficit, slash public debt, and promote economic growth. "Italy needs structural reforms of its labor market and social security systems," said Schaeuble. "Italy must convince markets that it is willing and determined to quickly address and implement the necessary reforms." Turning to Europe's banks, Schaeuble warned that if banks don't voluntarily participate in the planned swap of Greek bonds in an effort to restructure Greece's debt, they could be forced to do so. "We have always said that we prefer a voluntary haircut," said Schaeuble. "But we have also said that a less consensual path cannot be ruled out." According to Der Spiegel, Schaeuble said the alternative to agreement is disagreement, and that would have considerable consequences for private-sector creditors.
  • Radiation Cleanup Confounds Japan. Nearly eight months after the Fukushima Daiichi nuclear accident scattered radioactive material over surrounding communities, Japan still is struggling to figure out how to clean up the mess, exacerbating fears about health risks and fanning mistrust of the government.
  • Companies in Europe Are Pulling Back. The financial turmoil rattling governments and banks in Europe is further weighing on the already-sluggish outlook for business in the region. Even though euro-zone governments' latest package of measures to combat the crisis, agreed upon last week, appears to have warded off a financial crash for now, some damage already was done to many companies in Europe. Growing uncertainty regarding the outcome of the turmoil, coming after the global financial crisis and recession, has caused customers to hold off on purchases.
  • California's New Green Tax. As the world retreats from cap and trade, Sacramento signs on.
  • What Business Wants From Washington. America works best when government creates a stable environment for competition.
Business Insider:
Zero Hedge:
LA Times:
Cape Cod Times:
  • Luxury Car Lot in China Reflects Debt Crisis. For a glimpse of the unfolding debt crisis that many fear could be China's future, take a trip to the used-car market in this gritty industrial city on the coast. A half-dozen Mercedes-Benzes, an equal number of BMWs, several Porsches, a Range Rover, a Rolls-Royce and a Hummer, most just a few years old and in pristine condition, were there on a recent day. Their owners were all Wenzhou factory bosses who needed to sell their luxury cars for cash to pay back their business loans. "It's because of the credit crisis," said Ma Jianrui, who runs one of the used-car shops and has seen his business booming. "They need money quickly." Many economists fear that the crisis not only could devastate Wenzhou but also may be a portent of what China could be facing on a vastly larger scale: a massive amount of accumulated debt that could rival the subprime crisis in the United States that triggered a larger recession. Most is private debt amassed by small and medium-size companies, economists said, but a portion is personal household debt. Any precise figures are largely guesswork, they said.
  • BoE's Tucker: UK's Dip Into Recession Possible - Paper. A double-dip recession in Britain remains "within the bounds of possibility," Bank of England policymaker Paul Tucker was quoted as saying in an interview in the Saturday edition of The Times newspaper.
  • Portugal Wants U.S. Help in Euro Crisis: Source. Portugal asked Mexico on Saturday to tell fellow G20 members next week that the United States should offer "financial help" to resolve the euro zone sovereign debt crisis, describing it as a "systemic and global" problem, a Portuguese government source said. Portuguese Prime Minister Pedro Passos Coelho asked Mexican President Felipe Calderon to convey the message during the G20 meeting in Cannes next week, the source told reporters after the two leaders met at the Ibero-American summit in Paraguay. "The crisis isn't in the euro zone. It is a systemic and global crisis and we hope that other big G20 countries intervene," the source told reporters in the capital Asuncion, speaking on condition of anonymity. The source added that Washington should help resolve the crisis "by boosting trade and also with financial help." No one from Calderon's delegation in Asuncion could immediately be reached for comment. Financial markets rallied strongly this week after European leaders hammered out a deal to recapitalize their banks, boost the firepower of a euro zone rescue fund, and impose hefty losses on holders of Greek debt. However, economic analysts quickly warned that details of the rescue could still take weeks or even months to work out. Portugal is suffering a deepening recession as it implements painful austerity measures under a 78-billion-euro ($110.3-billion) EU/IMF bailout.
  • Draghi Over-Interpreted on Bond Buys, Says Trichet. Markets have over-interpreted comments by incoming European Central Bank chief Mario Draghi on the bank's readiness to go on buying the bonds of troubled euro zone states, outgoing ECB President Jean-Claude Trichet said. In a wide-ranging interview at the end of his eight-year term, Trichet welcomed what he saw as a commitment by euro zone governments at a summit last week to intervene in bond markets via the EFSF rescue fund to fight the bloc's debt crisis. The ECB embarked on its own bond-buying programme in May of last year but the plan has proven controversial, leading to the resignation of two leading German policymakers at the bank, and Trichet has appeared keen to withdraw from the policy. Draghi seemed to take a different stance last week, appearing to signal that the ECB stood ready to go on buying bonds, intervening in debt markets to lower the borrowing costs of countries snared by the crisis. Trichet said too much had been read into Draghi's comments. "I don't think that Mr Draghi said that," he said of the message understood by financial markets that the ECB would go on buying bonds. "I think there has been an over-interpretation," he added, looking out from the 32nd floor of the ECB's Frankfurt headquarters. The confusion over Draghi's message highlights the importance of communicating ECB policy -- an area where Trichet has largely succeeded, delivering a clean, consistent message that has endeared him to financial markets.
Financial Times:
  • Asset Sales a Dilemma for Europe's Banks. European banks are not strong enough to sell off thousand of billions of euros worth of assets without capital injections, says Wilbur Ross, the billionaire investor.
  • Schauble Calls for EU Lead on Tobin Tax. Wolfgang Schäuble, Germany’s finance minister, wants the European Union to take the global lead in introducing a financial transaction tax to curb speculative trading, along with tougher regulation of big banks and the “shadow” banking sector, such as hedge funds. If the UK blocked agreement on such a tax in the full EU, he said in an interview with the Financial Times, the eurozone should press ahead on its own.
  • China Warns It Cannot 'Cure' Eurozone's Debt Crisis.
  • Why the Latest Eurzone Bail-Out is Destined to Fail Within Weeks. The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So "euroquake" fears, once viewed as outlandish, are gaining pace. Despite Thursday's deal, and all the reassurances of a "durable solution", the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone's third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic. The eurozone must be consolidated. World leaders should similarly force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same "extend and pretend" non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.
Daily Mail:
  • Two-thirds of Britons want powers repatriated from the European Union, citing a poll by Harris Interactive.
Der Spiegel:
  • German industry opposed letting China help the euro area because the country may use the aid to influence European politics, Hans-Peter Keitel, head of the BDI Federation of German Industries, said. Keitel said Europe needs to achieve stability on its own and it would be a "huge mistake" to allow outside influence, the report said.
Der Tagesspiegel:
  • The European debt crisis still threatens growth in European and the U.S., Goldman Sachs Inc.'s(GS) chief economist said in an interview. European economic data remain weak and "contagion is still always a risk" for the U.S. economy, Hatzius said. Goldman forecast a slight recession in the euro area for the fourth quarter of 2011 and first quarter of 2012.
  • The European Union and IMF are considering a "safety net" for Italy and Spain, citing a person familiar with the situation. The "contingency plan" is being discussed by international financial institutions, including central banks, to prevent contagion from the debt crisis spreading.
La Repubblica:
  • The Italian Banking Authority plans to write a letter of protest after the European Banking Authority called for banks to raise capital. Italian banks don't need $21 billion, double that of French banks and triple the amount for German banks, according to the newspaper.
Il Foglio:
  • Austerity 'Isn't in My Vocabulary,' Berlusconi Says. Berlusconi said in a letter published today that he was committed to more effective competition rules, social mobility and not to depressing the economy. The world austerity "isn't in my vocabulary," he wrote.
Corriere della Sera:
  • Italy wants to protect jobs and isn't trying to make lay-offs easier, Labor Minister Maurizio Sacconi said in an interview. Italy was asked to revamp its legislation on dismissals in July by institutions including the ECB, citing Sacconi.
The Economic Times:
  • Fixing India Trade Imbalance: Import Curbs on China Likely as Deficit Grows. NEW DELHI: India's widening trade gap with China has triggered an alarm in the government, forcing it to brood over a host of measures to restrict imports from the country. The commerce department has hammered out a "China Strategy" that calls for higher tariffs on most Chinese goods while proposing a complete ban on specific items, like power and telecom equipment. It also suggests making it mandatory for Chinese firms to enter into joint ventures with Indian companies before they could import heavy equipment and machinery from the country. The move comes as India's trade deficit with China, its biggest trading partner, jumped 160% to $23.9 billion in the five years to 2010-11.
Beijing Times:
  • China's Railway Ministry has delayed payments totaling 130 billion yuan to China Railway Engineering Corp. and China Railway Construction Corp. because it doesn't have the funds, citing Wang Mengzhu, a senior engineer at the Chinese Academy of Engineering. More than 90% of railway construction projects have been suspended due to lack of "capital support" amounting to more than 10,000 kilometers of track, Wang said.
  • China to Maintain Its Family Planning Policy: Official. China will adhere to its family planning policy so as to maintain a low reproduction rate, said the country's family planning chief on Sunday, expected to be the eve of the world's population reaching seven billion. "Over-population remains one of the major challenges to social and economic development," said Li Bin, director of the State Population and Family Planning Commission in an exclusive interview with Xinhua, adding that the population of China will hit 1.45 billion in 2020. Li said maintaining and improving the existing family planning policy and keeping a low reproduction rate, along with addressing the issues of gender imbalance and an aging population, will be the major tasks in the future.
Financial News:
  • Ba Shusong, a researcher at the State Council's Development Research Center, said growth of the nation's gross domestic product may be slower as the country's export growth may moderate on "big" impacts from a "more complicated" external economic environment.
Weekend Recommendations
  • None of note
Night Trading
  • Asian indices are -1.25% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 171.0 +2.5 basis points.
  • Asia Pacific Sovereign CDS Index 146.0 -1.25 basis points.
  • FTSE-100 futures -.60%.
  • S&P 500 futures -.67%.
  • NASDAQ 100 futures -.69%.
Morning Preview Links

Earnings of Note
  • (SHAW)/.57
  • (HUM)/2.03
  • (ALL)/.09
  • (AVB)/1.18
  • (APC)/.66
  • (FST)/.26
  • (PPS)/.44
  • (CNA)/.10
Economic Releases
9:45 am EST
  • Chicago Purchasing Manager for October is estimated to fall to 59.0 versus 60.4 in September.
10:30 am EST'
  • Dallas Fed Manufacturing Activity for October is estimated to rise to -5.0 versus -14.4 in September.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • None of note
BOTTOM LINE: Asian indices are lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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