Thursday, October 27, 2011

Thursday Watch

Evening Headlines

  • EU Sets 50% Greek Writedown, $1.4 Trillion in Debt Fight. European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion), responding to global pressure to step up the fight against the financial crisis. Ten hours of brinkmanship at the second crisis summit in four days delivered measures that the euro area’s stewards said point the way out of the debt quagmire, even if key details are lacking. Last-ditch talks with bank representatives led to the debt-relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc. “The world’s attention was on these talks today,” German Chancellor Angela Merkel told reporters in Brussels at about 4:15 a.m. today. “We Europeans showed tonight that we reached the right conclusions.” Measures include a bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.
  • China Default Swap Bets Double as Growth Slows: Credit Markets. Investors are taking out a record amount of debt insurance on China amid concern that rising bad bank loans and slowing global growth will depress the world's biggest exporter. The net amount of Chinese sovereign debt covered by credit-default swaps doubled this year to $9.3 billion, the eighth highest of 1,000 entities tracked by the Depository Trust & Clearing Corp. Contracts on China were the sixth most-traded last week behind France, Spain, Germany, Italy and Brazil, with a daily average of $488 million.
  • Hedge Funds to Begin Opening Data to Regulators Next Year. The U.S. Securities and Exchange Commission responded to objections from hedge funds and private- equity funds by dialing back demands in its new rule requiring fund advisers to report internal information to regulators. The commission approved its final rule in a unanimous vote today, easing the thresholds for defining which large funds will have to report the most information to regulators. The final rule, which requires some funds to begin reporting as soon as next year, also allows private-equity funds to report less often than initially proposed.
  • Commodities Tumble Most in a Week, Led by Oil, Nickel on Economic Concerns. Commodities fell the most in a week, led by oil, nickel and wheat, on a bigger-than-expected gain in crude inventories and speculation that demand for U.S. grain will shrink as the global economy falters. The Standard & Poor’s GSCI Index of 24 raw materials dropped 1.8 percent after oil declined the most in more than three weeks in New York. The index retreated for the first time in four days as commodity prices declined amid concern that European debt-crisis talks are stalling. Gold and silver rose. “The markets that fell were working based on their own fundamentals and the economic outlook,” said Mike Armbruster, a commodities analyst at Altavest Worldwide Trading in Mission Viejo, California. Crude’s supply increase “was a nice excuse for that market to pull back.” The S&P GSCI index dropped to 637.76. Commodity prices have rebounded 11 percent from a 10-month low on Oct. 4. Eighteen of the commodities in the index declined today.
  • Congress May Pass Another Short-Term Government Spending Measure. For the sixth time in 2011, Congress may pass another short-term spending measure to keep financing the U.S. government while lawmakers work to complete annual appropriations legislation, lawmakers said. The stopgap legislation would fund the government from the Nov. 18 expiration of the current spending authority until sometime before Congress begins its annual holiday recess in late December, House Appropriations Committee Chairman Hal Rogers told reporters today. Congress hasn’t passed any of the 12 appropriations measures for the 2012 fiscal year, which began Oct. 1.
  • Want to Create Jobs? First Cut Capital-Gains Taxes: Amity Shlaes. Along with jobs, raising taxes on the rich is one of things the Wall Street protesters feel strongly about, as Andrew Cuomo, the Democratic governor of New York, is learning all too well. Cuomo has become a target for activists because he’s refusing to fight to extend a state-tax surcharge on the wealthy that expires soon. Cuomo’s insistence on protecting the rich is causing fellow Democrats to ask whether he has forgotten that he stands for workers. But Cuomo’s insistence is born of experience. Higher taxes can destroy jobs. As data from the Tax Foundation show, New Yorkers are net migrants to Connecticut. Both Cuomo and various jubilant governors in Connecticut have attributed the shift to taxes. Cuomo has said that he aims to ensure the tax regime in the Empire State stops driving others away. “I think you are kidding yourself if you think you can be one of the highest-taxed states in the nation, have a reputation for being anti-business and have a rosy economic future,” Cuomo said recently, according to the Daily News. He may also have looked at weightier studies surveying the treatment of capital nationally.
  • Currency Traders in Worst Year Since 1991 as Taylor Loses 12%. Currency-trading strategies are losing the most in two decades as the volatility that's boosted volume and profits for investment banks erodes the ability of investors to make money. Three out of four Royal Bank of Scotland Group Plc indexes of foreign-exchange trading strategies are down this year, including a 2.7 percent drop through September for its carry trade index. Deutsche Bank AG's dollar-denominated Currency Returns Index has fallen 3.4 percent, the biggest drop since a 4 percent slide in 1991. The Stark Currency Traders Index and a Barclays Plc index have declined by 8.6 percent and 0.4 percent.
  • Chinese Military Suspected in Hacker Attacks on U.S. Satellites. Computer hackers, possibly from the Chinese military, interfered with two U.S. government satellites four times in 2007 and 2008 through a ground station in Norway, according to a congressional commission. The intrusions on the satellites, used for earth climate and terrain observation, underscore the potential danger posed by hackers, according to excerpts from the final draft of the annual report by the U.S.-China Economic and Security Review Commission. The report is scheduled to be released next month. “Such interference poses numerous potential threats, particularly if achieved against satellites with more sensitive functions,” according to the draft. “Access to a satellite‘s controls could allow an attacker to damage or destroy the satellite. An attacker could also deny or degrade as well as forge or otherwise manipulate the satellite’s transmission.”
Wall Street Journal:
  • Live Blog: European Debt-Crisis Summit.
  • John Paulson Bets Wrong (Again). John Paulson’s push to scale back the bullish bets that led to steep losses earlier this year now is costing the hedge-fund titan a chance at regaining ground during this month’s stock-market rally. One of Paulson & Co.’s largest funds, Paulson Advantage, is up less than 1% in October, two investors say. The S&P500 is 9.92% higher so far this month. October’s lackluster returns come at a critical time for Paulson. Investors in Paulson’s two biggest funds have until Oct. 31 to decide whether they want to pull some or all of their money from the funds before the end of the year.
  • Fed Ties Purse Strings of Banks. J.P. Morgan Chase & Co.(JPM) recently approached U.S. regulators about potentially buying back more of its shares but the giant bank was told it might not get the answer it wanted, according to people familiar with the situation. J.P. Morgan decided against submitting a formal application following the Fed's discouraging feedback. But it isn't the only big, healthy bank clashing with regulators over how it may spend its money.
  • Bigger Haircuts Would Make Greek CDS Trigger More Likely. The bigger the loss or "haircut" that European officials will force private investors to take on Greek bonds, the more likely it is that an aggressive restructuring of the nation's debts would trigger payouts on the $3.7 billion of credit-default swaps tied to its bonds, analysts said Wednesday.
  • Chinese Tech Giant Aids Iran. When Western companies pulled back from Iran after the government's bloody crackdown on its citizens two years ago, a Chinese telecom giant filled the vacuum. Huawei Technologies Co. now dominates Iran's government-controlled mobile-phone industry. In doing so, it plays a role in enabling Iran's state security network.
Business Insider:
Zero Hedge:
  • FBR to Cut Workforce Up to 35%. FBR is laying off up to 35 percent of its workforce. The middle market investment bank is cutting its workforce by 30 to 35 percent as it struggles to stay profitable in a difficult environment.
  • China Labor Costs Soar as Wages Rise 22%. The government, which has made it a policy priority to boost incomes, welcomed the development, but economists warned that it would add pressure to companies already struggling against weak global demand. As of the end of September, local authorities in 21 of China’s 31 provincial-level regions had increased minimum wages by an average 21.7 percent, the ministry of human resources and social security said. Several more have also promised to raise minimum wages before the end of the year.
  • Visa(V) Earnings Beat But Revenue Misses; Shares Slip. Visa reported quarterly profit that beat analysts' expectations on Wednesday but revenue fell slightly short. Shares of the credit-card company slipped in after-hours trading.
  • Investors (and the Fed) are Addicted to Liquidity. Fed vice chair Janet Yellen, Fed governor Daniel Tarullo and NY Fed president William Dudley have all hinted in speeches recently that another so-called quantitative easing program, or QE3, could be possible. Why? The Fed has already pumped trillions of dollars into the economy with the first two renditions of QE. It has left its key interest rate near zero since December 2008 and has pledged to keep rates low until the middle of 2013. And the Fed is buying even more bonds now through Operation Twist, a program that allows the central bank to sell short-term Treasuries and trade them in for longer-term ones so it doesn't have to add more to its already bloated balance sheet.What has this accomplished? The economy is still in a sluggish growth phase that feels more like a recession than a recovery. Unemployment remains above 9%.
  • The 53%: We are NOT Occupy Wall Street. Occupy Wall Street protesters might say they represent 99% of the nation, but there's a growing number of Americans who are making it clear they are not part of the dissident crowd. They call themselves the in the 53% of Americans who pay federal income taxes. And they are making their voices heard on Tumblr blogs, Twitter and Facebook pages devoted to stories of personal responsibility and work ethic. The number originates in the estimate that roughly 47% of Americans don't pay federal income tax, according to the nonpartisan Tax Policy Center. The 53 percenters stress the fact that they are paying the taxes that support the government assistance the protesters say they want.
LA Times:
Washington Post:
  • Banks to Define Greek Bond 'Default'. The world economy may soon find itself in the hands of a small group of bankers who must make a seemingly technical decision that has huge ramifications. As European government leaders rush to find a strategy to contain the debt crisis in Greece and other nations, they are looking for the owners of Greek bonds to take a significant reduction in what they are owed — as much as 60 percent, according to some reports. That prompts a key question: Will that officially count as a “default” for purposes of the massive market that allows investors to insure against those losses? At issue is the market for “credit default swaps,” which allow investors to buy protection against an entity — whether a company or country — failing to pay its debts. If owners of Greek debt are seen as taking a voluntary cut in what they are owed, the credit default swaps would not have to pay off. If the cut is considered to be forced on debt holders, the swaps would have to pay. A committee of representatives from giant banks and other financial firms will make the call.
  • Indicted Goldman(GS) Exec Was Major Democrat Donor. Rajat Gupta, the former head of McKinsey & Co. and Goldman Sachs who pleaded not guilty today in his insider trading case, was a major Democratic donor, according to FEC data. Gupta has given to various Democratic candidates and committees, totaling just over $100,000 since 1990. He gave $2,500 to Obama during the '08 cycle and $10,000 to the Democratic Congressional Campaign Committee, plus donations to a handful of congressional candidates. Gupta cut a $23,000 check to the DNC in 2004, plus two $10,000 donations to the DCCC in 2005 and 2006. He also donated to Al Gore, Chris Dodd and Hillary Clinton, among others.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 19% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty percent (40%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -21 (see trends).
Financial Times:
  • Scrutiny is Price SAC Pays for Performance. Too good to be true is the argument that has dogged SAC Capital for years, as outsiders ponder how a hedge fund responsible for about 2 per cent of daily trading volume on the New York Stock Exchange can persistently be one of the industry’s best performers.
  • Counterparty Risk Makes An Anxious Return. Every week the fixed income team of one large European bank takes two minutes out of its busy schedule to look at the credit default swap spreads of its competitors. They have been blowing out in recent months, a sign of rising stress at these institutions, becoming a prime marketing tool for the bank.
  • Qatar Joins Mexico With 25% Oil Hedge. Qatar, a member of the Opec oil cartel, has joined Mexico in taking out an insurance policy against falling oil prices next year, hedging some of its oil for 2012 as both nations adopt a cautious view about the global economy. Oil brokers said that Mexico hedged the bulk of its net exports for the year, as it has done in the past, of around 800,000 barrels a day at a price of around $75 per barrel for the West Texas Intermediate crude. Qatar, however, hedged only a portion of its oil exports, with some brokers estimating about 200,000 b/d, a quarter of its annual oil output.
  • Debt Crisis: Live.
  • European Banks Given Just Eight Months to Raise €106bn.
  • Europe's Grand Gamble Risks Failure Without ECB. Europe's banks will be recapitalised for €100bn, first by private funds, then state funds, and only from the EFSF as a last resort. This falls well short of the €200bn figure first mooted by the IMF. Banks will have until next June to meet a core Tier 1 capital ratio of 9pc. The draft said banks must "enhance capital" and "avoid a credit crunch" at the same time, a contradiction in terms. Lenders have already begun to shrink their balance sheets rather than dilute capital. The danger is a brutal contraction of lending, perhaps by €5 trillion, according to RBS. The view in the markets is that only the ECB has the credible lending power to contain the crisis, and on that score the summit did not advance one millimetre.
People's Daily:
  • More than 60% of Chinese bankers surveyed felt pressure from limited lending and uncertainty in economic growth and inflation trends, citing a survey by the China Banking Association and PricewaterhouseCoopers. More than half of the bankers felt management of their operations are under pressure from uncertain macroeconomic policy and possible regulatory changes.
  • Bill Gates Opens Doors to Help China. China's Ministry of Science and Technology signed a memorandum of understanding with the Bill & Melinda Gates Foundation to invest together in research and development of new products and technologies to help with global health and agriculture. Under the $300 million project, for every dollar the foundation gives to support selected China-grown products and technologies that can help advance health and agriculture, particularly in the developing world, the ministry will offer $2 as grant money.
China Securities Journal:
  • It's necessary to continue tightening the housing sector as expectations remain strong for a home price rise, China Securities Journal says today in an editorial. The upward trend in home prices hasn't changed in tier-2, 3 cities. China may take more measures after Premier Wen Jiabao said the government would adjust economic policy at a "suitable time", the editorial said.
Evening Recommendations
Citigroup Global Markets:
  • Reiterated Buy on (BA), lowered target to $78.
  • Reiterated Buy on (F), target $16.
Night Trading
  • Asian equity indices are +.50% to +1.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 201.0 +1.0 basis point.
  • Asia Pacific Sovereign CDS Index 153.0 unch.
  • FTSE-100 futures +1.75%.
  • S&P 500 futures +1.35%.
  • NASDAQ 100 futures +1.33%.
Morning Preview Links

Earnings of Note
  • (IP)/.80
  • (BG)/1.58
  • (LLL)/2.15
  • (CLI)/.67
  • (CAH)/.72
  • (HOT)/.39
  • (JCI)/.76
  • (XOM)/2.13
  • (DBD)/.60
  • (GR)/1.51
  • (MWW)/.12
  • (PHM)/.00
  • (CL)/1.30
  • (AET)/1.14
  • (TWC)/1.14
  • (ZMH)/1.03
  • (CTXS)/.58
  • (PFCB)/.32
  • (RTN)/1.33
  • (GILD)/1.00
  • (MCRS)/.47
  • (KLAC)/1.16
  • (CLF)/3.67
  • (LVS)/.52
  • (ERTS)/-05
  • (FII)/.38
  • (CSTR)/.88
  • (CERN)/.47
  • (MET)/1.09
  • (AMD)/.10
  • (PCP)/2.04
  • (AVP)/.46
  • (OXY)/1.94
  • (EXPE)/.73
  • (HSY)/.84
  • (OMX)/.23
  • (DECK)/1.35
  • (PG)/1.03
  • (CELG)/.95
  • (RCL)/1.83
  • (UAL)/2.08
  • (BMY)/.58
Economic Releases
8:30 am EST
  • Advance 3Q GDP is estimated to rise +2.5% versus a +1.3% gain in 2Q.
  • Advance 3Q Personal Consumption is estimated to rise +1.9% versus a +.7% gain in 2Q.
  • Advance 3Q GDP Price Index is estimated to rise +2.4% versus a +2.5% gain in 2Q.
  • Advance 3Q Core PCE is estimated to rise +2.2% versus a +2.3% gain in 2Q.
  • Initial Jobless Claims are estimated to fall to 401K versus 403K the prior week.
  • Continuing Claims are estimated to fall to 3700K versus 3719K prior.
10:00 am EST
  • Pending Home Sales for September are estimated to rise +.3% versus a -1.2% decline in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The 7-Year Treasury Note Auction, ECB's Weidmann speaking, Kansas City Fed Manufacturing Activity for Oct., weekly Bloomberg Consumer Comfort Index and the (ETH) Investor Conference could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by financial and commodity shares in the region. I expect US stocks to open higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

1 comment:

theyenguy said...

An inquiring mind asks, with a 50% writedown, are the banks any more solvent, are the bonds any more tradeable, are the bonds worth 50%?

And an inquiring mind asks were the banks were coerced into accepting losses and should this trigger a default?

And an inquiring mind asks are the means to increase the EFSF’s firepower achievable? Will the rating agencies downgrade sovereign debt due to the leveraging of the EFSF? Will the markets eventually see the leverage as either ineffective or a monetization of debt and call interest rates higher? Will anyone or any organization purchase leveraged or guaranteed bonds? Would you buy a CDO backed by the European sovereigns?

And an inquiring mind asks, can the banks be recapitalized, or will they eventually be nationalized and known as the government bank or gov bank for short? Have the European leaders have kicked the can down the road, and if so, for how long? Till next year?