Thursday, October 13, 2011

Today's Headlines

  • Trichet Says It's Up to Leaders to Resolve Debt Crisis at Brussels Summit. European Central Bank President Jean-Claude Trichet said it’s now up to governments to solve Europe’s debt crisis as leaders get ready for a summit in Brussels in 10 days. “It’s our duty to tell governments and other institutions what we see, but up to them to take the appropriate decisions,” Trichet, 68, said in an interview with Bloomberg Television in London today. “I’m certainly not underestimating the difficulty of their task.”
  • German Banks Said to Prepare for Up to 60% Loss on Greek Debt. German banks are preparing for losses of as much as 60 percent on their Greek government debt holdings as European officials push for more private-investor involvement in a rescue of the debt-stricken country, said three people with knowledge of the matter. The country’s banks held a conference call this week and participants discussed the potential for losses on Greek bonds of between 50 percent and 60 percent, though no final figure has been set, according to the people, who declined to be identified because the talks are private.
  • Sovereign, Corporate Credit-Default Swap Indexes Rise in Europe. The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 10 basis points to 330 at 3 p.m. in London. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings jumped 20 basis points to 762, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose six basis points to 178.5. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers climbed 13.5 basis points to 245.5 and the subordinated index rose 12 basis points to 480.
  • Spain Presses EU to Avoid Tougher Bank Stress Tests, Pais Says. Spain, with support from Germany and France, is pressing the European Commission not to impose tougher stress tests on European banks, El Pais reported, citing Spanish officials without naming them. As many as 14 Spanish lenders would fail a test under new criteria the European Banking Authority is proposing which require a 7 percent tier 1 capital ratio with the European economy in recession and the value of sovereign debt holdings written down, the newspaper reported. The EBA may even boost the capital requirement to 9 percent, El Pais added. That would see the majority of Spain’s banks failed, it said.
  • Ackermann Says Higher Capital Won't Master Sovereign Crisis. Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann said he doubts forcing European lenders to boost their capital levels will master the sovereign debt crisis. “The injection of capital would not address the actual problem,” Ackermann said, according to the copy of a speech given at a conference in Berlin today. “It is not the capital funding of banks that is the problem, but rather the fact that government bonds have lost their status as risk-free assets.”
  • Carrefour Falls Most Since August After Cutting Forecast Again. Carrefour SA, the world’s second- largest retailer, fell the most in almost two months in Paris trading after lowering its 2011 profit forecast for the second time in three months amid a slump in Europe. The stock fell as much as 5.9 percent, the steepest intraday drop since Aug. 18. So-called current operating income will decline 15 percent to 20 percent this year, the Boulogne- Billancourt, France-based company said today, having in August forecast a retreat of 15 percent.
  • IMF Says Europe Crisis Escalation Poses Severe Risk to Asia. An escalation in Europe’s debt crisis may trigger a selloff in Asian assets, force foreign banks to cut lending to the region and disrupt its currency markets, the International Monetary Fund said. Asia’s growth has slowed since the second quarter of 2011, the fund said in a report today, cutting its forecast for this year’s expansion to 6.3 percent from an April estimate of 6.8 percent. Inflationary pressures across the region are still “elevated” and financial conditions remain accommodative in most of Asia, the IMF said. “An escalation of euro area financial turbulence and a renewed slowdown in the U.S. could have severe macroeconomic and financial spillovers to Asia,” it said. “Since 2009, investors from advanced economies have built up substantial positions in Asian markets. A sudden liquidation of these positions could trigger a loss of confidence, and contagion could spread from bond and equity markets to currency and other markets.” The risk of another global recession has prompted Asian officials from China to Indonesia to shield growth by boosting fiscal measures or easing borrowing costs. The MSCI Asia Pacific Index of stocks slumped 16 percent last quarter, the biggest drop since 2008, and the IMF said today the “panic selloffs” in the region show there is “no place to hide” when advanced nations are in turmoil. Foreign banks may sell Asian assets, cut credit lines to the region and avoid rolling over maturing loans if they face large losses in their home markets, the IMF said. “Such cutbacks could have a sizable impact in Asian economies that have large exposures to European and U.S. banks,” the fund said. “Contagion could also occur through Asian currency markets, as long and carry-trade positions are unwound. A loss of liquidity in cross-currency swap markets --as in 2008 -- could be particularly disruptive and spill over to bank funding, as many banks rely on this market to fund dollar assets or to meet regulatory currency matching requirements, notably in Korea and Japan.” “In economies where such overheating pressures remain high, inflation remains above target, and inflation expectations have continued to rise, such as in China, India, and Korea, the current pace of monetary tightening remains appropriate,” the fund said.
  • German Inflation Accelerated More Than Initially Estimated, Led by Energy. Inflation in Germany, Europe’s largest economy, accelerated more than initially estimated to the fastest in three years in September, led by energy costs. The inflation rate, calculated using a harmonized European Union method, rose to 2.9 percent from 2.5 percent in August, the Federal Statistics Office in Wiesbaden said today. It had previously reported an inflation rate of 2.8 percent. In the month, prices rose 0.2 percent.
  • French Socialist Finalists Seek Greater State Control of Banks. The two finalists in the battle for the Socialist Party’s nomination in the French presidential vote said the state must take greater control of banks and called for increased regulation of global financial transactions.
  • Earnings from Very Large Crude Carriers, or VLCCs, were the worst for a third quarter in at least 20 years, Clarkson Capital Markets analyst Michael Pak said in a report today.
  • Crude Oil Futures Fall for Second Day as Equities Drop and Supplies Grow. Oil dropped for a second day in New York as U.S. equities declined on a decrease in JPMorgan Chase & Co.’s earnings and after U.S. crude supplies increased more than forecast in a government report. Futures declined as much as 2.8 percent as the Standard & Poor’s 500 Index halted its biggest gain over seven days since 2009. Oil stockpiles rose 1.34 million barrels, or 0.4 percent, to 337.6 million and gasoline inventories unexpectedly dropped as the refinery utilization rate fell the most since February. Crude for November delivery declined $2.16, or 2.5 percent, to $83.41 a barrel at 12:33 p.m. on the New York Mercantile Exchange. Prices are down 8.7 percent this year. Refineries ran at 84.2 percent of capacity last week, down from 87.7 percent the previous week. Total products supplied, a measure of consumption, fell 1.9 percent to 18.7 million barrels a day last week, the lowest level since the seven days ended July 22, the department said. Gasoline demand increased 0.6 percent, the report showed. Earlier, prices fell after the American Petroleum Institute said yesterday that U.S. gasoline demand slid the most in more than five years and as China’s net crude imports declined to the third-lowest level this year, the customs bureau said today. Implied gasoline demand in the U.S., the world’s biggest oil consumer, dropped 10.5 percent in the week to Oct. 7, the API report showed. That’s the biggest decline since March 2006.
  • China Sees 'Severe' Challenges as Export Growth Moderates. China’s exports rose the least in seven months and the customs bureau warned of “severe” challenges as the global economic outlook dims, giving Premier Wen Jiabao’s government less incentive to let the yuan rise.
  • House Dems Ask DOJ to Probe Debit Fees. Five House Democrats asked Attorney General Eric Holder to investigate whether U.S. banks and their trade groups colluded on decisions to impose new fees in response to caps on what they can charge for using debit cards.
  • Initial Jobless Claims in U.S. Fell to 404,000. The number of Americans filing claims for jobless benefits was little changed last week, showing the labor market is making scant progress. Applications for unemployment insurance payments decreased 1,000 in the week ended Oct. 8 to 404,000, Labor Department figures showed today. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey. The four-week moving average, a less-volatile measure, fell to a two-month low of 408,000 from 415,000. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments increased by about 2,300 to 3.55 million in the week ended Sept. 24. The unemployment rate among people eligible for benefits fell to 2.9 percent in the week ended Oct. 1 from 3 percent, today’s report showed. Thirty states and territories reported an increase in claims, while 23 had a decrease.
  • Consumer Comfort Hovered Near Low Last Week. Consumer confidence hovered last week near a record low as Americans turned more pessimistic about the state of the U.S. economy. The Bloomberg Consumer Comfort Index fell to minus 50.8 in the week ended Oct. 9 from 50.2 the prior period. It was the fourth consecutive reading lower than minus 50, something that has happened just three previous times in its 26-year history. The index was minus 54 in November 2008, the lowest level since records began in 1985. The gauge has seen four-week stretches of readings lower than minus 50 just once in late 2008 and twice in 2009. Sentiment among respondents who own their homes and among registered independents dropped last week to the lowest level in data going back to 1990. Confidence for households earning more than $50,000 a year fell to the second-lowest in the data.
  • JPMorgan's(JPM) Earnings Decline on Investment-Banking Slump. JPMorgan Chase & Co., the second- largest U.S. bank, reported an approximately 33 percent profit decline excluding a $1.9 billion accounting benefit amid a slump in investment banking and trading. Third-quarter earnings fell to about $3.1 billion, or 73 cents a share, not including the 29-cent accounting gain, from $4.71 billion on the same basis a year earlier. Net income was $4.26 billion, or $1.02 a share, compared with the average per- share estimate for adjusted earnings of 92 cents in a survey of 30 analysts by Bloomberg, the New York-based company said today.
  • House's Frank Asks Supercommittee to Impose Fee on Biggest Banks. U.S. Representative Barney Frank, the top Democrat on the House Financial Services Committee, asked Congress’s debt-reduction supercommittee to impose a fee on the biggest banks and hedge funds to help pay down the federal deficit. Frank made the request in an Oct. 12 letter to Senator Patty Murray and Representative Jeb Hensarling, co-chairmen of the Joint Select Committee on Deficit Reduction.
  • Tanning Tax Income Pales Compared With Estimate, Audit Finds. Revenue from a 10 percent excise tax on indoor tanning services mandated by the 2010 health-care overhaul law is falling short of projections, a government watchdog reported Thursday. The tax brought in $17.8 million in the last quarter of the 2010 fiscal year and $36.6 million in the first half of fiscal 2011, according to the report by the Treasury Department’s inspector general for tax administration. The tanning levy was projected to generate $2.7 billion over 10 years, including $200 million for fiscal 2011, according to the congressional Joint Committee on Taxation.
Wall Street Journal:
  • Copper Falls on China, EU Worries. Copper futures slipped, under pressure from worry about Europe's debt crisis and a set of mixed Chinese trade data that suggested the world's top copper consumer continues to face economic headwinds. Copper for October delivery was down 10.2 cents, or 3%, at $3.2885 a pound in midday trade on the Comex division of the New York Mercantile Exchange. Copper was under pressure as European and U.S. equity markets were mostly lower, reflecting concern about the euro zone's fight to stave off a credit crunch. The growth-sensitive metal has taken cues from shifting sentiment about the currency union recently, as further weakness in the continent's financial system may rattle the industrial economy and sap demand for metals.
  • Rajaratnam Gets Longest Insider Sentence. Raj Rajaratnam, the face of the biggest trading scandal in a generation, was sentenced to 11 years in prison on Thursday, the longest-ever term handed down for an insider case. "His crimes and the scope of his crimes reflect a virus in our business culture that needs to be eradicated," U.S. District Judge Richard Holwell said in imposing the sentence. Judge Holwell also ordered Mr. Rajaratnam to pay a $10 million fine and to forfeit $53.8 million.
  • U.S. Incomes Seen Stagnant Through 2021. Americans' incomes have dropped since 2000 and they aren't expected to make up the lost ground before 2021, according to economists in the latest Wall Street Journal forecasting survey.
  • Who's Behind the Wall Street Protests? Anti-Wall Street protesters say the rich are getting richer while average Americans suffer, but the group that started it all may have benefited indirectly from the largesse of one of the world's richest men. There has been much speculation over who is financing the disparate protest, which has spread to cities across America and lasted nearly four weeks. One name that keeps coming up is investor George Soros, who in September debuted in the top 10 list of wealthiest Americans. Conservative critics contend the movement is a Trojan horse for a secret Soros agenda. Soros and the protesters deny any connection. But Reuters did find indirect financial links between Soros and Adbusters, an anti-capitalist group in Canada which started the protests with an inventive marketing campaign aimed at sparking an Arab Spring type uprising against Wall Street. Moreover, Soros and the protesters share some ideological ground. Soros, 81, is No. 7 on the Forbes 400 list with a fortune of $22 billion, which has ballooned in recent years as he deftly responded to financial market turmoil. According to disclosure documents from 2007-2009, Soros' Open Society gave grants of $3.5 million to the Tides Center, a San Francisco-based group that acts almost like a clearing house for other donors, directing their contributions to liberal non-profit groups. Among others the Tides Center has partnered with are the Ford Foundation and the Gates Foundation. Disclosure documents also show Tides, which declined comment, gave Adbusters grants of $185,000 from 2001-2010, including nearly $26,000 between 2007-2009. Adbusters, whose magazine has a circulation of 120,000 and which is known for its spoofs of popular advertisements, came up with the Occupy Wall Street idea after Arab Spring protests toppled governments in Egypt, Libya and Tunisia, said Kalle Lasn, 69, Adbusters co-founder. "It came out of these brainstorming sessions we have at Adbusters," Lasn told Reuters, adding they began promoting it online on July 13. "We were inspired by what happened in Tunisia and Egypt and we had this feeling that America was ripe for a Tahrir moment." "We felt there was a real rage building up in America, and we thought that we would like to create a spark which would give expression for this rage."
Business Insider:
Zero Hedge:
New York Times:
  • As China's Economy Cools, Loan Sharks Come Knocking. As China’s economy has begun to slow slightly, more and more entrepreneurs are finding themselves in Mr. Sun’s straits — unable to meet debt payments on which interest rates often run as high as 70 percent in this nation’s thriving unregulated, underground loan system. Such illegal lending amounts to about $630 billion a year, or the equivalent of about 10 percent of China’s gross domestic product, according to estimates by the investment bank UBS.
Wall St. Cheat Sheet:
  • AAII Sentiment Survey: Is Optimism Returning? Bullish sentiment, expectations that stock prices will rise over the next six months, increased 4.5 percentage points to 39.8%. This is the highest level of optimism since July 21, 2011. It also ends a streak of 11 weeks when bullish sentiment was below its historical average of 39%. Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 9.4 percentage points to 36.4%. This is a six-week low for pessimism. It is also only the third time in the past 11 weeks that bearish sentiment has been below 40%.
Seeking Alpha:
  • China Is In Credit Market Crosshairs. Which country saw the cost of insuring its sovereign debt against default rise more in the third quarter, Spain - the country that puts the S in PIIGS - or rising economic titan China? The answer is China, as concern grows in credit markets about the outlook for the country's economy. China's five-year sovereign credit default swap was among the 10 worst performing sovereign CDS in the world in the third quarter. The cost of insuring a Chinese five-year bond against default rose 136 per cent, according to a third-quarter roundup by debt market research firm Markit.
  • Commodity Sell-Off Hits Star Hedgies' Track Records. A sharp sell-off in commodity markets in the past few weeks is wreaking havoc with the track records of some of the biggest-name funds in the sector, many of which now languish near the bottom of the $2 trillion industry's performance tables. Funds like Mike Coleman's Merchant Commodity fund and Willem Kooyker's Blenheim Capital sit on hefty double-digit losses for the year after investors worried about global economic growth recently dumped gold, copper and cocoa for less risky assets. The Reuters-Jefferies CRB index of 19 commodities <.CRB> shed 13 percent during September, a drop which has echoes of May when many star managers betting on rising prices were caught on the hop by a quick sell-off. The size of the September hit, on top of losses suffered earlier this year, means many managers who enjoyed bumper profits from the long commodity bull run now face the likelihood of a down year. The average hedge fund investing in the Energy and Basic Materials sectors has slid 15.5 percent this year to end-September, making it the worst-performing strategy as measured by Hedge Fund Research's HFRI index.
  • China Regulator Looks to Tighten Grip on Microblogs. A Chinese Internet regulator on Thursday called for stricter policing of the nation's microblogs while also encouraging officials to use them to engage with citizens, state news agency Xinhua reported. China's microbloggers showed their potency in a string of recent official scandals, particularly an online uproar in the wake of a high-speed bullet train crash in July that killed 40 people. Microbloggers led the charge in challenging rail officials' evasive accounts of the disaster. Chinese state media have demanded that Internet companies, regulators and police do more to cleanse websites of "toxic rumors". China currently heavily filters the Internet, and blocks popular foreign sites such as Facebook, YouTube and Twitter. The Xinhau report said people who spread "fabricated rumors," pornography, and who "pollute the Internet environment," must be investigated according to the law. "Make microblogs a new platform that is positive and healthy and for expressing oneself in a civilized and rational way," it said, adding that influential bloggers should develop a stronger "sense of social responsibility." The State Internet Information Office is a newly formed agency intended to strengthen government regulation of Internet content, which is also monitored by several other, sometimes rival agencies.
  • Apple's(AAPL) New iPhone Features Qualcomm(QCOM) Chip. Apple Inc's fifth-generation iPhone uses a wireless chipset from Qualcomm Inc as well as silicon from smaller chipmakers, according to repair and parts specialist iFixit, which cracked the device open on Thursday.
  • Issuance Rumors Fuel China Bank Funding Concerns.
Financial Times:
  • German Banks Attack Recapitalisation Plan. Germany’s entire banking industry has joined forces to resist any compulsory recapitalisation of banks, urging Berlin to resist European moves to impose higher capital requirements across the board. In a furious letter to Wolfgang Schäuble, German finance minister, the country’s five banking associations are demanding that any risk assessment of European banks should be based on the current concept of capital requirements, and should not anticipate the Basel-III rules that are only supposed to come into effect from 2019.
  • Europe's Grand Plan Risks Slow Death by a Thousand Cuts. Is Europe's planned programme of banking recapitalisations going to work? It depends how it is done, but the omens aren't good. The message from bankers at the Association for Financial Markets in Europe (AFME) annual dinner in London this week was a concerning one.
Sky News:
  • Exclusive: Fitch Poised to Slash UK Bank Ratings. The credit ratings agency Fitch is poised to deliver further grim news for Britain’s banks by warning of a sector-wide downgrade later today, I can exclusively reveal. Fitch is understood to have told the country’s major high street lenders to expect a statement about the review for downgrade after the stock market closes today. It’s possible that the statement will be brought forward now that I have disclosed the development. The review will include our giant banks such as Barclays, Lloyds Banking Group and Royal Bank of Scotland (RBS).
21st Century Business Herald:
  • Wenzhou SME Crisis Escalates, 40% May Halt Production. Local media are reporting that 40% of small and medium-sized enterprises (SMEs) in Wenzhou, Zhejiang province, may halt production by the end of 2011 as they remain hesitant to accept new orders, reports According to some of these SMEs, the issues faced by them include renminbi appreciation, increased operation cost, weak earnings, higher returns from investments and capital going to the underground banking sector. Some of the smaller companies are thinking of switching into other businesses, and are hoping for consistent government policies to ensure the success of the switch. The difficulties in operating their businesses had allegedly led to Hu Fulin, the founder and chairman of Zhejiang Xintai Group, a major maker of eye glasses, fleeing the city late last month to avoid having to pay the high-interest loans obtained from the illegal lending market. Hu had since returned to the city. Three to 5 major makers of eye glasses are currently negotiating to restructure Zhejiang Xintai Group. Finding a way to restructure the loans taken by the owners of the SMEs has become the main focus, said Zhou Dewen, the head of Wenzhou's SME Development and Promotion Association. According to investigations by journalists, Wenzhou companies are experiencing greater difficulties than during the time of the financial crisis, and some of them are not willing to accept new orders. Labor costs had risen 20% year-on-year in 2011, and the continued renminbi appreciation had squeezed the company's profits as it exports 95% of its products, added Zhong. According to Zhong, the industry's profit margin had fallen from 30-50% previously to between 3% and 8% at present. Zhou said the majority of SMEs in traditional industries are suffering from low profitability. According to the Wenzhou Economic and Trade Commission, 35 export-oriented companies had posted a 30% year-on-year drop in net profits in the first quarter of 2011. Twenty percent of the SMEs in Wenzhou had already stopped, or are planning to halt production, and the percentage is projected to hit 30-40% by the end of 2011 should the government not step in to help, added Zhou. The tight monetary policy had led to some of the SME owners resorting to borrowing from illegal money lenders where the annualized interest rates are up to 50%. The profits earned by the SMEs are not enough to even repay the interests of the loans, according to the report.

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