Tuesday, October 11, 2011

Tuesday Watch

Evening Headlines

  • Euro Chiefs Push Back Debt Crisis Summit Amid Tension Over Greek Writedown. European leaders pushed back a debt- crisis summit amid opposition to German Chancellor Angela Merkel’s drive for deeper-than-planned writedowns of Greek bonds. The Oct. 18 meeting was postponed to Oct. 23 as Europe gropes toward a master plan for dealing with Greece’s oversized debt, insulating the Spanish and Italian markets, and shielding banks from the fallout. Europe needs a strategy for shoring up banks before unstitching a July accord to cut Greek bond values by an average of 21 percent, Belgian Prime Minister Yves Leterme said. “It is a very sensitive item,” Leterme said in a Bloomberg Television interview at his Brussels residence yesterday. “You can’t at every European Council change the percentages and bring supplementary problems to banks.” Germany and France, Europe’s dominant tandem, this week pledged a crisis-management breakthrough in time for a Nov. 3 meeting of Group of 20 leaders, the informal steering committee for the world economy. Opposition to bigger Greek debt writedowns is coming from the European Central Bank, which is against any backsliding from the July 21 accord on a second Greek bailout, a central bank official said yesterday. An appeal to “fully implement all aspects” of the July roadmap was inserted into last week’s monthly policy statement as a warning to Germany, the official said under condition of anonymity.
  • ECB Backs Guarantee Option for Rescue Fund. The European Central Bank says the firepower of Europe’s bailout fund should be magnified by using government guarantees rather than the central bank’s money market operations. The ECB says governments should use the 440-billion-euro ($603 billion) European Financial Stability Facility to insure a portion of new bonds issued by debt-strapped nations. That would leverage the amount available to protect member states from the region’s debt crisis. EFSF resources “should be dedicated to enhance sovereign debt new issuance of securities, thus multiplying their effect,” ECB Vice President Vitor Constancio said in a speech in Milan yesterday. Policy makers are trying to build a “firewall” around large European countries like Italy and Spain whose size would make them difficult to rescue if their debt became unsustainable. ECB President Jean-Claude Trichet opposes suggestions that the central bank should lend to the EFSF to boost its capacity, saying such a move would not be “appropriate.” The Frankfurt-based central bank maintains any such arrangement would constitute monetary financing of governments. A guarantee program would allow countries to access more capital without the EFSF exhausting its finite capital reserves.
  • Rate Swap Spreads Rise With Europe Plan Elusive: Credit Markets. A gauge of stress in credit markets reached its highest level in 16 months even as stocks rally, showing short-term funding concerns persist as European leaders rush to recapitalize the region's banks. The two-year interest-rate swap spread, which measures perceived credit risk, climbed 5.75 basis points last week, the biggest jump since June, to 39 basis points. The gap expanded 9 basis points in the two weeks ended Oct. 7 as the MSCI World Index of global stocks climbed 2.85%.
  • Economists Call for Crop-Trading Limits to Curb Volatility. Hundreds of economists including scholars from Oxford University and the University of California, Berkeley, are asking the Group of 20 nations to impose limits on speculative positions in food commodities to curb volatility in crop prices. “With around 1 billion people enduring chronic hunger worldwide, action is urgently needed to curb excessive speculation and its effects on global food prices,” according to a letter signed by 461 economists and sent to finance ministers from the G-20, which includes the world’s richest nations. The letter, dated today, was posted on Oxfam America’s website. Research sponsored by the United Nations, International Monetary Fund and other global organizations suggest speculation in crop futures by index funds and large banks may cause price spikes that can put grocery costs out of reach for poorer people.
  • Societe Generale SA, France's 2nd largest bank, may reduce its lending in Asia because of market volatility, according to 4 people with knowledge of the matter. Units in Asia that provide financing for aircraft, shipping and commercial real estate are under review, said the people.
  • IBM(IBM) Advances to Record Price as Investors Consider 'Safer' Bet. International Business Machines Corp., the world’s largest computer-services company, rose to a record, surpassing the mark set in July. IBM rose 2.3 percent to $186.62 at the close in New York, giving it a market value of $222.9 billion. The price topped the $185.21 it reached July 19. “It’s attractive as a safer, less volatile investment in tech in very turbulent times,” said Ed Maguire, an analyst at Credit Agricole Securities USA in New York who rates the shares “outperform.” IBM, which went public in 1915, has gained 27 percent this year, making it the best performer of the Dow Jones Industrial Average.
  • Most Supertankers Idled Since '80s Won't Buoy Charter Rates: Freight. Owners of supertankers, losing money for a sixth consecutive quarter, will probably idle the most ships in more than two decades as they contend with a glut that drove charter rates to the lowest in at least 14 years. The combination of too many ships and slowing demand growth for oil means that about 6 percent of the fleet will be anchored in a year from almost none now, according to the median in a Bloomberg survey of eight brokers and analysts. That may not be enough to end the slump. Forward freight agreements, traded by brokers and used to bet on transport costs, anticipate rates no higher than $13,819 a day through 2013. Frontline Ltd., the biggest operator of the vessels, says it needs $29,800 to break even. The Hamilton, Bermuda-based company will report its biggest annual loss in 12 years in 2011, analysts’ estimates compiled by Bloomberg show. While owners can cut operating costs to as little as $2,000 a day from $12,000 by anchoring ships, it also means no income, said Andreas Sohmen- Pao, chief executive officer of the oil and gas shipping unit of BW Group Ltd., which is idling three vessels.
Wall Street Journal:
  • Cantor Fitzgerald Bets On Expanding Private-Stock Market. Cantor Fitzgerald is looking to cash in on a growing secondary market for shares in hot private companies such as Facebook Inc. and Twitter Inc. The financial-services firm is creating a private-markets group to afford clients opportunities to invest in private-company stock along with private real estate investment trusts and private-equity and hedge-fund interests.
  • Schapiro to Stay at SEC Through Next Fall.
  • Longacre to Wind Down Main Hedge Funds. Longacre Fund Management LLC told investors Monday that it will wind down its main hedge funds, after losses and redemptions for the end of this year took a greater toll than the firm's managers expected. The high-profile firm was started 13 years ago by former Bear Stearns distressed-debt traders John Brecker, Vladimir Jelisavcic and Steven Weissman. As of February, Longacre had $835 million in assets, according to fund documents. Longacre executives told clients and others close to the matter that clients' withdrawal requests for the end of 2011 overwhelmed the firm, making the closure of its main funds the best course of action, the people said.
  • China Selloff Reflects Lower Credibility: Analysts. China's sovereign-wealth fund stepped in Monday to buy shares of the country's battered banks, which have been caught in a selloff that analysts say partly reflects a loss of trust in the integrity of government statistics and corporate earnings. The skepticism of investors comes as China has become increasingly exposed to global markets, largely through stock listings of its state-owned enterprises and other companies, but more recently through its currency and bonds, which are now traded in Hong Kong.
Business Insider:
Zero Hedge:
  • Nervous Asia Has Good Reasons to Fear Euro Zone Crisis. Over recent weeks, Asia’s largely dispassionate observation of the economic slowdown in Europe has given way to fears that the eurozone’s sovereign debt woes could trigger deep problems for the broader Asian economy and its financial centers. Singapore and neighboring Southeast Asian nations are among the most vulnerable to direct disruption, because so much of their economic activity depends on international trade. Even the least bearish bankers are braced for at least a repeat of the 2008 hit to Asia’s economy — and its banks — when the first flush of the global financial crisis led to two quarters of negative growth in the region. The old idea of Asia, or many other emerging markets for that matter, being a safe haven from troubles in developed markets, has been discredited. As 2008 showed, there is no such thing as a decoupled economy in a globalized world.Asia today faces two waves of pain.
  • China Shares Rise After State Props Up Bank Shares. Chinese shares rose nearly 2 percent in early trade on Tuesday, boosted by a unit of the country's sovereign wealth fund increasing its stakes in the "Big Four" lenders in a sign of government support for the languishing stock market.
NY Times:
  • Wall St. Banks Help Hedge Funds Recruit. Wall Street banks often boast that they hire the best and the brightest. Now, scrambling to bolster profits, they have become full-time headhunters for some of their biggest hedge fund clients, a role that is rife with potential conflicts.
Chicago Tribune:
  • Paulson Faces Big Test as Clients Mull Future. Hedge fund manager John Paulson, long lionized for his successful bets on the collapse of the subprime mortgage market and the surge in gold prices, is now facing the toughest challenge of his career. With one of Paulson's largest funds down nearly 50 percent for the year and several others also posting big losses, the big question is whether the manager's large and wealthy fan base will scurry for the exits and seek to redeem billions of dollars by year's end. "There will be a lot of internal discussion at big and small investors alike about the allocation to John Paulson and whether to redeem it or to keep it," said Professor Jim Liew, who teaches hedge fund strategies at New York University's Stern School of Business.
  • Irish Banks Noncore Assets Must Fall in 2011 - Govt. Ireland's three remaining banks should dispose of almost half of their noncore assets under a targeted deleveraging program this year, Ireland's finance department said. Bank of Ireland (BKIR.I), Allied Irish Banks (ALBK.I) and Irish Life & Permanent (IPM.I) need to shrink their balance sheets by 70 billion euros by 2013, 34 billion of which are to be achieved through asset disposals. Some 46 percent of those disposals are expected to be accomplished during 2011, the finance ministry said in a half-year review of Irish banks to end-September that it published on its website on Monday.
  • Carlyle-Blackstone(BX), THL Finalists for Morgan Keegan. Thomas H. Lee Partners and a consortium that includes Blackstone Group (BX.N) and Carlyle Group [CYL.UL] are the finalists for Regions Financial Corp's (RF.N) Morgan Keegan brokerage unit, sources familiar with the matter said.
  • 25 States Urge Court to Make US EPA Delay Power Plant Rule. Adding pressure on the U.S. Environmental Protection Agency to relax air pollution rules, 25 states urged a federal court on Monday to require the agency to delay a rule on mercury emissions and other pollutants from power plants by at least a year, saying the measure is too costly. "In the past, EPA has designed its regulations pretty carefully to make sure that they wouldn't be forcing any facilities to shut down," Jeff Holmstead, the former EPA assistant administrator for air and radiation under President George W. Bush, said about the brief, filed electronically on Monday with the U.S. District Court for the District of Columbia. "But now, it looks like there are senior folks at EPA whose main goal is to shut down as many coal-fired power plants as possible."
  • Congress Watchdog Probes Solar Loans After Solyndra. A top Republican congressional watchdog wants the Energy Department to turn over documents and emails about $4.7 billion in loan guarantees for four solar projects approved right before a Sept 30 deadline. The last-minute approvals of the projects raise fears that "the evaluation of loan guarantees may have been rushed in order to meet a deadline," said Darrell Issa, chairman of the House Oversight Committee, in a letter to Energy Secretary Steven Chu.
Financial Times:
  • Netherlands Finance Minister Jan de Jager wants harsh enforcement measures for violations of budget agreements as part of any new pact to save the eurozone, citing an interview. Netherlands wants reforms from any country that seeks help from the European financial stability facility. Some measures Netherlands wants may require renegotiating European treaties.
  • PrimeX Indices Suggest Mortgage Concerns are Spreading. (video) They are indices few have ever heard of outside the more arcane corners of the credit world. But they, nevertheless, are starting to flash warning signs, suggesting concerns about the mortgage market are spreading from subprime to better quality home loans.
  • Germany Push for Greek Default Risks EMU-Wide 'Snowball'. Germany is pushing behind the scenes for a "hard" default in Greece with losses of up to 60pc for banks and pension funds, risking a chain-reaction across southern Europe unless credible defences are established first. Officials in Berlin told The Telegraph it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July. The exact level will depend on findings by the EU-IMF "Troika" in Athens. "A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough," said one source. Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were "probably" too low, saying banks must have "sufficient capital" to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin. The shift in German policy has ominous echoes of last year when Chancellor Angela Merkel first called for bondholder haircuts, setting off investor flight from Ireland and a fresh spasm in the EU debt crisis. "This could set off a snowball effect," said Andrew Roberts, credit chief at RBS. "The markets will instantly switch attention to Portugal, where two-year yields are already 17pc".
  • Banque de France Turns a Blind Eye to European Financial Crisis. Crisis? What crisis? To judge by a speech in Tokyo last week from Christian Noyer, Governor of the Banque de France, you would never have guessed there was an almighty financial implosion going on at the heart of the eurozone.
  • Spain Unlikely to Meet Deficit Target. Alarm is sounded over the country's borrowing, with the chance of the public deficit being cut from 9% to 6% said to be slim. Alarm bells are being rung over Spain's ability to hit its public deficit target this year without taking further dramatic steps to raise extra income or cut spending. Figures released last week by the national statistics institute (INE) show that the deficit level remained virtually unchanged during the first half of this year, according to one of the country's leading analysts. Angel Laborda, of the savings banks federation Funcas, said the figures on the overall borrowing needs of Spain's public administration meant the chances of bringing the deficit down from 9% to 6% this year were slim. The deficit could now head for between 7.5 and 8%of GDP – well off the target agreed by the socialist government of prime minister José Luis Rodríguez Zapatero and the European Union and much worse than previous analysts' estimates. "Most of the year has already gone so I think it is impossible to meet 6%," Laborda said. "I'd say it will be closer to 8%." He blamed the problem on the regional governments, who account for a third of public spending. Many had only seriously begun to cut spending after May elections, he said. Lower-than-expected growth was also a handicap. Separate figures show that central government has brought down its part of the deficit, suggesting that regional governments may have actually grown their deficits during the first half of the year, he said.
Sky News:
  • Ratings Boss: Eurozone Crisis 'Getting Worse'. (video) "The eurozone crisis keeps on getting worse," he said on Jeff Randall Live. "It's now become a systemic crisis - not just in terms of spreading the contagion to Italy, which is deeply worrying - but it's now become a systemic banking crisis." His comments follow Fitch's downgrade of both Spanish and Italian government debt on Friday. But Mr Riley stressed there was "broad recognition" of what needs to be done to help the region. He said the solution includes dealing with Greece's debt, putting more money into banks and supporting weaker countries like Spain and Italy, which he described as "solvent but potentially illiquid". But when pressed by Randall on whether Germany would bankroll these measures, he admitted this was a problem. "It's not that they don't know the potential solution, it's that they don't want to put that one in place," he said. "That's one of the reasons why they've been behind the market, because where the market is wanting to take them... Germany in particular doesn't want to go there." He added:"(Prime Minister) David Cameron said they have weeks to do it, but I think this crisis could go on for months, not weeks."
Vietnam News:
  • Floods in Vietnam's Mekong Delta had killed 24 people as of Oct. 9 and inundated 22,920 hectares of the autumn-winter rice crop, citing the National Steering Committee for Flood and Storm Prevention and Control.
Shanghai Daily:
  • Dent in Shanghai Consumer Confidence. HIGH inflation, a weak stock market and concerns over tightening measures put a dent in the confidence of Shanghai's consumers who were pessimistic in the third quarter this year, the first time their confidence has dipped since the first quarter of 2009, according to a survey yesterday. The consumer confidence index dropped to 99 in July to September, down 7.7 points from the same period a year ago, the Shanghai University of Finance and Economics said in a report yesterday, quoting a quarterly index on consumer tendency in the city. A reading above 100 signals consumers are optimistic about the economy while one below indicates pessimism.
Shanghai Securities News:
  • The Chinese Academy of Social Sciences expects China's 2011 CPI to Be 5.5%. CASS suggests that the country should continue to curb inflation and stabilize prices this year and early next year.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are +.75% to +2.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 222.50 -7.0 basis points.
  • Asia Pacific Sovereign CDS Index 156.50 -10.0 basis points.
  • FTSE-100 futures +.04%.
  • S&P 500 futures -.25%.
  • NASDAQ 100 futures -.27%.
Morning Preview Links

Earnings of Note
  • (AA)/.23
Economic Releases
7:30 am EST
  • The NFIB Small Business Optimism Index for September is estimated to rise to 88.8 versus 88.1 in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Slovakia EFSF vote, FDIC's Volcker rule vote, weekly retail sales reports, 3-Year Treasury Note auction, IDB/TIPP Economic Optimism Index for October, (FISV) investor conference and the (CVX) Interim 3Q Update could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by financial and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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