Tuesday, October 18, 2011

Tuesday Watch

Evening Headlines

  • France Risks AAA on Bulked Up ESFS Bailout Fund: Euro Credit. Proposals to beef up Europe’s bailout fund by offering to guarantee portions of the debt owed by the region’s weaker governments threaten to trash France’s top credit rating. The nation’s 10-year notes are the third-worst performers this quarter -- behind only Greece and Belgium -- as traders speculate the European Financial Stability Facility will be used to insure the first portion of losses in the event of a sovereign default. Investors now demand to be paid a record 93.2 basis points more to hold French bonds rather than German notes, up from 29 basis points in April. “France is the key factor here,” said Bob McKee, chief economist at Independent Strategy Ltd. in London. “Offering insurance increases France’s contingent liability and that puts pressure on its rating. If France loses its AAA status, that in turn increases the pressure on Germany.” French bonds are being hurt as policy makers consider using the guarantee to ensure Italy, the world’s third-largest bond issuer, and Spain can continue to access markets as contagion spreads from Greece. A downgrade of France will also limit the EFSF’s ability to hold a top grade, according to Moody’s Investors Service. The cost of insuring French bonds using credit-default swaps has soared to 183 basis points, from an average of about 84 in the first half of the year. “Looking at the numbers, France is no longer a AAA credit,” said Nicola Marinelli, who oversees $153 million in funds at Glendevon King Asset Management in London. “They’re talking about guaranteeing trillions of euros of bonds but if France isn’t a AAA then even guaranteeing one more euro might not be sustainable.” “The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating,” Moody’s said in a report late yesterday. “The French government now has less room for manoeuvre in terms if stretching its balance sheet than it had in 2008.” Moody’s said it will monitor and assess its “stable” outlook on the nation’s debt over the next three months. French banks tumbled in the past three days with BNP Paribas SA, the biggest of the nation’s lenders, dropping more than 12 percent and Societe Generale SA down almost 14 percent on concern they would be downgraded along with the government. “Given the sheer size the French banking system it may end up being singled out as the most vulnerable country to a rating agency downgrade,” said Marchel Alexandrovich, an economist at Jefferies International in London.
  • Euro Rescue Is Hard Sell for Poorest Members. Estonia and Slovakia, the euro area's two poorest members, will contribute the most to the bailout system relative to the size of their economies, giving leaders opposed to helping richer states ammunition to stall future euro-stability programs. Estonia's share in the newly expanded EFSF equals 13.9% of GDP, compared with 8.5% for Germany, the largest guarantor in nominal terms. Slovakia, the second-poorest euro country, ranks second with a share amounting to 11.7% of GDP.
  • Euro Leaders' Crisis Campaign Bogs Down as Divisions Flare. Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases. European stocks and the euro reversed initial gains yesterday, slumping after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy. While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion. “We’re really in a bind here,” Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.” The ECB said yesterday it bought 2.2 billion euros ($3 billion) of bonds last week, the least since it restarted the market support program in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed 440 billion-euro rescue fund with enough firepower to do that job. “We don’t see how the EU officials will be able to present a solution by the weekend which will remotely approach the current expectations,” Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt, said in a research note yesterday.
  • China Will Write Off $3 Trillion, Says Das of 'Extreme Money'. If Satyajit Das is right, China will end up writing off its $3.2 trillion in foreign reserves. Europe is shambling toward Japanese-style growth. And a day of reckoning is at hand for creditors and debtors alike.“Europeans are going to have to recapitalize their banks,” Das said as we discussed the sovereign-debt crisis and his new book, “Extreme Money,” over coffee in a Brussels hotel. “You have made bad loans; you’re going to have to write them off. That is the one axiomatic law of making a bad loan.” Das, 54, is the puckish derivatives specialist who lampooned banking excesses in “Traders, Guns & Money.” He was in town to brief members of the European Parliament on the crisis. Looking relaxed in a black V-necked sweater and black shirt, he talked about Germany’s fling with Greece, China’s unpaid loans and what Angela Merkel can learn from Winston Churchill. We began with Dexia SA’s second bailout.
  • China Banking Crisis Possible. (video) Patrick Chovanec, a professor at Tsinghua University in Beijing, talks about China's economy. Chovanec speaks with Susan Li on Bloomberg Television's "First Up."
  • GE(GE) Redeems $3.3 Billion Stake Buffett Bought Amid 2008 Crisis. General Electric Co. paid $3.3 billion today to repurchase preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc. as financial markets froze in October 2008.
  • IBM(IBM) Q3 Revenue Misses Estimates on Slow Demand. International Business Machines Corp. (IBM), the biggest computer-services company, reported third- quarter sales that missed analysts’ estimates on slowing revenue growth at its software, hardware and services businesses. Sales climbed 7.8 percent to $26.2 billion, Armonk, New York-based IBM said today in a statement. Analysts predicted $26.3 billion, the average of estimates compiled by Bloomberg. Chief Executive Officer Sam Palmisano is focusing on areas such as business analytics, emerging markets and cloud computing to boost sales amid sluggish economic expansion. “Because they didn’t beat, the stock’s going to trade down; the expectation is pretty high for this name,” said Josh Olson, an analyst with Edward Jones & Co. in Des Peres, Missouri, who has a “buy” rating on the stock. A slowdown in hardware revenue growth is occurring “sooner than I expected.” IBM fell as much as 4.1 percent to $179.02 in extended trading after closing at $186.59 in New York today.
  • VMware(VMW) Braces for 'Difficult' 2012 as Corporations Cut Technology Spending. VMware Inc. (VMW), the biggest maker of programs that let computers run multiple operating systems, said it’s bracing for a “difficult” 2012 because corporations may slow spending on technology, including the company’s software. On a conference call today to discuss quarterly earnings, Chief Financial Officer Mark Peek said next year will be “challenging.” Net income in the third quarter more than doubled to $177.5 million, or 41 cents a share, from $84.6 million, or 20 cents, VMware said. Excluding some costs, profit was 53 cents, compared with the 49-cent average estimate of analysts surveyed by Bloomberg. “It will be a year of challenging revenue comparables and considerable investments,” Peek said on the conference call.
Wall Street Journal:
  • Yahoo(YHOO) Vexed by Weak Sales. As Yahoo Inc. shops itself to potential buyers, its core advertising business is weakening. That trend is evident through Craig Atkinson's ad agency.
  • New Mortgage Plan Floated. Underwater Borrowers Current on Payments Would Get Help. State and federal officials are pushing a plan that could help some "underwater" borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market. The proposal was raised in a meeting last week between government negotiators and giant lenders as part of an effort to settle allegations of questionable foreclosure practices. Discussions are still fluid and any final outcome is uncertain. Talks between government officials and the banks are expected to continue this week.
  • Traders Warn of Market Cracks. Amid the wild swings of the past few weeks, cracks are appearing deep in the workings of the stock market that some professional investors say are making the market treacherous to trade. Hedge-fund traders and mutual-fund managers say it has become increasingly tough to trade an individual stock without causing a big swing in its price. That's led many large investors to step back from the market instead of risking being stung by the trading difficulties.
  • Polling The Occupy Wall Street Crowd by Douglas Schoen. In interviews, protesters show that they are leftists out of step with most American voters. Yet Democrats are embracing them anyway. President Obama and the Democratic leadership are making a critical error in embracing the Occupy Wall Street movement—and it may cost them the 2012 election.
  • A New Spending Record. Washington had its best year ever in fiscal 2011. Maybe it's a sign of the tumultuous times, but the federal government recently wrapped up its biggest spending year, and its second biggest annual budget deficit, and almost nobody noticed. Is it rude to mention this?
  • Chanos: China's Hard-Landing Has Already Begun. China is heading into an economic storm, and the much-feared hard-landing of the world’s second-largest economy has already started, warned celebrated hedge-fund manager and China-bear Jim Chanos of Kynikos Associates on Monday. “The numbers are falling faster than we thought,” said Chanos during an exclusive interview with MarketWatch on the sidelines of the 7th Annual New York Value Investing Congress.
  • Fed's Lacker: Twist Will Boost Prices Not Growth. Richmond Federal Reserve Bank President Jeffrey Lacker said Monday that he does not support the central bank's Operation Twist move to help to recovery. "My sense is that the main effect will be to raise inflation somewhat rather than increase growth," Lacker said in a speech to a business group in Salisbury, Md. Lacker said he was more worried than most economists about inflation, saying he doubts it will fall much below 2% for a sustained period. Lacker also said he did not support the Fed's decision to reinvest proceeds from maturing agency mortgage-backed securities into the agency MBS market. Previously, the Fed had reinvested the proceeds into Treasurys. "It is simply inappropriate, in my view, for a central bank to channel credit toward some economic sectors and away from others," Lacker said.
Business Insider:
Zero Hedge:
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -23 (see trends).
  • Crocs(CROX) Cuts Outlook on Sales Slowdown, Shares Dive. Shoemaker Crocs Inc (CROX.O) lowered its outlook for the first time in three years as it faces softening sales at its stores, amid a weak economy in Europe and shaky consumer confidence in the United States. The dim outlook sparked a sell-off in the Crocs' stock, wiping out nearly 40 percent of the company's market value in extended trading. They were trading at $17.08 in after-market trade, after closing at $26.64 on Monday on Nasdaq.
Financial Times:
  • Companies Expect More Lawsuits. A boom in corporate litigation is expected in the US and UK due to increased regulation and whistleblower complaints, a transatlantic survey of top in-house lawyers by the law firm Fulbright & Jaworski has found. More than 90 per cent of US companies and 85 per cent of UK companies are expecting lawsuits to stay the same or rise next year, and stricter regulation was the top reason for the predicted increase, according to the survey of 405 companies.
  • A Leveraged EFSF Is Pure Poison. Big snag. If Europe’s leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of "first loss" insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal. Professor Ansgar Belke, from Berlin's DIW Institute, said any leveraging of the EFSF would be "poisonous" for France’s AAA rating and would set off an uncontrollable chain of events. "It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone", he told Handlesblatt.
Rheinische Post:
  • The structure of the European rescue fund would be undermined if France were to lose its AAA credit rating, citing Lueder Gerken, head of the Centre for European Policy, a Freiburg, Germany-based think tank. A cut in the rating would decrease the capacity of the European Financial Stability Facility by 35%, citing calculations by the CEP. Germany would have to increase its guarantees to the EFSF to 317 billion from 211 billion euros.
Yonhap News Agency:
  • North Korean Official Threatens War with South Korea. A senior North Korean official, who is on a rare trip to the United States, said Monday the security condition on the Korean Peninsula is so unstable that a war may occur again anytime. Rhee Jong-hyuk, a ranking member of the all-powerful Workers' Party of the communist nation, blamed the conservative government of South Korea, claiming Pyongyang remains committed to peace on the peninsula.
China Daily:
  • Former Vice Chinese Commerce Minister Wei Jianguo said the possibility of a full year trade deficit in 2012 "cannot be ruled out." Demand for Chinese exports in September and October, usually peak times for contracts ahead of holiday seasons in Europe and the U.S., is down "sharply" this year, citing Wei.
  • An appreciation of the Chinese currency may have "complicated negative effects" on the global economy such as raising prices of industrial products and may worsen inflation in many countries including the U.S., Xing Susu, a researcher at the Chinese People's Institute of Foreign Affairs, wrote in a commentary today. The U.S.'s quantitative easing and other "beggar-thy-neighbor" policies have increased the risk of inflation, especially in developing nations, Xing said.
  • China's public road projects have stalled because of a lack of funding over the last two or three months in some provinces, citing research by the Ministry of Transport. Road completion may be about 20% below plan. Public road construction may face greater funding pressures in Q4.
  • Reports by 16 provincial authorities showed they owed a combined $199 billion for the construction of toll roads. Only 4 provinces and municipalities including Beijing recorded profits from toll roads, according to the report.
China Business News:
  • Chinese rail projects are being halted on cash shortages. Over 10,000 km of building work has been halted, citing Wang Mengshu, a China Railway Group engineer.
  • Coal stockpiles at five major Chinese power companies rose to more than 60m tons as of the end of September, citing a person from one of the companies. Average daily coal consumption fell as much as 16% to about 3.3m tons.
Evening Recommendations
Sterne Agee:
  • Rated (HAL) Buy, target $48.
  • Rated (BHI) Buy, target $71.
  • Rated (CAM) Buy, target $57.
  • Rated (NOV) Buy, target $81.
  • Rated (WFT) Buy, target $20.
Night Trading
  • Asian equity indices are -3.0% to -1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 209.50 +11.5 basis points.
  • Asia Pacific Sovereign CDS Index 154.50 +4.5 basis points.
  • FTSE-100 futures -.50%.
  • S&P 500 futures +.17%.
  • NASDAQ 100 futures +.31%.
Morning Preview Links

Earnings of Note
  • (STT)/.89
  • (GPC)/.94
  • (KO)/1.01
  • (HOG)/.75
  • (PH)/1.69
  • (UNH)/1.12
  • (PII)/.85
  • (OMC)/.70
  • (BAC)/.21
  • (EMC)/.36
  • (JNJ)/1.21
  • (GS)/-.11
  • (GWW)/2.33
  • (FRX)/.99
  • (CREE)/.25
  • (AAPL)/7.31
  • (LLTC)/.49
  • (MANH)/.49
  • (CSX)/.43
  • (ISRG)/2.76
  • (YHOO)/.72
  • (INTC)/.61
  • (JNPR)/.28
  • (WERN)/.40
  • (DPZ)/.33
Economic Releases
8:30 am EST
  • The Producer Price Index for September is estimated to rise +.2% versus unch. in August.
  • The PPI Ex Food & Energy for September is estimated to rise +.1% versus a +.1% gain in August.
9:00 am EST
  • Net Long-Term TIC Flows for August are estimated to widen to -$20.0B versus $9.5B in July.
10:00 am EST
  • The NAHB Housing Market Index for October is estimated to rise to 15.0 versus 14.0 in September.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Bernanke speaking, weekly retail sales reports and the Spain/Greece T-Bill Auctions could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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