Tuesday, October 25, 2011

Tuesday Watch

Evening Headlines

  • Itlay, Spain May Be Biggest Losers in European Bank Capital Plan. Italian, Portuguese and Spanish lenders will bear the brunt of a 100 billion-euro ($139 billion) plan to recapitalize European banks, while their counterparts in the U.K., Germany and France may avoid raising additional funds. European policy makers, trying to reach agreement before a meeting in Brussels tomorrow on how to tackle the euro zone crisis, may force banks to boost core Tier 1 capital to 9 percent of risk-weighted assets by the end of June, two people with knowledge of the talks said. UniCredit SpA, Italy's largest bank, Banco Comercial Portugues SA, Portugal's second-biggest, and Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2, are among companies analysts say may have to raise the most capital. Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said. That may benefit U.K. and German lenders such as Royal Bank of Scotland Group Plc and Deutsche Bank AG, whose biggest holdings of bonds are those issued by their own governments. It may also allow French banks to avoid further fundraisings. “The mark-ups will definitely help German, northern European and British banks while hurting the peripheral countries,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA. “If we really allow banks to offset sovereign haircuts with gains on other bonds, then I'm not sure that's going to calm the markets.”
  • Spain Slipping on Deficit Means Possible Contagion: Euro Credit. Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall. “They will never make it,” said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month. Spain’s benchmark 10-year bond climbed seven basis points to 5.54 percent yesterday after European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund. The government has aimed for a deficit equal to 6 percent of GDP this year, down from 9.2 percent in 2010. Data on the deficit for the first nine months of 2011 will be published sometime this week. European leaders’ failure to end the debt crisis risks “a vicious circle” in which “deficit reduction weighs on growth, rendering targets unachievable and triggering more downgrades, eventually leading” to default, said Angel Laborda, chief economist at savings-bank foundation Funcas in Madrid. Policy makers must ensure that euro-area nations’ debt will be repaid even without growth, he said. While the European Union said yesterday that Spain is on track to meet its deficit goal for 2011, economists are revising their forecasts to reflect dwindling Spanish tax revenue, rising borrowing costs, and fiscal slippage in the semi-autonomous regions and in the social-security system.
  • Euro Area Debt Quality Worsens at Record Pace. The euro area's credit quality is fading at an unprecedented pace, posing a risk to the region's main tool against the debt crisis as leaders struggle to convince investors they have the situation under control. The average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed. The measure fell .25 point in the previous 15 months.
  • Banks Clash With Lawmakers on Greek Rescue. Banks are pushing back against European leaders on the size of losses they are ready to accept on Greek bonds as officials struggle to rescue the debt-laden country while avoiding a default. There are limits “to what could be considered as voluntary to the investor base and to broader market participants,” Charles Dallara, managing director of the Institute of International Finance, an industry group that’s participating in the talks on Greek debt, said in an e-mailed statement yesterday. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.”
  • China Boom-to-Bust Concerns Revealed in Agricultural Bank Slide. Kerry Stokes made his first billion dollars operating television stations and selling dump trucks in his native Australia. Now, he's betting a chunk of that fortune on a bank that operates in the backwaters of rural China. Stokes became one of the cornerstone investors in Agricultural Bank of China Ltd., whose July 2010 initial public offering was the world's largest, raising $22 billion. Investors such as Hong Kong billionaire Li Ka-shing and the sovereign wealth funds of Kuwait, Qatar and Singapore joined Stokes, 70, in wagering that the bank will benefit from the rapid development of China's agrarian inland areas, where growth is already outstripping that of the wealthy coastal cities, Bloomberg Markets magazine reports in its December issue. They agreed to maintain a stake for at least one year. The payoff is far from assured. Global investors increasingly have doubts about the future of Chinese banks, which in 2009 and 2010 went on a 17.6 trillion yuan ($2.8 trillion) lending spree, according to People's Bank of China data. Fitch Ratings estimated in a report issued in April that as much as 30 percent of all loans in China's banking system -- or $2.46 trillion -- could become nonperforming. Hedge-fund manager Jim Chanos told Bloomberg News in September that he was shorting Agricultural Bank and other Chinese lenders. Investors worried about nonperforming loans pushed the MSCI China Financials Index down about 28 percent from July 1, 2010, to Oct. 24 of this year.
  • Rice Jumps Exchange Limit to One-Month High on Asia Flood Damage. Rice futures jumped the most permitted by the Chicago Board of Trade, advancing to a one- month high, as flood damage to crops in Southeast Asia boosted prospects for U.S. exports. Storms since September damaged 12.5 percent of paddies in Thailand, the world’s largest exporter, and crops in the Philippines, Cambodia, Laos and Vietnam, the United Nations’ Food & Agriculture Organization said in a report dated Oct. 21. Floods and drought will cut U.S. output by 23 percent in the season that ends July 31, the government said Oct. 12. Prices have rallied 11 percent in the past two weeks. “Thailand won’t be able to export as much, which will drive business to the U.S.,” Dennis DeLaughter, the owner of Progressive Farm Marketing Inc. in Edna, Texas, said in a telephone interview. “The U.S. doesn’t have very much rice yet, so it will pop up prices. We’re talking about some world trade shortages.” Rough-rice futures for January delivery jumped by the CBOT’s 50-cent limit, or 3 percent, to settle at $17.215 per 100 pounds as of 1:15 p.m. in Chicago. That’s the highest price since Sept. 21, leaving the commodity up 19 percent from a year earlier.
  • TI's(TXN) 4Q Forecast Misses Some Estimates. Texas Instruments Inc. (TXN), the largest maker of analog semiconductors, forecast lower fourth-quarter sales than some analysts had estimated, indicating that demand for electronic components remains sluggish. Revenue will be $3.26 billion to $3.54 billion in the period, the Dallas-based company said today in a statement. Doug Freedman, an analyst at RBC Capital Markets, had estimated $3.57 billion for the period.
Wall Street Journal:
  • Fresh Worries of Recession Grip Europe. The risk of recession in the euro zone is mounting, according to a closely watched business survey, signalling that a vicious cycle of fiscal austerity and economic contraction threatens even some of Europe's biggest economies. The gloomy outlook comes as political differences among European leaders over how to handle the worsening debt crisis have given way to increasingly personal attacks. After enduring months of criticism from other European leaders, Italian Prime Minister Silvio Berlusconi on Monday issued a defiant statement that lashed back at EU authorities and his euro-zone peers.
  • George Soros Buys Big Investment in WebMD(WBMD).
  • My Tax and Spending Reform Plan by Rick Perry. Individuals will have the option of paying a 20% flat-rate income tax and I'll cap spending at 18% of GDP.
  • Regulator Flagged SAC Stock Trades. Wall Street regulators expressed mounting concern about SAC Capital Advisors' trading over a nine-year period, detailing in dozens of confidential reports suspicions that the hedge-fund firm might have profited from insider information. The reports, submitted by the regulators to the Securities and Exchange Commission, don't allege wrongdoing by SAC, one of the world's best-known hedge-funds, which is overseen by billionaire founder Steven A. Cohen.
  • Islamist Party Set to Win Tunisian Vote. Tunisia's moderate Islamist Nahda Party appears set for a decisive victory in the country's elections for a constituent assembly, in an historic test for how the region's long suppressed Islamic movements will govern.
  • The Post-Global Warming World. Moving on from climate virtue.
  • Netflix(NFLX) Earnings Jump; Shares Plunge on Outlook. Netflix Inc. earnings jumped 63% in the third-quarter despite controversial pricing changes, but a weak forecast for the fourth quarter sparked an after-hours selloff that pushed the stock to a new low. In after-hours trading on Monday, Netflix shares plunged more than 27% to $86.50.
  • China's Economy May Face Hard Landing. Analysts see ominous signs in credit, employment and monetary policy. “Investors should prepare for both a hard landing and a yuan devaluation,” said Societe Generale strategist Albert Edwards, who sees the beginning of an era of slow growth in China.
Business Insider:
Zero Hedge:
  • As Hope for EFSF Solution Vanishes, Europe Comes Crawling to Uncle Sam. From the WSJ: "Europe may ask the International Monetary Fund to create and run a special new fund to help solve its debt crisis, according to a person familiar with the matter. The idea is one of several options still in the formative stage that European officials are considering as a way to prevent the crisis from engulfing its largest economies
  • Obama Under Pressure to Lay Out China Strategy. U.S. lawmakers critical of China's trade policies will use a hearing on Tuesday to press the White House to lay out plans to confront Beijing, even as Republicans resist a bill to punish the world's second-largest economy for its currency policies.
  • US States Are Facing Total Debt of Over $4 Trillion. The total of U.S. state debt, including pension liabilities, could surpass $4 trillion, with California owing the most and Vermont owing the least, a new analysis says.
NY Times:
Rasmussen Reports:
Real Clear Politics:
  • Falcone's Harbinger Capital Down 17% in September. Philip Falcone's flagship portfolio lost about 17 percent last month as telecommunications start-up LightSquared, one of the hedge fund manager's biggest investments, faced regulatory hurdles that threaten its business plan. Investors with the billionaire stock picker were told late last week that Falcone's Harbinger Capital Partners Fund II, L.P. had dropped 16.76 percent in September while the Harbinger Capital Partners Special Situations Fund, L.P. lost 9.65 percent, said two investors who saw the numbers but are not permitted to discuss them publicly. "Falcone waited until the end of the quarter to account for all the problems they are facing with LightSquared and that is clearly reflected in these numbers," one of the two investors said. For the year, the flagship fund is down about 12 percent, the source said.
  • Veeco Instruments(VECO) Q3 Beats, Sees Weak Q4. Chip-gear maker Veeco Instruments Inc forecast fourth-quarter sales below analysts' expectations on lower bookings from China, and said it expects near-term orders to remain depressed due to a weak demand for backlighting equipment. The company, which makes metalorganic chemical vapor deposition products (MOCVD) -- equipment critical in LED production -- expects an adjusted fourth-quarter profit of 54-86 cents a share, on sales of $175-$215 million. Analysts were expecting a profit of $1.03 a share, on sales of $236.6 million, according to Thomson Reuters I/B/E/S.
  • Goldman(GS) Sued by Capmark, Conflicts Alleged. Capmark Financial Group Inc , a large commercial real estate lender that emerged from bankruptcy this month, sued Goldman Sachs Group Inc to recover $147 million it said the bank obtained by taking advantage of conflicts of interest. The complaint filed Monday in U.S. District Court in Manhattan arose out of Capmark's $1.5 billion secured financing facility obtained in May 2009, five months before its Chapter 11 filing, from Goldman and other lenders.
Financial Times:
  • Hard Line Adopted on Greek Debt Loss. European negotiators have asked Greek debt holders to accept a 60 per cent cut in the face value of their bonds, a hardline stance that far exceeds losses agreed in a deal between private investors and eurozone authorities three months ago.
La Tribune:
  • France's market regulator chief Jean-Pierre Jouyet said banks must voluntarily accept a haircut on their Greek sovereign debt to share the burden with states in face of the crisis, citing an interview.
Globe and Mail:
  • Mobius Takes a Swipe at Derivatives. An opaque and bloated derivatives market is ultimately at the root of the volatility roiling stock markets – and investors’ best defence against it is global diversification, argues the man generally recognized as the father of emerging-market investing. “You’ve got $600-trillion in derivatives out there – that’s 10 times more than global GDP,” Mark Mobius, the globe-trotting fund manager at Franklin Templeton Investments, said during a rare visit to Toronto Monday. “One of the things that is making things so unpredictable and difficult in Europe today is that in addition to the debt that Greece, Portugal, Spain and all these countries have, there are the banks, hedge funds and others that have taken out credit default swaps – which in some cases are more than the actual debt. Anyone looking at this from a European Central Bank perspective has got to now account for the impact of the credit default swaps … If the discount on these bonds goes down, their losses multiply.” “This is the crazy situation we’re in now – these derivatives have gotten out of control. And that adds more volatility and more uncertainty to the whole picture.”

21st Century Business Herald:
  • Growth in China's energy consumption will likely slow in the future as the country may have already passed a peak, citing Wu Yin, deputy director of the National Energy Administration, speaking at a forum.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 197.0 -5.0 basis points.
  • Asia Pacific Sovereign CDS Index 153.25 +2.25 basis points.
  • FTSE-100 futures -.40%.
  • S&P 500 futures -.23%.
  • NASDAQ 100 futures -.23%.
Morning Preview Links

Earnings of Note
  • (X)/.52
  • (SPG)/1.67
  • (NOV)/1.16
  • (LXK)/1.03
  • (AMG)/1.52
  • (BTU)/.86
  • (ILMN)/.22
  • (DAL)/.94
  • (R)/1.02
  • (DD)/.56
  • (DGX)/1.11
  • (ODP)/.00
  • (UA)/.83
  • (COH)/.70
  • (MMM)/1.61
  • (CMI)/2.25
  • (BRCM)/.77
  • (FFIV)/.98
  • (MCK)/1.39
  • (ITW)/.98
  • (SHW)/1.69
  • (UPS)/1.05
  • (CCI)/.12
  • (DV)/.95
  • (AMZN)/.24
  • (BXP)/1.24
  • (ESRX)/.76
  • (AGCO)/.75
Economic Releases
9:00 am EST
  • The S&P/CS 20 City MoM% SA for August is estimated to rise +.1% versus a +.05% gain in July.
10:00 am EST
  • Consumer Confidence for October is estimated to rise to 46.0 versus 45.4 in September.
  • The House Price Index for August is estimated to rise +.2% versus a +.8% gain in July.
  • Richmond Fed Manufacturing for October is estimated to rise to 0 versus -6.0 in September.
Upcoming Splits
  • (QSII) 2-for-1
Other Potential Market Movers
  • The Spain Auction, ECB's Mersch speaking, Slovak Vote on EFSF, 2-Year Treasury Note Auction, weekly retail sales reports and the BIO Investor Forum could also impact trading today.
BOTTOM LINE: Asian indices are slightly lower, weighed down by technology and commodity shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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