Wednesday, October 12, 2011

Wednesday Watch

Evening Headlines

  • Slovak Parties Seek Talks on EFSF Vote Repeat. Slovakia’s opposition leader said lawmakers must find a way to approve Europe’s enhanced bailout fund, which was rejected yesterday amid a dispute over the future of Prime Minister Iveta Radicova. Slovakia “must sign up to the rescue fund,” Robert Fico said late yesterday, adding that his party, which didn’t back the measure yesterday, is awaiting a proposal from the ruling coalition. Radicova said the only country in the 17 nations that use the euro that has yet to approve European Financial Stability Facility, must find a solution to approve the EFSF “as soon as possible.” No time for a new vote has been set. “Eventually a yes vote will be secured,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said by phone yesterday. “Does Slovakia really want to be alone among 17 euro-zone members states on this one, and when the future of Europe is at stake?” The political turmoil in the country of 5.4 million people reverberated on global stock and currency markets. Slovak approval of enhanced powers of the EFSF, the temporary bailout fund, is crucial for adopting the key element in the strategy to prevent contagion from the debt crisis that has spread from Greece to other countries in the region.
  • Alcoa(AA) Profit Misses Estimates as Europe Orders Cut 'Dramatically' and Costs Rise. Alcoa Inc. (AA), the largest U.S. aluminum producer, posted third-quarter profit that trailed analysts’ estimates and said its customers in Europe “dramatically” cut orders amid uncertainty about the region’s economy. The New York-based company’s earnings excluding restructuring costs and tax benefits were about 14 cents a share. The average of 15 analysts’ estimates compiled by Bloomberg was for 22 cents. Chief Executive Officer Klaus Kleinfeld said yesterday European aluminum demand will decline 13 percent in the second half from the first half. Alcoa is grappling with rising production costs while the price of aluminum on the London Metal Exchange has fallen in the past two months. The company cut thousands of jobs and closed smelters after commodities plunged during the financial crisis in 2008. Alcoa yesterday declined to provide a forecast for its fourth-quarter alumina and primary aluminum production. “They are going through and trying to decide do they need to cut production somewhere and if so, when,” Lloyd O’Carroll, a Richmond, Virginia-based analyst at Davenport & Co., who has a “buy” recommendation on Alcoa, said in an interview. “If the LME pulls back enough, they will. I don’t know what their magic trigger number is, but I think there is one.” Shares of the company dropped 5.3 percent to $9.75 as of 7:59 p.m. in New York. Alcoa fell 33 percent this year before the close of regular trading yesterday, the third-worst performer on the Dow after Bank of America Corp. and Hewlett- Packard Co. “Fearful of a slowing economy, our European customers reduced their orders dramatically, even into September, and drove a significant reduction in this segment’s profitability,” Chief Financial Officer Charles McClain said on the company’s earnings conference call, referring to its unit that produces flat and rolled aluminum. Growth in the three biggest euro-region economies will shrink 0.4 percent this quarter, the OECD said Sept. 8. European Union and International Monetary Fund officials are negotiating a 110 billion-euro ($150 billion) bailout. Alcoa received at least 24 percent of its 2010 revenue from European countries, according to company filings. The cost of goods sold -- excluding selling, general administrative and some other expenses -- increased 20 percent to $6.42 billion in the quarter, Alcoa said.
  • CFTC Said to Have Enough Votes to Approve Speculation Limits. The U.S. Commodity Futures Trading Commission has the three votes necessary to approve limits on speculation in oil, natural gas and other commodities at an Oct. 18 meeting, said a person briefed on the rule-making process. At the same meeting in Washington, the agency’s five commissioners may vote on rules governing clearinghouses that stand between buyers and sellers in derivatives markets, CFTC Chairman Gary Gensler said in a speech at a Futures Industry Association conference today in Chicago. The agency also may vote to delay until next year regulations originally set to be completed by July 2010. “We are focusing on considering these rules thoughtfully - - not against a clock,” Gensler said in the speech. The person briefed on the process spoke on condition of anonymity because the decision-making isn’t public. The rules will govern trades conducted by Goldman Sachs Group Inc., JPMorgan Chase & Co. and transactions on CME Group Inc., the world’s largest futures exchange, among others. The so-called position-limits rule to curb speculation will include an analysis estimating that it will cost the financial industry at least $100 million to comply, Scott O’Malia, a CFTC commissioner, told reporters at the conference. The position- limits rule may also come up for a vote on Oct. 18, he said. The CFTC and Securities and Exchange Commission, which are leading U.S. efforts to write derivatives regulations, also are working on a final rule that will define which Wall Street banks, energy firms and other companies are considered swaps dealers or other major swaps participants. Those definitions will lead companies to have higher capital and margin requirements to limit risk in trades.
  • Romney Steers Debate Course; Cain Trumpets 9-9-9. Former pizza executive Herman Cain sought to capitalize on his rise in opinion polls by repeatedly promoting his 9-9-9 tax plan at a debate focused on the economy, as other Republican presidential candidates derided it as impractical and criticized each other’s credentials. Mitt Romney, the former Massachusetts governor who is the party’s frontrunner, navigated through repeated attacks from his opponents, including Texas Governor Rick Perry, who is struggling to reignite his candidacy. The debate tonight showcased disputes among the candidates on a range of economic issues, including Chinese currency, housing loans, job creation and the possibility of future bailouts should the nation face another economic crisis. The candidates were united in their criticism of government, blaming President Barack Obama, the Federal Reserve and Congress for the nation’s economic struggles without noting that Republicans control the U.S. House.
  • Oil Drops First Day in Six on Concern Economy to Falter as Stockpiles Rise. Oil fell for the first day in six in New York, snapping the longest run of gains this year, on concern that fuel demand will falter after U.S. and European lawmakers rejected plans to bolster their economies. Futures slipped as much as 0.9 percent after Slovak lawmakers voted against an overhaul of Europe’s bailout fund and the Senate blocked President Barack Obama’s $447 billion plan to boost job creation. The Organization of Petroleum Exporting Countries cut its global oil demand growth forecast for this year and 2012, citing a weak economic outlook in industrialized nations. A report tomorrow may show U.S. crude stockpiles increased, according to a Bloomberg News survey. “The market is starting to come to grips with the depth of the issues in Europe,” Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, said by phone today. Investors are “questioning the ongoing demand for crude oil,” he said. Crude for November delivery dropped as much as 81 cents to $85 a barrel in electronic trading on the New York Mercantile Exchange and was at $85.03 at 11:13 a.m. Sydney time. The contract yesterday climbed 0.5 percent to $85.81, the highest close since Sept. 21. Prices are down 6.9 percent this year.
  • Senate Blocks Obama's $447B Jobs Plan. Opponents of President Barack Obama’s $447 billion jobs plan blocked the measure in the Senate, with two Democrats joining Republicans to derail his prime proposal to help turn around the struggling economy. The tally on the test vote was 50-49, falling short of the 60 needed to advance the measure and shelving it in its current form. Senate Minority Leader Mitch McConnell called the measure a “lousy idea” that relies on proposals similar to 2009’s $825 billion stimulus, an effort he said that failed to work. Senate Democratic leaders last week revised the president’s initial proposal, partly to try to pick up more support within their party. That scrapped Obama’s method of paying for the jobs plan, including higher taxes on families making more than $250,000 a year. Senate leaders substituted a 5.6 percent surtax on people making at least $1 million annually. Even so, Democratic Senators Jon Tester of Montana and Ben Nelson of Nebraska opposed the plan. “I can’t support tax gimmicks that do little to create jobs” and don’t address the need for a bipartisan deficit-cutting plan, Tester said in a statement. “The president’s jobs initiative is at the end of its legislative life -- not that it really had one,” Stretch said. He said the focus will likely shift away from jobs and toward the work of a congressional supercommittee that is tasked with cutting $1.5 billion from the federal deficit over 10 years. The new method of offsetting the bill’s costs still ran into Democratic opposition. Senator James Webb, a Virginia Democrat, said he would vote to let debate start, but wouldn’t support the Senate jobs legislation as it was drafted. He said a tax on millionaires that is income-based fails to address real issues of inequality in the tax code. He said the best method to spread the tax burden would be to boost taxes on capital gains. “The present proposal looks good at first glance; it sounds good on a TV bite, but in all respect to the people who put it forward, I do not believe it’s smart policy and it does not go where the real economic division lies in our country,” Webb said.
  • Volcker Rule Gaps May Leave Uncertainty About Trading Bans. More than a year after they began crafting the details of the Dodd-Frank Act’s ban on proprietary trading by U.S. banks, regulators released their first version of the so-called Volcker rule while acknowledging that hundreds of questions remain unanswered. The proposal written by four regulatory agencies and issued for public comment today would ban banks from making trades for their own accounts, allowing them to continue short-term trades for hedging or market-making. Banks also would face limits on investments in hedge funds and private-equity funds. Within the rule’s 298 pages, regulators seek feedback instead of offering precise definitions for many of the banned activities, which may leave financial firms uncertain about how to prepare for the final adoption of the rule next year. “There aren’t bright lines on many questions and that will make it difficult for banks to put in place their compliance regime,” said Kim Olson, a principal at Deloitte & Touche LLP, who formerly worked at the bank supervision department in the Federal Reserve Bank of New York.
  • China Sovereign Fund to Invest $1 Billion in Kremlin-Backed Fund. China Investment Corp., the nation’s sovereign-wealth fund, agreed to invest $1 billion in a Russian private-equity fund, the first foreign commitment to an investment pool championed by President Dmitry Medvedev. Beijing-based CIC, which managed $409.6 billion by end-2010, plans to invest in the Russia Direct Investment Fund, Kirill Dmitriev, head of the Russian company, said by phone from Beijing yesterday, where the agreement was signed during a visit by Prime Minister Vladimir Putin.
  • Hong Kong's Tsang Vows to Remedy Public Anger at Home Prices. Hong Kong Chief Executive Donald Tsang pledged to “break with tradition” ahead of his final policy speech today, moving to address discontent at a surge in home prices that threatens to mar his legacy.
  • Goldman(GS) May Drop Bank Status on Volcker Rule Costs, Hilder Says. Goldman Sachs Group Inc. and Morgan Stanley may consider dropping their status as bank holding companies to avoid expenses tied to the Volcker rule, said David Hilder, an analyst at Susquehanna Financial Group LLP.
Wall Street Journal:
  • U.S. Accuses Iran in Plot. Two Charged in Alleged Conspiracy to Enlist Drug Cartel to Kill Saudi Ambassador. U.S. authorities said Tuesday they foiled an Iranian-directed plot to assassinate the Saudi Arabian ambassador to Washington, a rare instance where Tehran is accused of fomenting terrorism on U.S. soil. Prosecutors alleged an elaborate international plot, with two men, including an Iranian-born U.S. citizen who had been living in Texas, using funding from the Iranian government to try to hire a Mexican drug cartel to kill the ambassador. Attorney General Eric Holder said elements of Iran's Qods Force, a unit of the Islamic Revolutionary Guard Corps, were ready to spend $1.5 million on the plan. Saudi officials described the alleged plot as an escalation in the confrontation between the two Middle Eastern rivals, which have clashed anew in recent months over Saudi efforts to bolster the monarchy in Bahrain.
  • Credit-Card Issuers Circling Subprime Borrowers Again. Credit-card issuers are knocking on the doors of subprime borrowers again as they look for ways to grow their business amid stiff competition. The move is part of a broader effort by banks to lure more credit-card customers after many lenders retrenched from the subprime market.
  • The iPhone Finds Its Voice by Walt Mossberg. Features in the 4S Include a System That Answers Questions Out Loud and Learns a User's Speech.
  • Red Flags for Green Energy. While Solyndra LLC's flameout has fueled criticism of federal initiatives to encourage alternative power sources, the solar-panel maker is hardly the only disappointment among U.S.-backed energy programs. That's evident in California, which was awarded $4.6 billion by the Energy Department as part of the 2009 Recovery Act—far more than any other state—to fund programs in energy efficiency and other areas.
  • Alberta Jobs-Increase Figures Are 'Stunning'. Commentary: Maligned oil sands fuel Canada’s strongest economy. Here’s a term you don’t hear too often these days — “blockbuster job growth.” But that’s what analysts are calling the latest employment figures in oil-rich Alberta, an exciting, upbeat place these days.
Business Insider:
Zero Hedge:
NY Times:
  • Massachusetts Asks Banks for Details on Recruiting. The top financial regulator in Massachusetts on Tuesday asked many of Wall Street’s biggest banks for more information on their hedge fund recruiting services. In a letter of inquiry sent to Bank of America, Goldman Sachs, Deutsche Bank, UBS and Morgan Stanley, William F. Galvin, the secretary of the commonwealth of Massachusetts, asked the firms to give a list of the clients they had provided employment referrals to since January 2009. Mr. Galvin said his letter was aimed at putting the firms “on notice that these are issues that need to be explored.”
Rasmussen Reports:
  • China Set to Raise Threshold for Oil, Gas Windfall Tax - Sinopec. China will raise the threshold for windfall tax on domestic oil and gas production, a top Chinese oil executive said on Wednesday. "The threshold for windfall tax will be raised...the government has such plans," Wang Tianpu, President of Sinopec Corp , told Reuters. But Wang added there was no timeline for such a change yet. Wang's comments come shortly after the government extended nationwide a resource tax on oil and gas.
Financial Times:
  • China's Debt Spree Returns to Haunt. Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash.
  • Billionaire investor George Soros and 100 supporters, including politicians, managers and economists, called for immediate measures to solve the European debt crisis, citing a letter to the heads of the 17-nation currency bloc. The signatories, among them former German Foreign Minister Joschka Fischer, former German Finance Minister Hans Eichel, Emma Bonino, an Italian former minister for European Affairs, and Timothy Garton Ash, a professor of European Studies at Oxford University, wrote that national solutions for the debt crisis would inevitably lead to an European collapse. Current measures are coming too late, are not sufficient and may trigger global tensions on financial markets.
Kyodo News:
  • Rice grown in Japan's Fukushima prefecture was cleared for shipping after post harvest radiation testing, citing the prefectural government.
China Business News:
  • The eastern Chinese province of Zhejiang is taking measures to stop company executives from fleeing the repayment of debt.
South China Morning Post:
  • Global Trade May Drop Up to 15%, Standard Chartered's Kwan Says. Trade volumes may decline by early next year if there's a recession similar to that caused by the 2008 financial crisis, citing Nicholas Kwan, the bank's chief economist for Asia. China and Asia are now more exposed to Europe's financial problems than during the 2008 crisis, he said.
China Securities Journal:
  • More Chinese coal producing provinces may follow Guizhou in the southwest and increase charges for local coal producers, citing analysts. Guizhou raised the charge to 10% of the coal sales price Oct. 1, with the fee put into a local coal prices adjustment that will be used to subsidize coal-fired power plants.
Evening Recommendations
  • Reiterated Underweight on Chinese banking sector.
Night Trading
  • Asian equity indices are -.50% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 232.0 +9.5 basis points.
  • Asia Pacific Sovereign CDS Index 160.0 +3.5 basis points.
  • FTSE-100 futures -.09%.
  • S&P 500 futures -.30%.
  • NASDAQ 100 futures -.15%.
Morning Preview Links

Earnings of Note
  • (PGR)/.28
  • (HST)/.17
  • (PEP)/1.30
Economic Releases
2:00 pm EST
  • Minutes of FOMC Meeting.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fisher speaking, Fed's Plosser speaking, Fed's Pianalto speaking, ECB's Trichet speaking, ECB's Stark speaking, JOLTs Job Openings report for August, USDA's October Ag Supply/Demand Estimates Report, weekly MBA mortgage applications report, 10-Year Treasury Note auction, Canaccord Energy Conference, (WMT) analyst day, (ALOG) analyst day and the (HPP) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and industrial 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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