Wednesday, October 26, 2011

Wednesday Watch

Evening Headlines

  • Europe Struggles for Crisis Remedy. European leaders “have risen to the challenge,” German Chancellor Angela Merkel said. French President Nicolas Sarkozy proclaimed their July 21 summit a “historic turning point” and Luxembourg Prime Minister Jean- Claude Juncker called it the “final package, of course,” to put out the debt inferno. Then they went on vacation. Before they returned to work, the deal fizzled. The euro’s stewards are back in Brussels today for an emergency summit struggling to heed the world’s calls to once and for all extinguish what U.S. Treasury Secretary Timothy F. Geithner called the “catastrophic risk” of the debt crisis. A potential Greek default threatens shockwaves that could engulf Italy and France, jolt the banking system and spell havoc for the global economy. “Buck up, this crisis is going to be with us still for a while,” Barry Eichengreen, an economics professor at the University of California at Berkeley, said on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “I fear they’re not going to take the kind of steps to resolve it.” The gathering marks the interim climax to six days of haggling among finance ministers, central and commercial bankers, chancellors and prime ministers over the shape of Greece’s second bailout, the recapitalization of banks and the retooling of the 440 billion-euro ($612 billion) rescue fund into a more potent weapon.
  • Joke Is on Europe as Sarkozy Laughs at Berlusconi: Euro Credit. The leaders of France and Germany shared a smile when asked whether Prime Minister Silvio Berlusconi can fix his nation’s finances, echoing investor concern about the Italian premier delivering on pledges to tame Europe’s second-biggest debt. The reaction of Nicolas Sarkozy and Angela Merkel at an Oct. 23 Brussels news conference highlights one of the issues policy makers must tackle at today’s European Union summits. Italy plans to sell 10.5 billion euros ($14.6 billion) of bonds today as rising borrowing costs reflect investor skepticism about its creditworthiness. The country has to repay 298 billion euros of debt next year, double its 2013 obligations and more than Germany, France, Spain or any other euro member. ‘‘Berlusconi’s standing in international politics has been seriously damaged,’’ said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. ‘‘Any hint of a buyers’ strike’’ during today’s auction ‘‘would be negative for risk in general,’’ she said. Berlusconi is struggling to convince investors he can tame Italy’s 1.9 trillion-euro debt burden, worth about 120 percent of economic output and second only to Greece in the euro region. The yield on Italy’s benchmark 10-year bond is about 5.93 percent, close to the 6 percent level that prompted the European Central Bank to start buying the debt in an effort to drive borrowing costs down from euro-era records.
  • BHP(BHP), Rio(RTP) Credit-Default Swaps Surge After Iron Ore Price Plunge. The cost of bond protection on BHP Billiton Ltd. and Rio Tinto Group surged after the cash price of iron ore for immediate delivery to China, a benchmark for Asia, dropped yesterday by the most in more than two years. Credit-default swaps on Rio rose 20 basis points to 200 as of 10:23 am in Sydney. Contacts on BHP jumped 10 basis points to 120. Iron ore for delivery to the port of Tianjin fell $10.20, or 7.2%, yesterday to $131.70 a metric ton, according to a price index compiled by The Steel Index Ltd. That is the biggest slump since August 20, 2009, and is the lowest price in 15 months.
  • Floods Ruining Thai Rice Erases Global Glut. Thailand’s worst floods in more than a half century may have wiped out as much as 14 percent of paddy fields in the world’s biggest rice exporter, potentially erasing the predicted global glut. The Thai export price, a global benchmark, may climb 20 percent to $750 a metric ton by December, said Sumeth Laomoraphorn, the president of C.P. Intertrade Co., the country’s largest seller of packaged rice. Tropical storms inundated 62 of 77 provinces, destroying 1.4 million hectares (3.5 million acres) and as much as 7 million tons of crops, the government says. That equals 4.6 million tons of milled grain, 1 million more than the surplus anticipated by the U.S. Department of Agriculture. Rice, a staple for half the world, was already this year’s best-performing agricultural commodity after drought cut the U.S. harvest to the lowest level in 13 years. Prices also rose as Thailand started buying at above-market costs to boost farmer incomes. That is adding renewed pressure to global food prices monitored by the United Nations, which had dropped 5 percent from a record in February as other grains declined. “I’ve never seen such a catastrophe, watching the field turning into a sea of floodwater,” said Wichian Phuanglamchiak, a 74-year-old farmer in the central province of Ayutthaya, speaking from the second floor of his house. “My entire crop was wiped out and I have to wait for the water to recede before I can replant in December.”
  • Crisis of 2012 May Hurt China More Than U.S.: William Pesek. Many would be taken aback to think that China, too, might experience its share of setbacks compared with the U.S. Some are well-known, including inflation that fans social unrest and a financial crisis erupting as the massive stimulus of 2009 comes back to haunt Beijing. All that investment created the illusion of economic vitality. Too much of it was funneled into unproductive sectors of the economy, setting up China for a banking meltdown. Choyleva adds a less obvious twist to the critique: how China’s financial proximity to the U.S. is a bigger problem than many people appreciate. By tying itself to the dollar and amassing more than $3 trillion of currency reserves, China essentially merged with the U.S. financial system. When the Fed pumps money into the economy, it inflates China more than America. There are rumblings in Washington about punishing China for its undervalued currency. Yet China is only now realizing the extent to which it surrendered sovereignty to the U.S. As the Fed adds more cash to markets, China’s inflation becomes more entrenched and Beijing loses even more control. Over time, this dynamic will harm China’s competiveness more than if Beijing had allowed the yuan to strengthen, as per the U.S.’s demands. China could increase interest rates to temper rising prices, but that would devastate growth. The thing about the G-2 is that pundits often view China as being in the stronger position -- its massive reserve holdings are both leverage and a fortification. Yet China is trapped. It’s addicted to cheap U.S. financing and is increasingly feeling the side effects.
  • Occupy Wall Street Knows Not What It Does Hurting Local Jobs. Occupy Wall Street protests assailing income inequality, joblessness and big banks may have some unintended consequences. They’re hurting nearby merchants as police barricades deter shoppers. “If this doesn’t stop soon I will be out of business,” said Marc Epstein, 53, president of Milk Street Cafe on Wall Street, less than a block from the New York Stock Exchange. Sales have dropped about 20 percent since the protests began last month and the 103 jobs created by the cafe’s opening in June are now at risk, said Epstein, who is not alone. Caroline Anderson, general manager of Boutique Tourbillon, a Wall Street jewelry store, said customer traffic is down about 20 percent, and Vincent Alessi, a managing partner at Bobby Van’s Steakhouse on Broad Street, said his lunch business has been cut in half. The Occupy Wall Street movement that began in New York with about 1,000 people on Sept. 17 has spread to cities on four continents as demonstrators from London to Rome and Chicago to Sydney have pitched tents in public spaces. Police, whose displays of force also may be hurting business as they block access to tourist destinations, have arrested hundreds. “These protesters don’t understand the consequences of their actions,” Epstein said. “Who’s going to create the jobs they’re banging their drums for?”
  • First Solar(FSLR) Plunges Most Ever After Chief Gillette Departs. Rob Gillette has left First Solar Inc. after almost doubling production capacity during the two years he ran the world’s biggest maker of thin-film solar panels. “Effective immediately, Rob Gillette is no longer serving as chief executive officer,” the Tempe, Arizona-based company said today in a statement that didn’t give a reason. Chairman and founder Mike Ahearn, 54, was named interim CEO. With demand and prices for solar panels falling, expanding First Solar’s production may have been the wrong decision, said Paul Leming, an analyst at Ticonderoga Securities LLC in New York. Declining prices also make it unlikely that the company will be seen as a buyout target. “Rob Gillette made one overwhelmingly bad decision,” Leming said today in an interview. “He made the decision early in his tenure to put the company on an aggressive capacity expansion.” The company’s shares have dropped 71 percent in the past year. First Solar is developing three projects that use its panels. It sold all of them after they received $3.1 billion in backing under the same U.S. Energy Department loan guarantee program that supported the failed solar panel maker Solyndra LLC.
  • Amazon(AMZN) Profit Plunges; Shares Tumble. Inc., the world’s largest Internet retailer, reported a plunge in third-quarter profit after it ramped up spending on new products such as the Kindle Fire tablet. The shares tumbled 19 percent in late trading. Net income fell 73 percent to $63 million, or 14 cents a share, from $231 million, or 51 cents, a year earlier, the Seattle-based company said today in a statement. That missed the 24 cents predicted by analysts, according to Bloomberg data. Amazon also said it may post an operating loss this quarter. The company is sacrificing profit margins in search of sales volume and market-share gains. Amazon will sell its Kindle Fire tablet for as low as $199, less than half the price of Apple Inc.’s cheapest iPad. Chief Executive Officer Jeff Bezos is counting on revenue from digital music, books and movies to make up for selling the product at a loss -- estimated by IHS Inc. to be about $10 per device. “They missed investors’ expectations,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. The companies’ growth plans aren’t doing enough to spur profit, rather than just sales, he said. “If they don’t show a corresponding increase in earnings, investors start to scratch their heads.”
  • Groupon IPO Said to Ask Triple Amazon's(AMZN) Price-to-Sales for 2012. Groupon Inc. is seeking a valuation of about 5 times projected 2012 sales in its initial public offering, people familiar with the plans said, making it three times more expensive than Inc. Advisers to Groupon based the asking price for the IPO on a projection that the company will have sales of about $2.1 billion next year, said the people, who asked to remain anonymous because the figures are private. The $17 midpoint of Groupon’s IPO price range would value the company at $10.8 billion, or about 5 times that sales prediction. That means unprofitable Groupon would be more expensive than, the biggest online retailer, which trades at about 1.6 times estimated 2012 revenue, according to data compiled by Bloomberg.
  • Hong Kong Office Rents May Fall Up to 40%, Barclays Says. Office rents in Hong Kong, the world's costliest place to lease commercial space, may fall as much as 40% over the next two year if China goes through an economic "hard landing," said Barclays Capital Research.
  • MetLife(MET) Says Fed Rejects Life Insurer's Plan for Dividend Boost, Buybacks. MetLife Inc., the largest U.S. life insurer, said its plan to increase the dividend and resume share repurchases was rejected by the Federal Reserve. The stock declined in extended trading. “We are disappointed that we cannot commence increased capital actions now,” Chief Executive Officer Steven Kandarian said in a statement today.
  • Morgan Stanley Smith Barney Said to Change Broker Pay Structure. Morgan Stanley Smith Barney, the world’s largest brokerage, plans to adjust its compensation structure to boost profitability, according to a person familiar with the discussions. The new pay policies are set to go into effect in 2012, said the person, who declined to be identified because compensation decisions aren’t public. The New York-based firm is raising the minimum amount of revenue a broker must generate to avoid pay cuts to $300,000 from $250,000, the person said.
  • China's Communists Vow to 'Strengthen Management' of Internet. China’s ruling Communist Party said it would work to “strengthen management” of online social media sites that have increasingly questioned government actions and exposed official graft. Vowing to promote the development of a “healthy Internet culture,” the party’s Central Committee said it would step up supervision of the world’s biggest online community, promoting “cultural treasures” and “constructive” websites, and punishing the spread of “harmful information,” according to a communique from the committee’s Oct. 15-18 meeting released overnight by the official Xinhua News Agency. China’s leaders are grappling with how to manage Twitter- like social-media sites such as one run by Sina Corp.(SINA) that are hard for government censors to control. Members of the party’s Politburo visited Internet companies after a deadly train crash in July. Web users criticized the government’s handling of the crash and spread commentary and photos of the accident at odds with the official line. China had 195 million microbloggers at the end of June, a 209 percent increase from the end of 2010, Xinhua reported last month, citing the China Internet Network Information Center.
  • Gold Advances to One-Month Highs as European Debt Risk Stokes Haven Demand. Gold advanced to the highest level in a month, extending gains above $1,700 an ounce, as concerns European leaders may fail to resolve the region’s debt crisis spurred demand for a haven. Bullion for immediate-delivery gained for a fourth day, rising as much as 0.3 percent to $1,710.70, the most expensive level since Sept. 23. The metal traded at $1,709.25 by 1:01 p.m. Melbourne time. Gold for December delivery climbed as much as 0.7 percent to $1,712.10 on the Comex in New York, the highest price for the most active contract since Sept. 23.
Wall Street Journal:
  • Bank Group Sees EU Recession Amid Push for Bigger Write-Downs. Amid a push for banks to take a bigger hit on their Greek debt holdings, the Institute of International Finance Tuesday warned that tightening credit conditions in Europe would likely force the euro zone into an economic recession. The group represents more than 440 of the world’s largest banks, insurance companies and other financial service firms, including those in negotiations over the private sector role’s in the Greek debt talks. The IIF has been actively opposing bigger write-downs on Greek debt and is campaigning against more stringent regulations they say would further crimp growth prospects in the U.S. and Europe. One of the major sticking points in talks among euro zone leaders trying to tame the growing sovereign debt crisis is how much of a write-down on Greek debt holdings the private sector should bear. European officials are pushing to double or even triple the hit previously agreed to by the IIF. “We have trimmed our already meager GDP growth forecast for the euro area in coming quarters, and now project a mild recession in the region,” the bank group said in its October Global Economic Monitor. European banks are also being asked to boost their capital buffers to protect against the rising risk of default in the euro zone. “As banks adjust aggressively to this new reality, a wave of credit contraction will severely dampen business activity, especially in credit-sensitive areas, such as construction,” the IIF warned. Compounding poor growth prospects, governments are also tightening their budgets to cut looming debt levels. And while the European Central Bank has taken some measures to offset this market-based tightening, the ECB “is doing too little too late to stave off outright weakness,” the IIF said. The group raised the specter of a European recession sparking a contraction in the U.S. as well.
  • Lower Demand Has Iron Ore Under Fire. The iron-ore sector has remained relatively buoyant in the face of broad commodity losses since the summer. But a deterioration in demand for steel in the past six weeks has put prices under pressure. Prices for steel have fallen as the deteriorating economic situation in the West has hit demand and sentiment. In addition, credit tightening in China continues to weigh on heavy industry there. As a result, the prospects for a recovery in iron-ore prices any time soon are looking remote, according to market players. "It is hard to see any significant increase in the price, given the state of the steel market at the moment," said Steve Hardcastle, head of client relations at commodities broker Sucden Financial, which is forecasting a pullback in the iron-ore price to around $120 a ton heading into the end of the year. A common spot iron-ore benchmark, published by the Steel Index, one of several information providers that supply price indexing, marked its eighth straight week of declines last week. Benchmark spot iron-ore prices for delivery into China fell 7.2% to $131.70 per ton Tuesday, the lowest since July 2010. The same benchmark was trading at a record high of just over $190 in February. China's crude steel production has fallen on a month-to-month basis since May, and the number of vessels being chartered to ship iron ore to China is beginning to soften, according to industry analysts. In addition, around 20 million to 25 million metric tons of apparent steel demand could be at stake in 2012 and 2013 if Europe were to re-enter recession, Michel Van Hoey, a partner at management consultancy firm McKinsey & Co. said. Several European steelmakers have cut production due to expectations of lower demand as a result of poor economic growth.
  • IBM(IBM) Names Rometty as Next CEO. International Business Machines Corp. named Virginia M. Rometty as its next CEO, turning to an executive responsible for the technology giant's sales and marketing to lead the company as the industry shifts toward mobile computing and emerging markets. Ms. Rometty, now in her 30th year at IBM, will be the first woman to head Big Blue. She takes over as president and chief executive on Jan. 1 from Samuel J. Palmisano, age 60, who will remain the company's chairman.
  • Turkey Hits Group of Militants Inside Iraq. Turkey's military engaged in full combat with militants from the outlawed Kurdistan Workers' Party inside Iraq on Tuesday, said the PKK, as the group is known. The PKK saıd around 1,000 Turkish troops with heavy weaponry had entered part of the militants' base area, supported by planes and "Cobra-type" helicopters.
  • The Flat-Tax Sweepstakes. Perry's 20% optional rate joins the GOP debate over pro-growth tax reform.
Business Insider:
Zero Hedge:
  • China's Largest Real Estate Developer Warns of Price Falls. China’s largest real estate developer believes the country’s property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices and volumes decline further. China Vanke, the country’s biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volumes in 14 of the country’s largest cities halved in September from a year earlier. “We can see a trend of declining sales, especially in the major cities,” Shirley Xiao, executive vice-president at China Vanke, said on a conference call with investors on Tuesday. “Prices have begun to decline little by little so we think even buyers who are able to buy will choose to wait for now because they’re targeting even lower price cuts.”
  • Obama Kick-Back Cronyism, Part 1: Stimulating Green Energy the Chicago Way. This article is the first in a four-part series discussing the early formative Chicago political career days of Barack Obama as community organizer, lawyer, Illinois state senator, financial foundation executive, and U.S. Senate campaigner. Part 2 will emphasize his activities related to Illinois health care issues leading to Obamacare. What do federal subsidy rip-offs for green energy and Chicago low-cost public housing politics have in common? Just about everything—including certain key players.
Washington Post:
Washington Times:
  • Exclusive: SEC Weighs Easing Hedge Fund Data Rule. Regulators are considering easing a proposed rule so that fewer hedge fund advisers would have to hand over troves of confidential data to the government, according to people familiar with the deliberations. The Securities and Exchange Commission is due to vote on a final rule on Wednesday on the threshold that would trigger extensive reporting requirements for advisers to large hedge funds and other private funds.
  • Broadcom(BRCM) Sees Revenue Decline, Stock Falls. Broadcom Corp warned revenue could fall as much as 13 percent this quarter due to broad- based weakness in demand, even in wireless, where it supplies chips for Apple Inc products such as the iPhone. The shares in the maker of chips for products from cellphones to television set-top boxes fell about 5 percent after it forecast fourth-quarter revenue of $1.7 billion to $1.8 billion compared with Wall Street expectations for revenue of $2 billion, according to Thomson Reuters I/B/E/S. "The guidance is disappointing to say the least," said Sanford C. Bernstein analyst Stacy Rasgon. "People thought there might be enough upside in the wireless business to offset the rest. It doesn't seem to be the case."
  • Panera(PNRA) Forecasts Top Street, Shares Up. Panera Bread Co on Tuesday forecast fourth-quarter and 2012 earnings above Wall Street expectations, sending its shares up almost 10 percent. Panera shares closed down $115.72 and jumped 9.8 percent to $127.01 in extended trading.
  • Express Scripts(ESRX) Profit Beats Views, Shares Rise. Express Scripts Inc posted better-than-expected third-quarter earnings on Tuesday as the U.S. pharmacy benefit manager reported increased use of more profitable generic drugs. The shares rose 3.2 percent to $39.70 in after-hours trading on Tuesday.
Financial Times:
  • Bankers Fear Political Moves Will Kill Off CDS. It has been blamed by politicians for causing the eurozone debt crisis and attacked as the favoured asset of “evil speculators”. Now, politicians are seeking to take their revenge: not just with the recent introduction of bans on some trading of credit default swaps but also in their attempts to ensure that any haircut on Greek government bonds does not trigger a credit event. Combined, these two events could spell the end of the credit default swaps market, say bankers.
  • Fitch Rejects Third of Complex Debt Packages. One in three new structured finance deals, the complex debt packages that were at the heart of the recent financial crisis, that are being rated by Fitch, are being sent back to issuers for improvements, the agency has said.
  • Obama Loses Magic for Young Voters. Mr Obama’s campaign is this week trying to rekindle some of the magic that propelled the president to victory in 2008, when Mr Obama won an unprecedented two-thirds of voters under 30. This time around, the president faces an enormous challenge in generating a similar level of enthusiasm and motivating millions of first-time voters to participate. The jobs problem is a key part of this. The unemployment rate among people under 25 is almost 15 per cent, far higher than the national average of 9.1 per cent.
  • Debt Crisis: Live.
  • EU Rescue Plans Hostage to Raw Politics. Europe's debt crisis has taken a deeply political turn as parliamentary battles rock Italy and Greece and once again cause simmering dissent in Germany, vastly complicating the search for a workable solution. Italy's coalition was scrambling to head off collapse late on Tuesday after deep rifts on austerity measures dictated by Brussels for a Wednesday deadline, when EU leaders reconvene for yet another crisis summit. "I remain pessimistic," said Umberto Bossi, Northern League leader and key ally of premier Silvio Berlusconi, who had warned earlier in the day that the government was in danger of collapse. Mr Bossi said his party had offered a compromise on fresh austerity but could not accept EU demands for a rise in the retirement age to 67. "The people would kill us," he said. The pension reform is the EU's tacit condition for intervention to shore up Italy's bond markets. Silvio Peruzzo from RBS said the Italian government is likely to "implode" before its mandate ends, risking "an ever more severe deterioration of the crisis in Europe". The warning came as French President Nicolas Sarkozy told an Élysée breakfast meeting held behind closed doors that "Europe has never been so close to explosion".

21st Century Business Herald:
  • China may not ease its policies for the real estate market, including limits on home purchases, within a year's time, citing a researcher from the Ministry of Housing and Urban-Rural Development.
Securities Times:
  • About 67% Chinese bankers said large declines in the nation's home price are major risks for them, citing a survey conducted by China Banking Association. Almost 60% of bankers are concerned about the risk of loans made to local government financing vehicles, according to the report.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.25% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 200.0 +3.0 basis points.
  • Asia Pacific Sovereign CDS Index 153.0 -.25 basis point.
  • FTSE-100 futures -.13%.
  • S&P 500 futures +.47%.
  • NASDAQ 100 futures +.47%.
Morning Preview Links

Earnings of Note
  • (GLW)/.42
  • (DPS)/.70
  • (OC)/.76
  • (HES)/1.36
  • (LMT)/1.81
  • (ADP)//.61
  • (SEE)/.49
  • (EAT)/.27
  • (MHS)/1.05
  • (WLP)/1.67
  • (PX)/1.39
  • (WYN)/.88
  • (F)/.44
  • (GD)/1.77
  • (S)/-.22
  • (BA)/1.10
  • (NOC)/1.68
  • (COP)/2.18
  • (ACOM)/.35
  • (CA)/.49
  • (TER)/.23
  • (BYI)/.43
  • (V)/1.25
  • (SFSF)/.00
  • (EQR)/.61
  • (SYMC)/.39
  • (SLG)/.99
  • (RYL)/-.08
  • (NSC)/1.41
  • (AFL)/1.60
  • (OI)/.72
  • (JNY)/.44
  • (NVLS)/.68
  • (AKAM)/.33
  • (JBLU)/.13
  • (BMC)/.80
  • (AGN)/.91
  • (ATI)/.60
Economic Releases
8:30 am EST
  • Durable Goods Orders for September are estimated to fall by -1.0% versus a -.1% decline in August.
  • Durables Ex Transports for September are estimated to rise +.4% versus a -.1% decline in August.
  • Cap Goods Orders Non-defense Ex Air for September are estimated to rise +.5% versus a +1.1% gain in August.
10:00 am EST
  • New Home Sales for September are estimated to rise to 300K versus 295K in August.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,475,000 barrels versus a -4,729,000 barrel decline the prior week. Distillate inventories are estimated to fall by -2,000,000 barrels versus a -4,266,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,750,000 barrels versus a -3,324,000 barrel decline the prior week. Finally, Refinery Utilization is estimated unch. versus a -1.1% decline the prior week.
Upcoming Splits
  • (QSII) 2-for-1
Other Potential Market Movers
  • The EU Leaders Meeting, ECB's Corstancio speaking, ECB's Coone speaking, ECB's Mersch speaking, 5-Year Treasury Note Auction and the weekly MBA mortgage applications report could also impact trading today.
BOTTOM LINE: Asian indices are slightly lower, weighed down by technology 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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