Monday, November 07, 2011

Monday Watch

Posted by Gary .....at 12:52 AM

Weekend Headlines
Bloomberg:
  • Italy Yield Surge Sets Berlusconi on Bailout Path: Euro Credit. Italian bond yields are sending the nation down the same path taken by Greece, Portugal and Ireland in the days before they were forced to seek rescues. Italy’s 10-year notes traded above 5.5 percent for 40 days before breaching the 6 percent mark on Oct. 28, according to data compiled by Bloomberg. The bailed-out nations followed a similar trajectory, consistently averaging above 6 percent for about a month before crossing the 6.5 percent barrier. After that, it took an average of 16 days for yields to pass the unsustainable 7 percent level. “The trend appears worryingly similar,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. “Clearly, the longer it lasts, the worse it gets.” With almost 1.6 trillion euros ($2.2 trillion) of bonds outstanding, Italy has more liabilities than Spain, Portugal and Ireland combined, making it vulnerable to increases in borrowing costs. Prime Minister Silvio Berlusconi triggered the latest surge in yields after bowing to domestic demands to water down a 45.5 billion-euro austerity package. Yields on Italy’s bonds rose even as the European Central Bank bought the securities. Italy’s 10-year borrowing costs have increased to a euro-era record of 455 basis points more than German bunds, the benchmark for Europe. Germany is able to borrow at a yield of 1.8 percent for 10 years, less than a third of the 6.37 percent Italy has to pay. The cost of insuring Italy’s debt using credit-default swaps surged to as much as 519 basis points last week, approaching the record 534 reached in September, according to CMA. “The acceleration in Italy’s bond yields is very, very frightening,” said Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London “It’s surprising how quickly a difficult situation can become an impossible one. Politicians always think they have lots of time, but when the market decides to withdraw support, it can do so very suddenly.” Italy has to refinance 37 billion euros of bills and bonds by year-end and another 307 billion euros in 2012, Bloomberg data show.
  • Thousands Rally in Rome, Pressing Italy's Berlusconi to Resign. Tens of thousands of Italians gathered in Rome to call on Prime Minister Silvio Berlusconi to resign, as defections eroded his parliamentary majority at a time when the country’s borrowing costs are at a euro-era high. Hundreds of buses and 14 special trains brought thousands of supporters of the opposition Democratic Party to the rally in front of the Basilica of St. John Lateran to hear calls for the premier to go. Demonstrators shouted “Shame”” and “Get Out” in the square that’s home to the first church built in Rome. The premier, who generally spends his weekends at his home in Milan, remained in Rome in consultation with his top advisers after several lawmakers said they planned to abandon his People of Liberty party, threatening to leave him without a majority in Parliament before a key vote. Calls will increase for Berlusconi to resign if he loses the ballot to rubberstamp the 2010 budget report, likely to be held on Nov. 8. “A lot of rumors and whispers are making the rounds of Rome’s palaces: the resignation of this government,” Berlusconi said in an e-mailed statement today. “But the responsibility toward the voters and the country force us and our government to continue the battle of civility that we have been conducting during this difficult moment of crisis.”
  • Greece Will Form National Unity Government. Greek Prime Minister George Papandreou agreed to step down to allow the creation of a national unity government intended to secure international financing and avert a collapse of the country’s economy. Papandreou met with Antonis Samaras, leader of the main opposition party, and agreed to form a government to lead Greece “to elections immediately after the implementation of European Council decisions on October 26,” according to an e-mailed statement yesterday from the office of President Karolos Papoulias in Athens. Papandreou already stated he won’t lead the new government, the statement said. “If we take it to mean that Greece is making efforts to ensure that they continue to receive funding support from the euro zone, then the move is positive,” Sacha Tihanyi, a Hong Kong-based currency strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia, said today of the decision. “However, it would be much better to see sustained political stability out of the country.”
  • Greece Euro Exit Threat is 'Pandora's Box,' Morgan Stanley Says. European leaders may have opened a "Pandora's box" of unintended consequences by raising the possibility of Greece leaving the euro, according to Morgan Stanley. Responding to Greek Premier George Papandreou's plan to hold a referendum on the nation's second bailout, Angela Merkel and Nicolas Sarkozy last week said the question must be framed as a choice between staying in the euro and submitting to the bailout, or exiting the single currency. Papandreou canceled the vote amid growing pressure on him to resign. The possibility of leaving the euro has been "so far a taboo in European political circles," Joachim Fels, Morgan Stanley's chief global economist in London, wrote in a note to clients today. "European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign." Responding to the sovereign debt crisis that is sweeping through Europe's peripheral economies, euro area leaders have torn up the rulebook in their efforts to stem contagion. As well as offering Greece a choice about remaining in the euro, they have been forced to abandon the clauses prohibiting bailouts in the treaty governing the euro.
  • China PMI, Inflation Signal Rate Cut Unlikely. China's central bank probably won't follow G-20 counterparts such as Brazil and Australia in cutting interest rates unless there is a deeper slowdown in manufacturing and inflation, history shows. The PMI was at 38.8 and inflation 2.4% in November 2008 when the People's Bank of China last lowered its polity rate below the current level of 6.56%. The most-recent figures for manufacturing and CPI are 50.4 and 6.1%, respectively. "There's no urgency for a rate cut," Ken Pang, senior economist for China at BNP Paribas SA, said in an interview. "Shifting to a loose monetary policy needs a consensus among government officials, which will only be reached when economic growth weakens more obviously."
  • China Credit Squeeze Prompts Suicides, Violence. Wenzhou’s 400,000 businesses are facing financial hardship because of rising costs, soaring black market interest rates and a sudden credit squeeze, Zhou said. Similar problems are happening across China because private enterprises in China rely on underground borrowing rather than banks to operate, he said. “This is a much bigger problem across the country,” said Tao, who estimates outstanding private loans stand at 4 trillion yuan, or 8 percent of total lending in China. “Wenzhou is just the tip of the iceberg.” Most of the informal lending has been pumped into real estate developers riding China’s property boom that is showing signs of slowing, said Tao.
  • Hedge Funds Curb Raw-Material Bets for First Time in a Month: Commodities. Speculators reduced wagers on higher commodity prices for the first time in four weeks on mounting concern that Europe’s failure to contain its debt crisis will slow economic growth and demand for raw materials. Money managers cut combined net-long positions across 18 U.S. futures and options by 3.9 percent to 798,787 contracts in the week ended Nov. 1, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Index of 24 raw materials tumbled 14 percent since reaching a 32-month high in April. “When you look out and see what’s happening in Europe, you get very worried that demand could disappoint,” said Nic Johnson, who helps manage about $30 billion in commodity assets at Pacific Investment Management Co. in Newport Beach, California. “How stable is industrial demand? Is it sustainable? People are waiting to see whether weakness shows up in the numbers.” Fifteen of 24 commodities tracked by the S&P GSCI fell last week, led by a 5.4 percent decline in cotton, a 4.6 percent retreat in aluminum and 4.1 percent drop in nickel.
  • Berkshire(BRK/A) Profit Declines 24% on Buffett's Derivative Bets. Buffett, 81, uses derivatives to speculate on long-term gains in stocks and the creditworthiness of corporate and municipal borrowers. The contracts tied to equity indexes, which aren’t scheduled to settle until 2018 or later, produced a loss of $2.09 billion in the period as the Standard & Poor’s 500 Index posted its biggest decline since 2008. Liabilities on the equity derivatives rose to $8.85 billion. “He’s been in the negative position for some time now and I’m not worried yet, but it’s something to keep an eye on,” said Tom Lewandowski, an analyst with Edward Jones & Co., who has a “buy” rating on Berkshire.
  • CFTC's Gensler Said to Recuse Himself From MF Global(MF) Probe on Corzine Ties. U.S. Commodity Futures Trading Commission Chairman Gary Gensler will recuse himself from the agency’s investigation of MF Global Holdings Ltd. (MF) amid concern that his ties to the bankrupt firm’s former chief executive may give the appearance of a conflict of interest, two people with direct knowledge of the decision said. Gensler decided this week against participating in the probe of MF Global because of his history with Jon Corzine, said the people, who spoke on the condition of anonymity because the decision isn’t public. Corzine, who stepped down as MF Global’s chairman and CEO yesterday, worked with Gensler at Goldman Sachs Group Inc. (GS) and during his term in the U.S. Senate, where Gensler served as an aide.
  • CME(CME) Temporarily Reduces Margin to Ease MF Global(MF) Account Shift. CME Group Inc. is reducing the initial margin required to back futures trades to ease the bulk transfer of accounts held by MF Global Holdings Inc. customers. “This is a short-term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event,” the Chicago-based exchange owner said in an e-mailed statement today.
  • Tepco Finds Dangerous Level of Radiation at Fukushima Station. Tokyo Electric Power Co. found a dangerous level of radiation at its wrecked Fukushima nuclear plant, eight months after the March 11 earthquake and tsunami that caused the worst atomic crisis in 25 years. Workers at the company usually called Tepco detected 620 millisieverts of radiation an hour on the first floor of Reactor 3 on Nov. 3, the highest level found in that unit, it said.
  • Syrian Forces Kill 22; Arab League Plans Emergency Meeting. Syrian security forces opened fire on protesters, killing 22 people yesterday and prompting the Arab League to call an emergency meeting to discuss the government’s failure to halt the bloodshed. Protests against the rule of President Bashar al-Assad followed prayers for the Islamic holiday of Eid al-Adha. At least 16 of those killed were in Homs, Usama al-Himsi, a Syrian activist in Homs, told Al Jazeera television by phone. “The army hit us with rockets,” he said, adding that a plane dropped unidentified chemical materials and tank shelling increased. There was no water, no power, and protesters weren’t able to aid the injured, he told Al Jazeera.
Wall Street Journal:
  • Europe's Struggle to Keep Growing - And Avoid Vicious Cycle. Europe is at risk of a potentially devastating negative feedback loop. The economy is "practically in free fall," says Yves Mersch, a member of the European Central Bank's governing council. ECB President Mario Draghi has warned publicly of a recession. The latest economic data bear out their gloomy assessments. Failure to tackle the sovereign-debt crisis has fueled the downturn, but a new recession makes the crisis even harder to solve.
  • Merkel Rejected IMF SDRs to Fund EFSF. A plan to have the International Monetary Fund issue its special currency as a powerful weapon in Europe's efforts to contain the widening euro-zone debt crisis was blocked by German Chancellor Angela Merkel, according to a report in a German newspaper. Leaders of the Group of 20 industrialized and developing nations meeting in Cannes this week pressed euro-zone leaders to deliver a credible plan to leverage the €440 billion European Financial Stability Facility, the euro-zone bailout fund, to quickly stop the European debt crisis from spreading to the global economy. One plan under discussion at the two-day meeting was to request that the IMF print more of its Special Drawing Rights. The SDRs are essentially an IOU that countries can exchange for cash and become part of the IMF's member's reserves. Such reserves are held by a country's central bank. Germany has rejected any plan that would involve direct funding of the EFSF through either the European Central Bank or the German Bundesbank. "This initiative was rejected by the German side," the Frankfurter Allgemeine Sonntagszeitung quotes Merkel's spokesman Steffen Seibert as saying in a report that was issued ahead of publication on Sunday. Mr. Seibert also dismissed speculation that G-20 leaders had discussed using gold and currency reserves held by the Bundesbank as a way to bolster the EFSF.
  • Generation Jobless: Young Men Suffer Worst as Economy Staggers. Few groups were hit harder by the recession than young men, like Cody Preston and Justin Randol, 25-year-old high-school buddies who didn't go to college. The unemployment rate for males between 25 and 34 years old with high-school diplomas is 14.4%—up from 6.1% before the downturn four years ago and far above today's 9% national rate. The picture is even more bleak for slightly younger men: 22.4% for high-school graduates 20 to 24 years old. That's up from 10.4% four years ago.
  • Credit Agricole Freezes Leveraged Loans. Credit Agricole's (ACA.FR) London leveraged finance desk has put a freeze on lending until the new year, according to six people familiar with the matter. Credit Agricole declined to comment. Other European banks are considering stepping back from corporate lending in the face of macroeconomic uncertainty and the euro-zone crisis.
  • New Twist on Hedge Funds. A handful of mutual-fund companies say they've built a better mousetrap when it comes to investing like a hedge fund. But for investors, these funds require a very close look under the hood.
  • Old Debts Dog Europe's Banks. European banks are sitting on heaps of exotic mortgage products and other risky assets that predate the financial crisis, adding to pressure on lenders that also are holding large quantities of euro-zone government debt. Four years after instruments like "collateralized debt obligations" and "leveraged loans" became dirty words because of the massive losses they inflicted on holders, European banks still own tens of billions of euros of such assets. They also have sizable portfolios of U.S. commercial real-estate loans and subprime mortgages that could remain under pressure until the global economy recovers.
Business Insider:
 Zero Hedge:
NY Times:
  • Leaving Iraq, U.S. Fears New Surge of Qaeda Terror. As the United States prepares to withdraw its troops from Iraq by year’s end, senior American and Iraqi officials are expressing growing concern that Al Qaeda’s offshoot here, which just a few years ago waged a debilitating insurgency that plunged the country into a civil war, is poised for a deadly resurgence.
  • Sad Proof of Europe's Fallout. WHO are you going to believe — me, or your own lying eyes? That old line from the Marx Brothers came to mind last week as MF Global, the brokerage firm run by Jon S. Corzine, was felled by over-the-top leverage and bad derivative bets on debt-weakened European countries. Suddenly, all of those claims that American financial institutions have little to no exposure to Europe rang hollow.
PC World:
Financial Times:
Telegraph:
  • Goldman(GS): Euro Could Split Apart. The chairman of Goldman Sachs Asset Management has said that the need for a German-led fiscal integration in the eurozone would make it increasingly unattractive for all the countries who joined to stay in the single currency.
  • Europe's Rescue Fiasco Leaves Italy Defenceless. The six weeks allotted to save monetary union have expired. The G20 has come and gone, yet no workable firewall is in place as the drama engulfs Italy and threatens to light the fuse on the world’s third largest edifice of debt.
WirtschaftsWoche:
  • Hans-Werner Sinn, president of the Munich-based Ifo economic institute, sees no possibility for Greece to remain in the euro region, citing an interview. Sinn said Greece won't be able to remain competitive within the euro zone.
Bild Zeitung:
  • TUI AG is calling for Greece hoteliers to sign new contracts under which the tour operator will be entitled to payment in the new currency if Greece leaves the euro zone.
  • German Economy Minister Philipp Roesler said there was no alternative for Greece to embracing reform if it wants to remain in the euro area. "The Greeks can decide themselves: reform in the euro area or don't reform and get out. There is no third way", Roesler said. Roesler, who head Chancellor Angela Merkel's Free Democratic Party coalition partner, said while the goal was to help countries stay in the euro area there could be no delays in reforms.
De Tijd:
  • Belgium will miss a European Union target for reducing its structural budget deficit unless it intensifies its efforts, citing a document prepared by government officials. Belgium has averaged only .5 to .6 percentage point reductions in its structural deficit over the last three years compared with a .75 percentage point annual target set by the EU for the period 2010 to 2012. The shortfall may require the government to find an extra $2.76 billion in savings in the 2012 compared with current plans, it said.
Focus:
  • German Top Court to Rule on EFSF Panel By Christmas. Germany's highest court may rule by Christmas on whether a special parliamentary body is authorized to clear emergency issues regarding the euro rescue fund, citing Andreas Vosskuhle, president of the court.
Handelsblatt:
  • Canadian Finance Minister Jim Flaherty opposed the IMF granting aid to European economies battling the region's debt crisis, citing an interview. Flaherty instead called on richer European nations to provide funds, saying the IMF's role is to stand by financially weak states.
La Repubblica:
  • As many as 20 lawmakers are ready to defect from Prime Minister Silvio Berlusconi's coalition before a Nov. 8 vote to rubberstamp the 2010 budget report. The defectors may abstain from the vote, signaling Berlusconi doesn't have an absolute majority in the lower house of Parliament, citing People of Liberty deputy Fabio Gava.
Xinhua:
  • Chinese property developers are hoping in vain for a loosening of regulations and monetary policy which would allow them to raise property prices, Ma Guangyuan, an economist with the Chinese Academy of Social Sciences, wrote in a commentary. Decision-makers have reached a consensus that dependence on the housing market poses a huge risk to the nation's economy, Ma wrote. Ma cites Premier Wen Jiabao in the September issues of Qiushi, a Communist Party magazine, as saying that China won't waiver in its push for tighter real estate regulations.
China Business News:
  • Beijing's existing home sales volumes in the past three months were close to the lowest level since the second half of 2008, citing Zhang Dawei, a researcher at Centaline Property Agency Ltd. The city's October existing home sales were fewer than 10,000 units for seven consecutive months and the lowest in 34 months. Beijing sold 7,262 exiting home units in October, 17% fewer than in September.
Weekend Recommendations
Barron's:
  • Made positive comments on (EFX), (LH), (MELA) and (CVC).
  • Made negative comments on (DMND).
Night Trading
  • Asian indices are -.50% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 192.25 +2.75 basis points.
  • Asia Pacific Sovereign CDS Index 152.25 +.25 basis point.
  • FTSE-100 futures +.10%.
  • S&P 500 futures -.23%.
  • NASDAQ 100 futures -.11%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (SYY)/.51
  • (LPX)/-.17
  • (KWK)/.05
  • (PCLN)/9.30
  • (RAX)/.13
  • (WMS)/.29
  • (DISH)/.73
Economic Releases
3:00 pm EST
  • Consumer Credit for September is estimated to rise by $5.2B versus a decline of -$9.5B in August.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The EU Finance Ministers Meeting and the (ALTR) Investor Meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and financial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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