Tuesday, December 06, 2011

Tuesday Watch

Evening Headlines

  • S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis. Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks. “Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement. The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year. “The S&P move is yet another signal that euro area countries must take decisive action to deal with the crisis or else the problems will spread from Greece and others with the most acute fiscal problems to the rest of the euro zone,” said Phillip Swagel, a professor of economics at the University of Maryland’s School of Public Policy who was an assistant Treasury secretary for economic policy in the George W. Bush administration. “It is time for Germany and France to act -- either to save Greece and the others or to let them fail.” The firm said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments. The other countries warned were Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.” Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations. Yields on EFSF 3.375 percent bonds due in July 2021 2 basis points, snapping a five-day rally, to 3.6 percent, according to Bloomberg prices.
  • AAA Nations Held Hostage as Debt Crisis Amplifies Volatility: Euro Credit. Bonds from AAA rated Austria, the Netherlands and Finland are suffering as Europe’s debt crisis increases volatility and erodes their haven status. Sixty-day volatility on 10-year government debt from the three nations reached euro-era records in November, as investors increased bets the currency bloc may unravel and as yields on Italian and Spanish securities surged. The countries were among 15 put on watch for a downgrade by Standard & Poor’s yesterday. Europe’s leaders will try again to fashion a solution to the turmoil this week after the failure of their fourth rescue blueprint sparked concern that the crisis will infect all 17 euro nations. “Volatility clearly has increased and it makes life a lot tougher for investors,” said Alex Johnson, who helps oversee $47 billion as London-based head of portfolio management at Fischer Francis Trees & Watts. “If you are invested in countries like the Netherlands you can find that what were safe- haven positions have become correlated with what’s going on in the periphery, when actually the economic fundamentals are still very good.” The extra interest the Netherlands has to pay investors to hold its 10-year bonds instead of Germany’s rose to a two-year high of 68 basis points on Nov. 17 and stood at 37 basis points yesterday, almost triple this year’s low of 13 basis points reached in March. A measure of 60-day volatility on the so- called spread has more than doubled to 103 percent from 49 percent six months ago.
  • Basel Rules Face Change With No-Risk Sovereign Debt Major Focus. Regulators may diminish the central role of government bonds in planned banking rules designed to make the financial system safer. The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private. The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves. “One of the central pillars of the Basel III framework is the notion of a risk-free asset class,” said Matthew Czepliewicz, a banking analyst at Collins Stewart Hawkpoint Plc in London. “That central pillar is disintegrating. Basel is quite clearly going to have to be revised.”
  • Asia Faces 'Much Greater' Risks From Global Slowdown, ADB Says. Asian economies are facing “much greater downside risks” now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the Asian Development Bank said. The biggest challenge for policy makers in emerging East Asian nations is to safeguard growth against the threat of another global economic crisis, the Manila-based lender said in its Asia Economic Monitor report today. Uncertainty over the world economy means officials in the region must have “sufficient flexibility” to adjust policies quickly, it said. “The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago,” the ADB said. “The global economic recovery could flounder if the euro zone and the US fall back into recession, causing another global financial crisis. Large and destabilizing capital flows could complicate the region’s macroeconomic management and jeopardize economic growth.” Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, according to the report today. That’s lower than the lender’s September forecast for 7.6 percent growth this year and 7.5 percent in 2012, it said. The MSCI Asia-Pacific Index fell about 16 percent last quarter, the biggest drop since the last three months of 2008. “The lingering eurozone debt crisis could boost risk aversion among investors, with rapid swings in risk appetite boosting capital flow volatility beyond the spurts and stops seen in the third quarter this year,” the ADB said. “Consequently, exchange rate volatility would follow from large but fickle capital movements.” Emerging East Asia won’t be immune to a “major” slowdown in advanced economies, which would hurt the region’s economic growth and pose “significant” policy challenges, the ADB said. “With the euro zone’s sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent,” it said.
  • Paulson Fund Loses 46% in 2011 Through November. John Paulson, the billionaire money manager having his worst year, has lost 46 percent in 2011 through November in one of his largest hedge funds, according to an investor update obtained by Bloomberg News. Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 3.6 percent last month. Paulson & Co., which is based in New York and manages $28 billion, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson, 55, cut the so-called net exposure in his main hedge funds to 30 percent last month and reduced bullish bets across all his funds. Paulson’s biggest funds, Advantage Plus and Advantage, employ similar strategies and have $11 billion in combined assets. The dollar-denominated Advantage Fund fell 3.3 percent in November and 32 percent this year. The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, fell 4 percent in November and 28 percent this year. The Paulson Partners Enhanced Fund, which invests in the shares of merging companies, decreased 0.6 percent last month and 18 percent this year. Paulson’s Credit Opportunities Fund slumped 3.6 percent last month and 18 percent this year.
  • More 'Mancession' Fathers Caring for Kids While Mothers at Work. One-third of fathers with working wives are now the regular caregivers for their children, the result of the depressed economy and large numbers of out-of-work men, the U.S. Census Bureau reported today. The number of such dads caring for children under age 15 increased to 32 percent in 2010 from 26 percent in 2002. Among those fathers with preschool-age children, one in five served as the adult who spends the most time with the child, the census found. The recession has spurred the number of fathers with an active role in child care, which has been increasing since at least 1988, said Lynda Laughlin, a family demographer at the Census Bureau. “The economy hasn’t completely rebounded, particularly for men,” Laughlin said. “What did they label it, a ‘mancession’?”
  • Women CEOs Say Debt Uncertainty and Regulation Hurt Job Growth. Women business leaders meeting with Republican lawmakers said tax burdens, duplicative government rules, an unskilled workforce and congressional deadlock on the deficit are hurting job creation and the economy. “Like everyone else, we need certainty when we get up in the morning and go into the office and worry about how many people we are going to hire,” said Lisa Hook, chief executive officer of Neustar Inc., a provider of telephone and Internet directories based in Sterling, Virginia, at a panel discussion today in Washington.
  • Australia Cuts Key Rate, Citing Europe Risk. Australia’s central bank reduced its benchmark interest rate today for a second straight month as Europe’s fiscal crisis threatens to slow the nation’s commodity exports, sending the nation’s currency lower. Reserve Bank Governor Glenn Stevens and his board cut the overnight cash-rate target by a quarter percentage point to 4.25 percent, saying in a statement that “financing conditions have become much more difficult, especially in Europe.” “This, together with precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased,” Stevens said in the statement.
Wall Street Journal:
  • The Pitfalls of Merkozy's Third Way. What the French and German leaders appear to be cooking up at the start of the most critical week in the euro crisis appears well short of the comprehensive solution needed.
  • Euro-Zone Economy Falls Short on Growth. Europe has a glut of grand plans but a shortage of growth. The euro-zone economy has already slowed markedly this year, from a 3.1% annualized growth pace in the first quarter to just 0.8% in the third, as revised government figures due Tuesday are likely to show. And the going will only get tougher; it appears Europe is slipping into a recession in the current fourth quarter.
  • Search Begins for Next CEO at Ford(F). Ford Motor Co. has begun a broad search for candidates to replace current Chief Executive Officer Alan Mulally, who is expected to leave the company within two years, people familiar with the matter said. Candidates for the position include at least two former Ford executives as well as two internal candidates, those people said. The internal candidates are Americas President Mark Fields, 50, and Joe Hinrichs, 45, the chief of Asian operations.
  • Corzine Rebuffed Internal Warnings on Risks. MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said. The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.
Business Insider:
Zero Hedge:
Rasmussen Reports:
  • US Senators Call For Full Review Of Pakistani Ties. Two senior Republican senators called on Monday for a thorough review of U.S. relations with Pakistan, declaring that all security and economic aid to Islamabad must be reconsidered. John McCain and Lindsey Graham -- influential members of the Senate Armed Services committee -- said Washington had to be realistic about the deteriorating relationship. They said actions of Pakistan's military, such as its support for militant groups, were harming U.S. forces and threatening American security. "The time has come for the United States to fully review its relations with Pakistan," McCain and Graham said in a statement. "In particular, all options regarding U.S. security and economic assistance to Pakistan must be on the table, including substantial reductions and stricter standards for performance."
  • Monti Warns of Greek-Style Risk to Italy. Italy risked a Greek-style economic collapse which could threaten the future of the euro without the austerity package approved by the government, Prime Minister Mario Monti said on Monday, calling on European partners to do their part.
  • Euro Enters The Last Chance Saloon. Ever since central banks agreed to provide additional liquidity support to Europe's stricken banks, stock markets have been surging in anticipation of an eventual, much wider ranging deal to save the euro. Are they right to do so?

  • Philippine Electronics Exporters See Steeper 2011 Fall. ELECTRONICS EXPORTS could plunge by as much as 25% this year as manufacturers expect last quarter results to hit new lows, an industry official yesterday said. The even more dismal outlook for 2011 -- the -25% figure is worse than -18% estimate held as of October -- was discussed last Friday by the Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI). The group, however, tentatively expects a recovery to 10% growth next year as shipments improve in the second quarter, SEIPI President Ernesto B. Santiago told BusinessWorld. “The prognosis for the fourth quarter is bad. The second biggest retail performance already happened in the first week of October ... and there is no more expectation of more buying,” Mr. Santiago said. “We could drop by 25% to $23 billion [this year]. Given this, most companies are focusing on cost reduction and rightsizing,” he continued. The plans do not include laying off workers, Mr. Santiago claimed. Electronic exports contracted by 47.9% to $1.813 billion in September based on latest data. The result brought nine-month sales to $18.778 billion, down 20.1% from a year earlier.
Economic Daily News:
  • China Steel, Baoshan Ask Iron-Ore Firms to Cut Prices, Edn Says. China Steel Corp. and Baoshan Iron & Steel Co. have asked iron ore producers, including Vale SA, BHP Billiton Ltd. and Rio Tinto Group, to cut iron ore prices by 23% to lower costs. The steelmakers also asked iron ore supplies to cut deliveries by 20%.
China Daily:
  • China Inflation May Rise in 2012 on Labor, Energy Costs. China may have "moderate inflation" for a long time, citing Sheng Laiyun, a spokesman for the National Bureau of Statistics.
  • China Researcher Says Buying Bonds Won't Help Europe. The European debt crisis needs to be solved by enhancing the repayment ability of European countries, citing Wang Yiming, a deputy head of China's National Development and Reform Commission's macroeconomic research academy.
Shanghai Securities News:
  • China to extend property control measures into 2012, citing Zhao Luxing, real estate department head at the Ministry of Housing and Rural Development's policy research center. Policy makers have other measures in reserve to control property prices, including speeding up the implementation of property tax and loan restrictions, according to the report.
China Securities Journal:
  • China property prices may see a downward trend develop in 2012, citing Qin Hong, head of the policy research center under the Ministry of Housing and Urban-Rural Development.
  • Some companies in the Chinese eastern city of Wenzhou may still face difficulties in repaying loans to private lenders at year end, citing a report for the city's government.
Evening Recommendations
  • Rated (INTU) Overweight, target $62.
  • Rated (ORCL) Overweight, target $37.
  • Rated (LOGM) Overweight, target $52.
  • Rated (N) Overweight, target $50.
  • Rated (CTS) Overweight, target $87.
  • Rated (CSOD) Overweight, target $21.
  • Rated (ARBA) Overweight, target $37.
  • Rated (VMW) Overweight, target $115.
  • Rated (INFA) Overweight, target $60.
  • Rated (QLIK) Overweight, target $33.
  • Rated (SAP) Overweight, target $70.
  • Rated (CRM) Overweight, target $143.
Night Trading
  • Asian equity indices are -2.0% to -1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 194.50 -.5 basis point.
  • Asia Pacific Sovereign CDS Index 153.25 -5.0 basis points.
  • FTSE-100 futures -1.19%.
  • S&P 500 futures -.70%.
  • NASDAQ 100 futures -.47%.
Morning Preview Links

Earnings of Note
  • (TOL)/.06
  • (AZO)/4.43
  • (TTC)/.09
  • (MW)/.65
  • (CASY)/.98
  • (SAI)/.34
  • (AVAV)/.20
Economic Releases.
  • None of note

Upcoming Splits

  • None of note
Other Potential Market Movers
  • The Fed's Tarullo speaking, Fed's Raskin speaking, ECB's Coene speaking, Bank of Canada rate decision, weekly retail sales reports, IBD/TIPP Economic Optimism Index for December, (LOW) Investor Conference, William Blair Services Conference, Goldman Sachs Financial Services Conference and the BofA Merrill Industrials Conference could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology 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 day.

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