Tuesday, December 13, 2011

Tuesday Watch

Evening Headlines

  • Investors May Shun Banks' Contingent Convertibles as Regulator Adds Limits. European banks seeking to meet capital targets by selling contingent convertible bonds may struggle to attract investors after regulators imposed limits on the form the instruments must take. The European Banking Authority said last week lenders could use the securities, bonds that convert into equity or are written down if a bank’s capital drops below a set level, to help plug a 115 billion-euro ($153 billion) capital shortfall. It published a standard set of terms for the securities, which investors said were unlikely to be attractive to buyers because the risk of triggering a conversion is too high and issuers will have too much control over interest payments. “The majority of institutions that actually need capital to reach the EBA target will not be able to attract private investors for these instruments,” said Satish Pulle, a portfolio manager at London-based European Credit Management Ltd., which oversees a fund that invests in CoCos and bank debt.
  • Spain's 'Cayenne Crisis' Spreads to BMW. Roberto Murga, a construction manager from Barcelona, loved his platinum gray Porsche Cayenne until the debt crisis made the sport-utility vehicle’s leather interior and electronic seats expendable. The 66,370-euro ($88,800) status symbol is now unnecessary ballast for Murga, 33, who like other Spaniards has been forced to cut spending because of the country’s weakening economy. Car demand, which has halved since peaking in 2007, probably won’t recover this decade, analysts predict. “I can’t splurge anymore, and maintaining my precious Cayenne is just too expensive,” said Murga, who made as much as 8,000 euros a month before the real estate bubble went bust three years ago, forcing him to fire half his workers. “We have no profit at all. We just try to survive.” Murga has lots of company. “This car was the paradigm of how we lived above what we could afford,” Conde said. “Banks were giving way too many loans and everybody here was driving a Cayenne.” Those days are over and may never be coming back. Porsche sales in Spain and Portugal have fallen 34 percent from the 2007 peak to 1,900 cars last year. Deliveries of Bayerische Motoren Werke AG’s namesake brand have dropped 47 percent to 32,500.
  • MF Global Officials Say They Don't Know. Henri Steenkamp, chief financial officer of MF Global Holdings Ltd., said he doesn’t know the location of $1.2 billion in missing client funds and didn’t have direct involvement with accounts and fund transfers at the failed brokerage. “I do not know why these funds cannot be accounted for, but based on the fact that no shortfalls had been reported to me previously, it appears that any irregularities were likely caused by events that occurred shortly before the bankruptcy filing."
  • Australia Cuts Estimate for Agricultural Exports on World Economic Outlook. Australia, set to be the world’s second-biggest wheat shipper, cut its forecast for agricultural- export earnings on concern that the European debt crisis may damp global economic growth and hurt commodity demand. Earnings from farm, forest and fisheries products may total A$38.4 billion ($38.6 billion) in the year to June 30, the Australian Bureau of Agricultural and Resource Economics and Sciences said today. That compares with A$38.6 billion forecast in September and a revised A$36.1 billion in 2010-2011, it said.
  • Oil Trades Near Two-Week Low; Kuwait Says OPEC Production Cut Not Needed. Oil traded near a two-week low as signs Europe is struggling to tame a debt crisis that threatens economic growth countered a forecast drop in crude stockpiles in the U.S., the world’s biggest consumer of the commodity. Futures were little changed after falling 1.7 percent yesterday as Moody’s Investors Service said it will review the credit ratings of all European Union countries. An Energy Department report tomorrow may show U.S. crude supplies dropped for the first time in three weeks. Kuwait’s oil minister Mohammad al-Busairy said there is no need to change OPEC’s output or production quotas because “the market is stable.” “We’re expecting further pressure on the market and most of it relates to Europe,” said Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty. in Sydney who predicts oil in New York will trade just above $95 a barrel in the short-term.
  • Democratic Payroll Tax Position Hardens Ahead of Deadline. Democratic leaders in the U.S. Senate are hardening their opposition to a House Republican measure that would extend the payroll tax cut for workers while restructuring unemployment compensation and speeding approval of a Canadian oil pipeline. Senator Richard Durbin of Illinois, the chamber's No. 2 Democrat, said lawmakers must cover the cost of extending a payroll tax cut for workers with new revenue. Republicans have blocked Democratic proposals in the Senate to pay for the payroll tax cut by imposing a surtax on income exceeding $1 million a year. "If we do pay for it, it's going to be paid for with a revenue source, such as the millionaire's tax," Durbin said in an interview today. "It's not going to be paid for with spending cuts." Durbin's comments underscore the differences that exist between congressional leaders over how to extend the payroll tax cut. If Congress doesn't act by Dec. 31, employees will begin paying a 6.2 percent tax on their first $110,100 in wages in January, up from 4.2 percent this year.
  • China's 'Interventionist Policies' Remain a Concern, U.S. Says. China’s trade restrictions and “interventionist policies” in areas such as intellectual property rights remain a concern for American companies doing business in the Asian nation, the U.S. said. China discriminates against foreign business in “numerous sectors” of the economy, the U.S. Trade Representative said in its annual report on Chinese compliance with World Trade Organization rules.
  • Zoomlion Biggest Short on Wagers China Building Binge Will Slow. Short sellers have never been so sure that Zoomlion Heavy Industry Science & Technology Co., China's second-biggest maker of construction equipment, will drop as building slows and customers fall behind on payments. Speculators lifted bets against Zoomlion to 22 percent of shares outstanding last month, the highest proportion on record and the most among Hong Kong-traded stocks tracked by Data Explorers. Bearish wagers increased even after the stock tumbled as much as 47 percent this year to an all-time low on Sept. 26. Zoomlion, whose sales of cranes and concrete machinery in China make it a gauge of the world's largest building boom, posted a 50 percent gain in first-half revenue and a 110 percent jump in profit, four times more than the Hang Seng China Enterprises Index average. The company spurred sales by letting customers buy machinery without paying upfront, a strategy that some investors say may backfire after banks curbed real-estate loans.
  • Sino-Forest Will Miss Earnings Deadline, May Default. Sino-Forest Corp. (TRE), the timber producer fending off fraud allegations, said it will default on its bonds and miss a self-imposed deadline to report earnings as it considers putting itself up for sale. Sino-Forest won’t make a $9.78 million interest payment on its 2016 convertible notes that’s due Dec. 15, the Hong Kong-and Mississauga, Ontario-based company said yesterday in a statement. There’s no assurance if or when the earnings results will be released, it said.
  • Cash Crunch Driving ICICI Risk Up By Most in Asia: India Credit. Costs to protect the bonds of Indian banks against default are rising at the fastest pace among Asian lenders as a worsening cash crunch threatens profits. Five-year credit-default swaps on Mumbai-based ICICI Bank Ltd., the nation's largest private lender, jumped 87 basis points in the past month to 482 basis points, the biggest advance in the region.
Wall Street Journal:
  • Markets Doubt Europe Deal. Investors and Ratings Firms Skeptical of Fiscal Unity Pact; Euro Falls Sharply. Investors and Ratings Firms Skeptical of Fiscal Unity Pact; Euro Falls Sharply.
  • Europe's Banks Retreat From the East. Dozens of euro-zone banks flocked to Eastern Europe in recent years, hoping to harness the region's fast-growing economies and relatively untapped banking markets. Amid Europe's banking crisis, the situation has suddenly been thrown into reverse. Banks are beating hasty retreats from the region, scrambling to conserve limited resources and facing pressure to concentrate on their domestic markets. The withdrawal is fanning fears that the economies of Eastern Europe, which so far have held up reasonably well despite the crisis to the west, could fall victim to a downturn.
  • China To Withhold Aid To EU Until It Meets Certain Conditions - Scholar. China will withhold aid to the European Union until the region meets certain conditions, including the "conferral of market-economy status" on China, a Chinese scholar said in a commentary published in the state-run China Daily on Tuesday. Yao Yang, director of the China Center for Economic Research at Peking University, said a failed euro hurts China, as it would weigh on China's export and leave the U.S. dollar as the single international reserve currency. However, he said China won't provide substantial financial assistance without the EU's "ironclad guarantee" of the investment.
  • Sen. Grassley: Hedge Funds May Have Gotten ‘Special Treatment’ From Medicare Administrator. Sen. Chuck Grassley sent a letter on Monday to the Centers for Medicare and Medicaid Services, saying he believes the organization may have given special treatment to information requests from hedge funds and political intelligence brokers “who seek to profit from government information.”
  • Wall Street Group Puts Up Defense of High-Frequency Trading. Wall Street's largest trade group wants to broaden the discussion surrounding high-frequency trading and its ramifications on investors and broader market structure. High-frequency trading represents a growing, albeit contentious, part of the investing community. These traders use powerful computers to rapidly move in and out of stocks and other securities in fractions of a second. Critics say this practice has been one of the contributors to the stock market's heightened volatility.
  • A Rare Apple(AAPL) Compromise. Facing challenges winning over customers for its iAd mobile advertising service, Apple is softening its approach as it loses ground to Google Inc.(GOOG) in the fast-growing mobile-ad market.
  • Christians Face Murky Future After Egypt Polls. When Victor Anis goes to the polls Wednesday to vote in the second round of Egypt's parliamentary elections, he plans to cast his ballot for the Egyptian Bloc, a list of liberal politicians who represent the strongest answer to the rise of hardline Islamists. "What's happening now is turning voting into religion," said Mr. Anis, 60 years old. Egypt's religious ideologies and organizations, he complains, all appear to be using the ballot box to orchestrate a kind of power grab. All of them, that is, except the institution that represents his own faith, the Coptic Orthodox Church.
  • Congress's Phony Insider-Trading Reform. The denizens of Capitol Hill are remarkable investors. A new law meant to curb abuses would only make their shenanigans easier.
  • Moody's May Downgrade Spanish Banks. Moody's on Monday placed eight Spanish banks and two holding companies on review for possible downgrades due to expectations of increased losses stemming from their commercial real estate exposure. The move was prompted by Moody's reassessment of all Spanish banks which indicated a projected decline in earnings generation capacity due to a weaker growth outlook for the Spanish economy.
Business Insider:
Zero Hedge:
LA Times:
USA Today:
  • Household Electricity Bills Skyrocket. Electric bills have skyrocketed in the last five years, a sharp reversal from a quarter-century when Americans enjoyed stable power bills even as they used more electricity. Households paid a record $1,419 on average for electricity in 2010, the fifth consecutive yearly increase above the inflation rate, a USA TODAY analysis of government data found. The jump has added about $300 a year to what households pay for electricity. That's the largest sustained increase since a run-up in electricity prices during the 1970s. Electricty is consuming a greater share of Americans' after-tax income than at any time since 1996 — about $1.50 of every $100 in income at a time when income growth has stagnated, a USA TODAY analysis of Bureau of Economic Analysis data found.

Hong Kong Economic Times:
  • UBS Analyst Sees Hong Kong Home Prices Falling 15-20% in 2013. Prices for new properties in the city are expected to fall on government plans to increase land supply, citing UBS analyst Eva Lee. Office rents in the city's Central district may decline 25-30% next year on unfavorable economic conditions, Lee says.
The Standard:
  • Cathay Braces for Carbon Tax to Bite. Cathay Pacific Airways (0293) admitted that demand for passenger flights to Europe will be hurt by fare hikes stemming from a tax on carbon dioxide emissions which is effective next month. "We have to pass the additional cost to our passengers, with each single ticket to the [EU] bloc at about HK$50," chief executive John Slosar said yesterday. "It might be more expensive later." The charge will amount to about 0.5 percent on a ticket from Hong Kong to Frankfurt airport, which costs HK$9,240. "Passengers might be put off by additional fees," Slosar said.
China Daily:
  • Researcher Sees Risk of China's Slowdown Accelerating. China faces risks of accelerating slowdown in economic growth, Ba Shusong, a researcher at the State Council's Development Research Center, wrote in a commentary. China's exports growth may see an "obvious" slowdown. The country should allow fiscal policy to play a more proactive role while maintaining tightness in monetary policy to curb inflation.
Financial News:
  • The country's consumer price increases will stay at a high level, the Financial News said in a commentary. The causes for China's price increases are systematic issues, including financing mechanisms that fail to meet market demand for funds, a system that easily leads to unbalanced government investment, and exchange rate mechanisms that lacks flexibility.
China Securities Journal:
  • China may be on track to resume the development of its nuclear power industry after March next year, citing Zhang Guobao, former head of the National Energy Administration.
  • China's Oil Import Growth May Slow in 2012. Import growth may slow as oil prices become volatile, citing a research report by the Chinese Academy of Social Sciences. Global oil prices may fluctuate between $70 and $90 a barrel in 2012, citing the research report.
Evening Recommendations
  • Rated (SBUX) Buy, target $50.
  • Rated (BAGL) Buy, target $17.
  • Rated (PNRA) Buy, target $165.
  • Rated (PEET) Buy, target $68.
  • Rated (DNKN) Buy, target $30.
Night Trading
  • Asian equity indices are -1.75% to -.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 206.0 +12.5 basis points.
  • Asia Pacific Sovereign CDS Index 155.0 +2.0 basis points.
  • FTSE-100 futures -.10%.
  • S&P 500 futures +.02%.
  • NASDAQ 100 futures +.02%.
Morning Preview Links

Earnings of Note
  • (FDS)/1.00
  • (BBY)/.51
  • (ABM)/.36
Economic Releases
7:30 am EST
  • The NFIB Small Business Optimism Index for November is estimated to rise to 91.5 versus 90.2 in October.
8:30 am EST
  • Advance Retail Sales for November are estimated to rise +.6% versus a +.5% gain in October.
  • Retail Sales Less Autos for November are estimated to rise +.4% versus a +.6% gain in October.
  • Retail Sales Ex Auto & Gas for November are estimated to rise +.4% versus a +.7% gain in October.

10:00 am EST

  • Business Inventories for October are estimated to rise +.8% versus unch. in September.

2:15 pm EST

  • The FOMC is expected to leave the benchmark fed funds rate at .25%.

Upcoming Splits

  • (ROST) 2-for-1
Other Potential Market Movers
  • The Bundesbank's President Weidmann speaking, weekly retail sales reports, Raymond James IT Supply Chain Conference, Oppenheimer Healthcare Conference, RBC Silver Conference and the (ESIO) analyst 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 higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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