Wednesday, December 07, 2011

Wednesday Watch

Evening Headlines

  • French-German Plan Gets Geithner Backing. A German-French push for closer economic ties in Europe won the backing of U.S. Treasury Secretary Timothy F. Geithner, who urged governments to work with central banks to erect a “stronger firewall” to end the debt crisis. Geithner, speaking in Berlin yesterday after talks with German Finance Minister Wolfgang Schaeuble, praised the commitment to fiscal programs put in place by new governments in Spain, Italy and Greece, and said he was “very encouraged” by recent efforts to buttress the euro area. He welcomed “progress toward a fiscal compact for the euro zone,” echoing language used last week by European Central Bank President Mario Draghi. Geithner’s comments backing German Chancellor Angela Merkel and French President Nicolas Sarkozy were more upbeat than his recent remarks urging Europe to move faster. In a September trip to Europe, Geithner asked leaders to set aside their differences to excise “catastrophic risks” from markets, prompting European criticism of U.S. debt levels.
  • Germany Says Private-Sector Role in Stemming Crisis Ensured by IMF Rules. Germany rejected comments by French Prime Minister Francois Fillon that Chancellor Angela Merkel agreed to drop demands on investors to accept losses in any sovereign default, saying that International Monetary Fund rules will ensure private-sector involvement. “We only made it clear that the kind of PSI you had with Greece is an extreme case that won’t be repeated,” Steffen Seibert, Merkel’s chief spokesman, said by text message late yesterday. So-called collective action clauses “will stay, so the investors will only encounter risks in Europe that they already know from everywhere else in the world.”
  • Saudi Arabia's Crude Production Rises to Highest Level in 30 Years. Saudi Arabia, the world’s biggest crude exporter, boosted output last month to the most in more than three decades to meet customer demand. “We produced 10 million and 40 barrels in November because that’s what the customers wanted,” Ali al-Naimi said in an interview in Durban, South Africa, where he is attending a climate conference. That’s the highest level since at least 1980, according to data from the U.S. Energy Department. The desert nation pumped 9.4 million barrels a day in October, al- Naimi said on Nov. 20. Saudi Arabia, the largest and most influential member of the Organization of Petroleum Exporting Countries, will meet with other members of the group on Dec. 14 in Vienna to set output targets for early 2012.
  • Libyan Leaders Impose Lockdown in Tripoli and Demand Weapons. Tripoli was placed under a security lockdown as the governing National Transitional Council sought to impose control over local militias and demanded that residents give up their weapons by the end of the month. Side streets were closed and armed security units set up checkpoints on main roads in the Libyan capital in the most extensive security operation in the city since Muammar Qaddafi was toppled and Tripoli fell to revolutionary forces in August. Prime Minister Abdurrahim el-Keib said in a statement he ordered armed military units to impose the lockdown. Citizens have complained that the militias, many from outside the city, lack discipline and have engaged in skirmishes with residents and nightly shooting in the streets. Tripoli residents have until Dec. 31 to hand in firearms, and non-Tripoli militias must leave the city by Dec. 20, the National Transitional Council said in a statement yesterday. “The people demand safety provided by legitimate government enforcement bodies, and it is our duty to respond,” Razzak Abuhajar, the head of Tripoli’s city council, said in a statement. “These plans, coordinated by the government and the people of Tripoli, reflect a necessary step in the city’s transitional process.”
  • Citigroup(C) Plans to Cut 4,500 Jobs, Take $400 Million Charge. Citigroup Inc. Chief Executive Officer Vikram Pandit will cut about 4,500 jobs in coming quarters as he seeks to trim costs amid slumping revenue. Citigroup will take a charge of about $400 million in the fourth quarter tied to the reductions, including severance, Pandit, 54, said today during an investor conference in New York. Citigroup, the third-biggest U.S. lender by assets, employed about 267,000 people as of Sept. 30, according to a quarterly filing. Pandit is cutting staff as the European sovereign-debt crisis persists and banks prepare for regulations on minimum capital levels to take effect, threatening revenue from trading and investment banking. Citigroup said in September it would limit hiring to “critical” jobs to control costs. “The 4,500 is a drop in the bucket for them, particularly when you consider how big they are and their global scope,” Nancy Bush, an analyst at SNL Financial, a bank-research firm in Charlottesville, Virginia, said in a phone interview. “I’d be suspicious that this may be the tip of the iceberg.”
  • Cesium in Baby Mild Shows Risk for Japan Food. Radioactive cesium was found in milk powder in Japan made by a Meiji Holdings Co. unit, causing the shares to fall the most in eight months and raising concern that nuclear radiation is contaminating baby food.
Wall Street Journal:
  • Spain Weighing a Fast, Costly Cleanup of Banks. Spain's incoming prime minister, intent on curing the country's ailing banking sector, is considering cleanup plans that could dwarf the cost of previous efforts, including the creation of a state-funded "bad bank" to acquire toxic assets or a move to force banks to dramatically boost loan-loss reserves, people close to the situation say.
  • U.S. General Seeks Pause in Afghan Pullout. The top military commander in Afghanistan is privately recommending staving off new U.S. troop reductions until 2014, a position that could put him at odds with a White House eager to wind down the 10-year-old war. Gen. John Allen, who commands U.S. and North Atlantic Treaty Organization forces in Afghanistan, has shared his thinking with visiting congressional officials and other delegations in a series of recent closed-door briefings in Kabul, according to participants and other officials.
  • Obama Take Populist Swing. President Says GOP Policies Threaten Middle Class; Republicans Blame Him. Adopting a sharply partisan and populist tone, President Barack Obama on Tuesday painted a picture of the American middle class under siege from wealthy interests, drawing an explicit comparison to the industrial monopolies of an earlier era. In a gamble, Mr. Obama largely put aside optimism about the U.S., a tone he struck at his State of the Union address in January, and instead worked to embrace the anger and skepticism emanating from much of the electorate.
  • The Two Left Coasts. Cuomo and Brown decide to 'occupy' taxpayers.
  • Obama and the Hezbollah Terrorist. Call it the triumph of ideology over national interest and honor. Having dithered for nearly three years, the Obama administration has only a few weeks to bring to justice a Hezbollah terrorist who slaughtered five U.S. soldiers in Iraq in 2007. Unfortunately, it appears more likely that Ali Musa Daqduq will instead be transferred to Iran, to a hero's welcome.
  • NYC Weighs Change in Hedge Funds Tax. New York City is considering a tax change that could hurt the coffers of the already ailing private equity and hedge funds. At the heart of the change is a current tax arrangement that allows expenses related to management of funds, like staff compensation, to be exempt from a 4% unincorporated business tax, a corporate tax on unincorporated entities such as alternative investment management companies.
Business Insider:
Zero Hedge:
Seeking Alpha:
Fox Business:
  • Exclusive: Kiss the MF Global Money Goodbye, Sources Say. Investigators looking into the disappearance of customer funds during the implosion of MF Global last month are coming to the conclusion that the money is likely gone for good, sources with direct knowledge of the matter tell the FOX Business Network.
Washington Times:
  • Chanos: Moody's, S&P Wrong on China. Hedge fund manager James Chanos, who has been a long-time skeptic on the Chinese growth story, is sticking with his gloomy view of ratings agencies Moody's Corp (MCO.N) and Standard and Poor's, saying their rosy outlook on China's debt only bolsters his bearish bet. The famed short-seller said he's puzzled by the readiness of S&P, a division of McGraw-Hill Companies Inc (MHP.N), to downgrade the sovereign debt of countries like the United States and much of Europe while continuing to give a nod of approval to China and its banks. "The rating agencies are getting this one really wrong," Chanos, the founder and president of hedge fund Kynikos Associates, told the Reuters 2012 Investment Outlook Summit. S&P earlier on Tuesday affirmed its long-term rating on China's sovereign debt at AA-minus, just one day after it threatened to downgrade 15 countries in the troubled euro zone, including that of Germany, Europe's biggest economy. Moody's rates China at Aa3, with a positive outlook. For at least a year now, Kynikos, with $6 billion under management, has been shorting shares of Moody's Investor Services and S&P parent McGraw-Hill. Chanos, who specializes in making money when stocks fall in value, said China's housing bubble and opaque political and economic systems merit greater scrutiny and cynicism by the rating agencies. He is shorting mining companies and construction companies that ship raw materials to China and is also betting against shares of some Chinese banks. Short sellers make money by borrowing stocks in the hope that the price will decline, allowing them to buy the shares at a lower price and pocket the difference. Chanos, who founded Kynikos in 1985 with $16 million, gained famed on Wall Street after his prescient call on accounting fraud at Enron a decade ago. Since then, his most well-known target has been China, whose economy he says will eventually crash, driven by an unsustainable real estate bubble. "It is already happening," Chanos said, citing what he said is a drop in new apartment sales across the country of about 40 percent year-on-year. "Everybody is admitting transaction volumes have plummeted. This is what we saw in places like Las Vegas and Florida before the crash; transactions just stopped." "We are short anyone involved in the China real estate boom," he added. Recently, Chanos has been focused on China's banks, which he says have made and continue to make billions in risky loans without sufficient capital. Kynikos is short shares of the Agricultural Bank of China (601288.SS), the country's largest county lender.
  • China Export Outlook Darkens, Officials Say. China's annual rate of export growth slowed in November versus October, vice commerce minister Chong Quan told reporters on Wednesday after an official media briefing. "Export growth in November was even slower than October," Chong said on the sidelines of a news conference releasing a government report on China's long term trade development. China is due to publish November trade data on Saturday, December 10, with economists expecting the numbers to reveal the weakest growth in two years, excluding an anomalous slide in February when the Lunar New Year holiday disrupted activity.
  • Massachusetts Picks 10 More Hedge Fund Managers. Massachusetts, already a big investor with hedge funds, hired 10 more managers on Tuesday as part of its push into direct investments with these types of portfolios. Trustees for the $48 billion state pension fund picked a hometown hedge fund, some funds based in London and others from New York to jointly oversee $245 million. The state pension fund, which began putting money into hedge funds in 2004, will soon have 10 percent of its capital, or $5 billion, invested in these kinds of portfolios.
  • India Suspends Foreign Supermarket Entry After Backlash. India's government has put on hold its decision to open the country's $450 billion supermarket sector to foreign firms such as Wal-Mart Stores Inc(WMT). The decision came after a meeting of ruling coalition and opposition political parties in New Delhi, an attempt by the government to douse political fires over one of Prime Minister Manmohan Singh's boldest reforms in years. "The decision is suspended till the consensus is developed through consultation among various stakeholders," the finance ministry said in a statement, giving no timeframe for the reform to be back on track.
Financial Times:

  • Brazil's Rapid Growth Shudders To A Halt. Brazil’s economy stalled in the third quarter of this year, demonstrating the vulnerability of the world’s emerging market growth engines to the eurozone crisis and the slowdown in the developed world. Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer.
  • BofA(BAC) Less Confident Than Rivals On Dividends. Some of the largest US banks intend to raise dividend payments after the Federal Reserve board completes its latest stress tests on their financial health, with Bank of America a notable absentee from the optimism expressed by its peers.
  • Bank of France Debts Jump Tenfold on Capital Flight. The Bank of France faces surging debts to Germany's Bundesbank and fellow central banks in the EMU system as foreign investors pull large sums out of French accounts. French lenders lost €100bn (£86bn) in short-term deposits in September alone, mostly due to precautionary moves by US money market funds and Asian investors afraid of France's exposure to Italy. "There were huge net capital outflows," said Eric Dor from the IESEG School of Management in Lille. The effects of this capital flight are surfacing on the Bank of France's books under the European Central Bank's so-called "Target2" scheme, an ECB payment network that lets funds move automatically where needed. Liabilities jumped suddenly in late July, rising from €10bn to €98bn by September. Ireland's central bank owes €118bn, Spain's €108bn and Italy's €89bn. The triple-trigger appears to have been a sudden drop in Club Med manufacturing orders, an ECB rate rise, and the EU's July summit – which led to haircuts on Greek bondholders and battered faith in EMU sovereign debt.
  • Bob Dudley Says High Oil Prices Threaten Economic Recovery. Oil prices are so high as to risk stunting global economic growth, according to BP chief executive Bob Dudley. A combination of low supply and high prices could particularly damage the US and have a knock-on effect on the rest of the world, threatening the already fragile economic recovery, he said.
The Standard:
  • JPMorgan(JPM) Forecasts China Property Gloom. Flat prices in first-tier mainland cities may plunge as much as 30 percent next year and investors should consider shedding related equities, JPMorgan warned yesterday. "China's property market is the most volatile one among emerging markets," said Adrian Mowat, chief strategist of Asian and Emerging Market Equity at the US investment house. Mowat said inflows into the mainland property sector and related assets such as stocks have been receding in the past few months due to concerns over sliding home prices. "The correction in the Chinese property market will inevitably drag down the country's gross domestic product growth to 7 percent for the coming six months," he said. Sales revenue of developers has continued to slip. Contracted sales at Country Garden (2007) fell 43 percent in November to 2.5 billion yuan (HK$3.05 billion) from October. Beijing Capital Land (2886) sales slipped 10 percent from October to 1.11 billion yuan in November.
South China Morning Post:
  • Chan Warns European Funds May Exit Overseas Markets. Treasury chief says European banks may need to scale down in the region to shore up their capital bases in the face of tighter rules and S&P review. European banks may withdraw their funding from global markets including Hong Kong because of the European debt crisis, warned Secretary for Financial Services and the Treasury Professor Chan Ka-keung.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.25% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 194.50 unch.
  • Asia Pacific Sovereign CDS Index 152.0 -1.25 basis points.
  • FTSE-100 futures +.50%.
  • S&P 500 futures +.53%.
  • NASDAQ 100 futures +.51%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,250,000 barrels versus a +3,932,000 barrel build the prior week. Distillate inventories are estimated to rise by +1,150,000 barrels versus a +5,526,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +875,000 barrels versus a +213,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.63% versus a -.90% decline the prior week.
3:00 pm EST
  • Consumer Credit for October is estimated at $7.0B versus $7.39B in September.

Upcoming Splits

  • None of note
Other Potential Market Movers
  • The Germany bond auction, Fed's Sarah Bloom Raskin speaking, weekly MBA mortgage applications report, Barclays Tech Conference, CSFB Consumer Conference, (OMI) Investor Day, (OC) Investor Day, (YUM) Investor Conference, (IGT) Investor Conference and the (PH) Investor Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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