Monday, January 30, 2012

Monday Watch

Weekend Headlines

  • Greek Debt Talks Risk Derailing EU Summit's Crisis-Fighting Plan. European Union leaders gather for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis. EU chiefs arrive in Brussels about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings. Efforts to hold the 17-member euro area together with bolstered fiscal rules and a stronger firewall are colliding with stalled progress in Greece, where the crisis began in 2009. To prevent a financial collapse, Greek bondholders have been pushed to cede more ground after agreeing in October to take a 50 percent cut in the face value of more than 200 billion euros ($263 billion) of debt. “The fact we’re still at the beginning of 2012 talking about Greece is a sign this problem hasn’t been dealt with,” U.K. Chancellor of the Exchequer George Osborne said at the World Economic Forum in Davos, Switzerland. The summit follows warnings at the gathering that ended yesterday in Davos that it’s time to end the region’s debt crisis and that measures aimed at simply containing the turmoil are no longer enough. The euro economy is set to contract by 0.5 percent this year, according to the median of 19 economist forecasts compiled by Bloomberg.
  • Euro-Area Debt Sales Top $29 Billion in Week as Fitch Threatens Sentiment. European nations including Italy, Belgium and Spain sell no less than 22 billion euros ($29 billion) of securities this week as credit-rating cuts risk upending optimism the region’s debt crisis is being contained. Italy auctions as much as 6 billion euros of five- and 10- year debt today, along with securities due in April 2016 and March 2021. Belgium sells as much as 3 billion euros of bills tomorrow, with Spain, Portugal, Germany and France issuing 13 different maturities in the five days.
  • Ackermann Says Greek Default Would Be 'Playing With Fire'. The economic and political consequences of Greece defaulting instead of reaching a voluntary debt-restructuring deal are being underestimated, Deutsche Bank AG Chief Executive Officer Josef Ackermann said. “Default risk is much higher than what people normally take into account,” Ackermann said today in an interview at the World Economic Forum in Davos, Switzerland. “You see already that some markets are nervous about certain countries,” he said. “That is playing with fire if you think that a default will have no impact.” As Greece's creditors continue negotiations with the country's government as well as the International Monetary Fund, European Union, and European Central Bank over the terms of a restructuring, some investors and financiers are downplaying the consequences of a default. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said this week that it would not be a “disaster,” Dow Jones reported, citing an interview with CNBC. “They are underestimating the collateral damages and they are underestimating the risk of contagion,” Ackermann, 63, said today. “If we have a default in the euro zone going forward, this will reduce somewhat the trust and confidence in the euro system and so, in that sense, we should do everything also from a historic and political perspective to prevent a default.”
  • Greek Debt Deal May Mean Little Relief for Portugal: Euro Credit. The Greek debt swap negotiations that may produce relief for Athens are fueling concerns in Lisbon where an agreement would make it more likely Portuguese investors would be next in line to accept a loss. European leaders have said a Greek accord where investors take a 50% writedown in the face value of their bonds is unique and won't be applied to other nations struggling to tame rising debts. Holders of Portuguese securities are skeptical, with the yield on the nation's 10-year bonds rising 42 basis points to a euro-era record of 15.22% on Jan. 27. "Portugal's debt and lack of growth is very similar to Greece," Yannick Naud, who manages $150 million at Glendevon King Asset Management, said in an interview. "Its bonds are falling because it's very obvious to everyone that if there's a haircut for Greece, there might well be a haircut for Portugal too."
  • Merkel Stopped by Kauder on ESM, EFSF Merger Plan, BamS Says. Volker Kauder, the floor leader for German Chancellor Angela Merkel’s Christian Democrats, blocked a plan to put unused funds from the euro region’s financial backstop into its permanent successor, Bild am Sonntag reported. Merkel wanted to endorse combining the lending power of the European Financial Stability Facility and the 500 billion-euro ($659 billion) European Stability Mechanism, the euro region’s future permanent financial backstop. Christian Democrat members of parliament opposed the move because Germany then would be liable for more than the 211 billon euros originally approved, prompting Merkel to drop the plan, BamS said, citing parliament members it didn’t name.
  • Issing Doesn’t Rule Out Euro-Zone Exits, Neue Zuercher Reports. Otmar Issing, the former chief economist of the European Central Bank, said he wouldn’t rule out exits from the euro area, Neue Zuercher Zeitung reported, citing an interview. “The Greek case is obvious,” Issing told the newspaper. He added that the risk of contagion has fallen because countries like Ireland and Spain escaped “the line of fire” because of reforms. For the highly-indebted nations there is “no alternative” to fiscal consolidation, he said, Neue Zuercher reported.
  • German Lawmakers Reject Increasing Aid for Greece, Spiegel Says. Lawmakers from German Chancellor Angela Merkel’scoalition rejected increasing aid for Greece, Der Spiegel said, citing members of the parliament in Berlin. There can be no further aid if Greece doesn’t implement the agreed adjustment programs, the magazine said, citing Horst Seehofer, chairman of the Christian Social Union, the Bavarian sister party of Merkel’s Christian Democratic Union. Greece must show evidence that it’s serious about implementing structural reforms, the magazine cited Rainer Bruederle, head of the Free Democratic Party’s group in parliament, as saying. All Greek parties must show the desire for fundamental change because there is increasing “annoyance” in Berlin, Der Spiegel said, citing CDU lawmaker Gunther Krichbaum, head of the European Affairs committee.
  • Asian, Middle Eastern Holders Cut EFSF Bond Purchases, FT Says. Asian and Middle Eastern money managers have reduced purchases of new European Financial Stability Fund bonds at a faster pace than other investors, the Financial Times reported, citing data from CreditSights Inc. The proportion of the bonds bought by investors including central banks and sovereign wealth funds has fallen to 17 percent this month from 54 percent in June, the FT said. Asian and Middle Eastern investors purchased 12 percent of the bonds compared with 50 percent in June, according to the report.
  • France May Raise EU1 Bln From Tax on Stock Trades, Figaro Says. France may raise 1 billion euros ($1.3 billion) annually from a transaction tax on stock trades, Le Figaro reported, without saying where it got the information. The 0.1 percent tax would also cover the most standardized derivatives products, while bonds and transactions on capital instruments would not be taxed, Le Figaro said. The tax project will be presented at a Feb. 8 French government cabinet meeting, according to the report.
  • China Signals Limited Loosening as PBOC Bucks Forecast. China (CNGDPYOY) signaled caution toward more monetary loosening by holding off on a reduction in bank reserve requirements that some economists had predicted would come before a week-long holiday ending Jan. 28. “The central bank aims to ease policies prudently and pace loan growth at the beginning of the year so as to avoid a replay of the credit explosion in 2009 and 2010 and prevent inflation from rebounding,” said Lu Zhengwei, a Shanghai-based economist at Industrial Bank. Lu now sees a reserve-ratio cut in February to add liquidity and spur growth after the reverse-repurchase contracts expire.
  • China's Stocks Decline After Weeklong Holiday. China’s stocks fell after the government signaled caution toward further easing of monetary policy by holding off on a cut in bank reserve requirements and the U.S. economy expanded less than forecast. China Vanke Co. (000002) and Poly Real Estate Group Co., the nation’s biggest developers, slid more than 2 percent after the Beijing Morning Post said home sales in the capital dropped during the weeklong Chinese New Year holiday. Liquor maker Kweichow Moutai Co. (600519) paced declines for consumer stocks after retail sales growth slowed last week. Zijin Mining Group Co. led gains for gold producers after bullion prices jumped. “There was no reserve-ratio cut during the holiday so liquidity will still be tight,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “It looks like the government isn’t in a hurry to release too much liquidity into the market as opposed to the market expectation of an immediate and aggressive relaxation.”
  • Simpson Says 'Terrified' Obama Walked Away From Deficit Issue. President Barack Obama “walked away” from his bipartisan U.S. deficit-cutting commission’s plan “because he knew he’d be torn to bits,” said former Republican Senator Alan Simpson, who was co-chairman of the panel. Obama is “terrified” of the deficit issue, Simpson said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “He didn’t deal with it” in his annual State of the Union address to Congress on Jan. 24.
  • SEC Probes Deutsche Bank CDO Deal With Paulson, Spiegel Says. The U.S. Securities and Exchange Commission is investigating a collateralized debt obligation transaction in which Deutsche Bank AG (DBK) allowed U.S. hedge fund Paulson & Co. to select mortgage-backed securities, Der Spiegel reported. For a CDO called “START,” the bank allowed Paulson to bet against the securities without telling other investors, the German magazine said on its website. Goldman Sachs settled a suit by the SEC for $500 million over a similar transaction, according to Der Spiegel. Like other lenders, Deutsche Bank is faced with lawsuits brought forward by retail and institutional clients who have lost money in the financial crisis, Deutsche Bank spokesman Frank Hartman said when contacted by Bloomberg News. The lender look into the claims carefully and, if they prove wrong, will defend itself vigorously, he said.
  • Oil Drops a Second Day Before European Leaders Meet for Debt Discussions. Oil declined for a second day in New York before a meeting of European Union leaders to discuss the region’s debt crisis, which has slowed the economy and threatened to curb fuel consumption.
  • ABB Nears Deal for Thomas & Betts for About $4B. ABB Ltd. (ABBN) is near an agreement to buy Thomas & Betts Corp., a maker of electrical connectors, for about $4 billion in cash, a person with knowledge of the plan said. ABB, based in Zurich and the world’s largest provider of power-transmission gear, may announce a deal as soon as today, said the person, who spoke on condition of anonymity because the negotiations are private. The talks for Thomas & Betts, whose market value was $3.02 billion based on its Jan. 27 closing price of $57.95 a share, may still break down.
  • StanChart's Bindra Sees Hong Kong Hyperinflation Risk. The U.S. Federal Reserve’s pledge to keep interest rates low through at least late 2014 creates a risk of hyperinflation in Hong Kong, said Jaspal Bindra, Standard Chartered Plc (STAN)’s chief executive officer for Asia. A currency peg to the dollar means the city won’t be able to raise benchmark borrowing costs as China’s expansion fuels growth and price gains, Bindra told journalists on Jan. 27 at the World Economic Forum in Davos, Switzerland. “It will have a very profound impact in Hong Kong,” he said. “If you have near-zero interest rates when their inflation is at over 6 or 7 percent given the China effect, and their growth is, also thanks to China, at 6 or 7 percent, you’re looking for hyperinflation.”
  • If Carried Interest Irks You, You Don't Get It: William Dantzler. Do we really want a tax law in which only people who already have money can earn a capital gain? And, if earning a capital gain requires an investment, then how much? Does it have to be a big investment? Can it be borrowed from the other partners? Isn’t a carried interest in effect just a loan from the moneyed partners? These are difficult questions that affect the entire structure of capital-gains taxation -- not just carried interest. It would be very hard to draw a fair line between the type of private-equity investment that is deserving of capital gain treatment and that which is not. It is perhaps not an accident that the carried interest discussion is taking place in the political arena -- over Mr. Romney’s tax returns -- rather than the worlds of tax law or tax policy, and that the advocates of taxing carried interest at higher rates are not tax experts who understand the complexity of the issue and the difficulty of drawing fair lines.
  • Goldman Sachs(GS) Among Banks Fighting to Exempt Half of Swaps Books. More than half of the derivatives- trading business of Goldman Sachs Group Inc. (GS), Morgan Stanley and three other large banks could fall largely outside the Dodd- Frank Act if they succeed in lobbying regulators to exempt their overseas operations, government records show. The banks have met with regulators, testified to Congress and filed dozens of letters contending that they will suffer a competitive disadvantage if the regulations apply to their foreign arms. Banking lobbyists have been gaining traction with their argument that a combination of U.S. supervision of their holding companies and foreign supervision of their operations abroad is sufficient to oversee risk to the financial system. While the banks haven’t publicized how much of their swaps business is overseas, they file quarterly statements to the Federal Reserve. A Bloomberg News analysis of the filings shows that Goldman Sachs had 62 percent of its $134 billion in fair- value derivatives assets and liabilities in non-U.S. branches or subsidiaries for international banking as of Sept. 30, while 77 percent of Morgan Stanley (MS)’s $101 billion was in non-U.S. operations. If overseas operations aren’t subject to U.S. rules or equivalent regulation by other nations, it could impede the goal of preventing another credit crisis, Darrell Duffie, professor at Stanford University’s Graduate School of Business, said in a telephone interview. “Not only is that neglectful from a viewpoint of systemic risk as it sits today, but it’s also an incitement to move the risk abroad,” Duffie said.

Wall Street Journal:
  • Japanese Debt Concerns Rise. Default-Insurance Costs Climb as Raters Weigh Downgrades; 'Absurdly Unsustainable'. Jitters from Europe's sovereign-debt crisis are now touching Japan, a country with a long-calm bond market despite fiscal deficits far larger than those of Greece or Italy. In recent weeks, the cost of insuring against default on Japanese government bonds—a measure of perceived credit risk—has increased sharply, nearing the historic peak at the height of the Greek debt crisis in October. The price for default insurance, through derivatives known as credit-default swaps, exceeds levels seen last March, immediately after natural disasters and a nuclear crisis darkened Japan's outlook.
  • Law Firms Keep Squeezing Associates. Law firms are finally starting to recover from the recession, but they aren't taking their young lawyers along for the ride.
  • Citi(C) Chairman Parsons Considers a Departure. Richard D. Parsons, who as chairman of Citigroup Inc. helped steer the bank through its near-death experience in the financial crisis, is considering stepping down after three years in the post, said people familiar with the situation.
  • Money From MF Global Feared Gone. Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation. As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation.
  • The Solyndra Rule. Another green subsidy favorite goes belly up. President Obama keeps pushing the (Warren) Buffett rule that nobody making more than $1 million a year should pay less than 30% in taxes. He'd do better by the economy if he adopted a Solyndra Rule, in which no company touting unproven and expensive technology should receive millions in taxpayer subsidies.
Business Insider:
Zero Hedge:


  • India Won't Cut Iranian Oil Imports: Finance Minister. India, the world's fourth-largest oil consumer, will not take steps to cut petroleum imports from Iran despite U.S. and European sanctions against Tehran, its finance minister said on Sunday during a visit to Chicago. The United States wants buyers in Asia, Iran's biggest oil market, to cut imports to put further pressure on Tehran to rein in its nuclear ambitions. Washington suspects Iran of trying to make nuclear weapons, but Tehran says its nuclear program is for peaceful means. India, which imports 12 percent of its oil from the Islamic Republic, cannot do without Iranian oil, the official said. "It is not possible for India to take any decision to reduce the imports from Iran drastically, because among the countries which can provide the requirement of the emerging economies, Iran is an important country amongst them," India Finance Minister Pranab Mukherjee told reporters in Chicago at the end of a two-day visit aimed at wooing U.S. investment.
  • With $100 a Barrel Oil, Why Isn't Green Tech Better? The demand for energy is expected to double in the next 40 years globally, as populations grow and access to electricity increases, yet a large-scale, safe alternative to fossil fuels has yet to be built.
  • China's Wen Says Government Debt Risk 'Controllable'. China's Premier Wen Jiabao said the nation's government debt is at an "overall safe and controllable" level, that funding for key projects would be ensured and that applying the brakes to the problem would be done in a way to avoid systemic risks. Investors have been worried by the scale of the debts built up by China's local governments, which some fear could threaten the stability of the banking system.
LA Times:
  • Occupy Oakland Arrests Reach 400; City Hall Vandalized. Officials surveyed damage Sunday from a volatile Occupy protest that resulted in hundreds of arrests the day before and left the historic City Hall vandalized after demonstrators broke into the building, smashed display cases, cut electrical wires and burned an American flag. Police placed the number of arrests at about 400 from Saturday's daylong protest — the most contentious since authorities dismantled the Occupy Oakland encampment late last year. Mayor Jean Quan condemned the local movement's tactics as "a constant provocation of the police with a lot of violence toward them" and said the demonstrations were draining scarce resources from an already strapped city. Damage to the City Hall plaza alone has cost $2 million since October, she said, about as much as police overtime and mutual aid. Oakland has logged five homicides since Friday, and Police Chief Howard Jordan said the law enforcement "personnel and resources dedicated to Occupy reduce our ability to focus on public safety priorities."
  • Syrian Army Cracks Down on Protests in Damascus Suburbs. Syrian tanks and troops moved Sunday to crush resistance in the rebellious suburbs of Damascus, opposition groups reported, bringing the bloody battle that has ravaged the nation for months to the doorsteps of the nation's capital. The fierce fighting reported outside Damascus was the latest sign that Syria's armed insurgency — long concentrated in provincial hotbeds of revolt like Homs, Hama and Dara — has now reached the edge of the city from which the Assad family has ruled Syria in autocratic fashion for more than 40 years. That reign now appears threatened as never before, raising the prospect of a revamped geopolitical alignment in the heart of the volatile Middle East. More than 250 people have been killed in clashes nationwide since Thursday, according to the Local Coordination Committees, an opposition coalition. The group reported at least 64 deaths on Sunday alone.
NY Times:
  • U.S. Banks Tally Their Exposure to Europe's Debt Maelstrom. After a hurricane, homeowners check nervously to see if their insurance will cover all of their damages. With the European financial crisis still threatening a trail of defaults, United States banks are betting that their insurance is going to pay out. Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro currency zone, according to a New York Times analysis of the banks’ financial disclosures.
USA Today:
  • Apple(AAPL) Makes Move Into Offices. Microsoft's(MSFT) corporate Windows business is losing ground to Apple. Apple is hiring sales executives across the U.S. to get more of its products into Fortune 1000 companies.
  • Iran Vows to Stop "some" Oil Sales as Inspectors Visit. Iran sent conflicting signals in a dispute with the West over its nuclear ambitions, vowing to stop oil exports soon to "some" countries but postponing a parliamentary debate on a proposed halt to crude sales to the European Union. The Islamic Republic declared itself optimistic about a visit by U.N. nuclear experts that began on Sunday but also warned the inspectors to be "professional" or see Tehran reducing cooperation with the world body on atomic matters.
Financial Times:
  • Successful Short Selling - An Effective But Rare Skill. Returns from short bias funds over the past few years do not make particularly happy reading as shorting only works in particularly dire years. In 2008, for instance, the strategy returned 28 per cent to investors, according to HFR. But it lost investors 24 per cent in 2009 and 18 per cent in 2010, compared with 10 per cent gains for the average hedge fund investor. It is little wonder that, despite the common perception that hedge funds are obsessed with shorting, in reality there are few specialists on the short side.
  • Deutsche Bank Targets Problem Assets. Deutsche Bank is preparing to launch a fund to snap up investors’ illiquid or damaged holdings in hedge funds that have failed to recover since the financial crisis. The bank estimates that, three years after the collapse of Lehman Brothers, investors are sitting on between $80bn and $100bn of hard-to-sell hedge fund assets that could prove lucrative in the coming years.
  • Western Industrials Feel A Chinese Burn. Western industrial companies have seen a slowdown in some markets in China as efforts to cool the world’s second largest economy have hit demand for capital goods and products linked to the construction industry. China was until recently a source of rapid growth for US and European manufacturers, helping to offset weak sales in developed countries.
Le Monde:
  • French President Nicolas Sarkozy plans to announce tomorrow the value-added tax will be increased by 1.6 percentage points to 21.2%.
  • China has no plans to invest local pensions in the market "temporarily," citing Yin Chengji, spokesman of the Ministry of Human Resources and Social Security.
Caixin Online:
  • China may impose a 10% tax on profits from stock investment by qualified foreign institutional investors for the first time since the funds were set up nine years ago.
Beijing Morning Post:
  • Home sales in China's capital Beijing fell to zero during the week-long Lunar New Year holiday, the first time in three years that no sales were recorded for a week, citing data from the local government. Average home prices dropped 23.6% from a year earlier as of Jan. 27.
Tehran Times:
  • Iran said it will install its first 20% nuclear fuel plates at the Tehran Research Reactor within a month, citing Foreign Minister Ali Akbar Salehi.
Weekend Recommendations
  • Made positive comments on (YUM), (COH) and (CLF).
  • Made negative comments on (JAH) and (SHLD).
Night Trading
  • Asian indices are -1.50% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 183.50 +3.0 basis points.
  • Asia Pacific Sovereign CDS Index 145.75 unch.
  • FTSE-100 futures -.28%.
  • S&P 500 futures -.50%.
  • NASDAQ 100 futures -.50%.
Morning Preview Links

Earnings of Note
  • (WEN)/.04
  • (TNB)/.90
  • (WWW)/.45
  • (GCI)/.68
  • (MCK)/1.38
  • (GGG)/.51
  • (PCL)/.39
  • (SLG)/.01
  • (HOLX)/.32
Economic Releases
8:30 am EST
  • Personal Income for December is estimated to rise +.4% versus a +.1% gain in November.
  • Personal Spending for December is estimated to rise +.1% versus a +.1% gain in November.
  • The PCE Core for December is estimated to rise +.1% versus a +.1% gain in November.

10:30 am EST

  • Dallas Fed Manufacturing Activity for January is estimated to rise to .5 versus a reading of -3.0 in December.
Upcoming Splits
  • (CMN) 3-for-2
  • (TJX) 2-for-1
Other Potential Market Movers
  • None of note
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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 week.

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