Wednesday, January 18, 2012

Wednesday Watch

Evening Headlines

  • World Bank Cuts Global Growth Outlook. The World Bank cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico. The Washington-based institution said the world economy this year will grow 2.5 percent, down from a June estimate of 3.6 percent. The World Bank sees the euro area contracting 0.3 percent in 2012, compared with a previous estimate of 1.8 percent growth. The U.S. outlook was cut to an expansion of 2.2 percent from 2.9 percent. “Even achieving these much weaker outturns is very uncertain,” the World Bank said in its Global Economic Prospects report released today. “The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome.” The World Bank urged developing economies to “prepare for the worst” as it sees a continued risk for the European turmoil to turn into a global financial crisis reminiscent of 2008. Euro-area industrial production declined for a third straight month in November, a report last week showed, adding to signs the economy failed to expand in the fourth quarter as leaders struggled to quell the region’s fiscal crisis. The revision is the largest since January 2009, when the World Bank cut its global estimate for that year by 2.1 percentage points. “Despite the significant measures that have been taken, the possibility of a further escalation of the crisis in Europe cannot be ruled out,” the World Bank said. “Some of the big developing countries that have been the motor of growth in the post 2008-2009 period now have slowed,” Andrew Burns, who heads the World Bank’s global macroeconomics team, told reporters on a conference call.
  • Spain Offers Crisis Credit Line for Liquidity Aid to Cash-Starved Regions. Spain’s central government will provide a credit line and other liquidity measures to ease pressure on cash-strapped regions while demanding tighter deficits in return, Budget Minister Cristobal Montoro said. The government will offer the loan aid to help regions settle bills for suppliers via the Official Credit Institute, and give states more time to make payments due to the central administration, Montoro said. He spoke after meeting regional finance chiefs late yesterday following Prime Minister Mariano Rajoy’s pledge to “rescue” states with liquidity problems. The Spanish government is seeking ways to skirt a law forbidding direct bailouts of the 17 semi-autonomous regions after they caused Spain to miss its budget-deficit target last year. The regions control more than a third of Spain’s public spending, including health and education. “We’re all in the same boat,” Montoro told reporters in Madrid after the meeting. “I won’t have any qualms about making demands,” of the regions in return for help, he said, without giving details.
  • China Dec. Home Prices Post Worst Performance. China’s December home prices posted their worst performance last year, with only two of the 70 cities tracked posting gains, as the government reiterated its plans to maintain housing curbs. Prices in 52 of 70 cities monitored by the government declined from the previous month, the National Statistics Bureau said in a statement on its website today. New home prices in the nation’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou declined for a third month, it said. The government said last month it won’t back away from curbs on the real-estate industry, with the financial center of Shanghai and the capital of Beijing among Chinese cities that have said they will continue to impose restrictions on home purchases this year.
  • Philadelphia Taxpayers Lost $331 Million on Swaps, Report Says. Philadelphia and its school district have lost a combined $331 million on interest-rate derivatives known as swaps, and the city stands to lose $244 million more, the Pennsylvania Budget and Policy Center said in a report. Losses came in the form of net interest payments and cancellation fees related to derivatives negotiated with banks that included Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc., the Harrisburg-based nonprofit organization said today in the report.
  • Covenant-Lite Debt May Present Risk in Downturn, Moody's Says. Investors who purchased covenant- lite loans may see value “drain away” if the economy deteriorates and credit markets tighten, according to Moody’s Investors Service. Subordinated debt holders to companies with covenant-lite loans would be hit the hardest, while actual lenders would be protected by their more senior position in the capital structure, the ratings company said in a report published yesterday. In the last downturn, covenant-lite loans, or debt carrying no financial maintenance requirements, allowed many companies to avoid default and benefit from the stabilization of the U.S. economy in late 2009 amid injections of liquidity by the Federal Reserve, according to the report.
  • Google(GOOG) Plans Home Page Protest Against U.S. Piracy Measures. Google Inc. will place a link on its home page tomorrow protesting anti-piracy measures in the U.S. Congress, joining other Internet companies demonstrating against the Hollywood-backed legislation. Google, owner of the world's most popular search engine, and Facebook Inc. are among companies opposing House and Senate bills they say they will hurt the growth of the U.S. technology industry. Wikipedia, the online encyclopedia where users contribute entries, said it will shut the English version of its website for 24 hours tomorrow to protest the measures. "We oppose these bills because there are smart, targeted ways to shut down foreign rogue websites without asking American companies to censor the Internet," Samantha Smith, a Google spokeswoman, said in an e-mail today.
  • IMF to Explore Options to Boost Lending Resources, Lagarde Says. The International Monetary Fund’s staff will look into options to increase the fund’s lending power, Managing Director Christine Lagarde said, following a discussion among the institution’s board of directors. Officials from the Group of 20 nations have been considering increasing IMF resources, currently at about $385 billion, as a way to support a world economy threatened by the European debt crisis. Euro-region nations have pledged to channel 150 billion euros ($191 billion) to the IMF, while the U.S. has said it has no plans to make bilateral loans to the Washington-based institution.
  • BHP(BHP) Iron Ore Production Rises to Record, Beating Estimates. BHP Billiton Ltd. (BHP), the world’s largest mining company, said second-quarter iron ore production rose a better-than-estimated 22 percent to a record, driven by mine, rail and port expansions in Western Australia. Output from the company’s biggest earning unit was 41.1 million metric tons in the three months ended Dec. 31, compared with 33.7 million tons a year earlier, Melbourne-based BHP said today in a statement. That compares with RBC Capital Market’s forecast for 35.7 million tons and UBS AG’s 38.9 million tons. BHP, which today raised its Australian full-year iron ore output guidance, and Rio Tinto Group are forging ahead with expansions of their mines to supply steel mills in China, the world’s biggest buyers.
  • Christie Seeks 10% Income-Tax Cut for New Jersey Residents. New Jersey Governor Chris Christie proposed reducing income-tax rates for every state resident by 10 percent to provide relief from the "burden that has strangled our families and forced many to move away." "Today, because we have put our fiscal house in order, we can budget for our priorities and give tax relief to all of our people," Christie, a first-term Republican, said during his State of the State speech. "Tax relief that will lead to better lives for our citizens and more jobs for our state."
  • America's Dirty War Against Manufacturing(Part 1): Carl Pope. “I’d love to make this product in America. But I’m afraid I won’t be able to.” My host, a NASA engineer turned Silicon Valley entrepreneur, has just conducted a fascinating tour of his new clean-energy bench-scale test facility. It’s one of the Valley’s hottest clean-technology startups. And he’s already thinking of going abroad. “Wages?” I ask. His dark eyebrows arch as if I were clueless, then he explains the reality of running a fab -- an electronics fabrication factory. “Wages have nothing to do with it. The total wage burden in a fab is 10 percent. When I move a fab to Asia, I might lose 10 percent of my product just in theft.” I’m startled. “So what is it?” “Everything else. Taxes, infrastructure, workforce training, permits, health care.
Wall Street Journal:
  • Calpers Downsizes Housing Portfolio. Calpers, the giant California pension fund, is dumping one of its last major housing investments at a big loss. In a major step toward winding down a two-decade program as the pension world's biggest player in the U.S. housing market, Calpers is selling a portfolio of 28 housing communities to a partnership between San Diego-based developer Newland Real Estate Group LLC and an affiliate of Japan's largest home-building company, Sekisui House Ltd.
  • Apple(AAPL) Macs Land on More Corporate Desks. Inside General Electric(GE), Employees Can Now Choose Apple Over Windows PCs. One Hitch—Most Don't Know They Can.
  • Obama Brings Back the Constitution. Thanks to his executive overreach, Americans take a renewed interest in our fundamental governing document.
  • New, Old Media Battle Over Net Rules. The passage of antipiracy legislation affecting the Internet, long considered likely, is no longer so certain.
  • Italian Captain: 'We Abandoned the Ship'. Voice Recordings Portray Coast Guard Ordering Him Back Aboard, as Passengers Scramble to Survive.
Fox News:
  • 'Occupy' Protesters Suspected of Throwing Smoke Bomb Over White House Fence. The Secret Service was responding Tuesday night to an escalating protest that may have involved one or more smoke bombs being thrown over the White House fence. An estimated 1,000 protesters have gathered. No arrests have been made, but authorities are on alert. The Secret Service also deployed a robot to check out the devices on the North Lawn. No one is currently allowed to leave through the North Gate, but those with the right access can go through the White House and leave through the South Gate.
Business Insider:
Zero Hedge:
NY Times:
  • Greek Premier Says Creditors May Be Forced to Take Losses. Taking direct aim at hedge funds and other private holders of Greece’s debt, Prime Minister Lucas Papademos says he will consider legislation forcing the creditors to take losses on their holdings if no agreement can be reached in critical negotiations scheduled to resume Wednesday.
Rasmussen Reports:
  • ECB Mulling Alternatives to Bond-Buy Plan: Nowotny. The European Central Bank is exploring alternatives to its controversial bond-purchase program but has yet to decide on any replacement policy tool, ECB Governing Council member Ewald Nowotny told a German website in comments published on Tuesday. Nowotny, who is also Austria's national central bank chief, said there was skepticism on the policymaking Council about the bond-buy program "because we fear the market imperfections that we want to correct with this could emerge in another area." "We are discussing possible alternatives. But this discussion is not so far developed that we can dispense with the SMP (bond-buying program)," Nowotny told the Wall Street Journal's German website. He declined to say what direction the talks were heading in, adding only: "That is a discussion that encompasses the whole monetary policy spectrum." "The need for some type of intervention is widely recognized," he said. On one hand, the ECB is under political pressure to take more aggressive action to put an end to Europe's debt crisis. On the other, many voices inside Germany, led by the Bundesbank, oppose both bond-buying and anything beyond that. The Bundesbank feels the bond-buying program - never mind the outright "quantitative easing" that many economists have called for - takes the ECB into the realm of fiscal policy and away from its core role of delivering stable prices. The ECB more than tripled its bond purchases last week to the highest level since late November, spending 3.77 billion euros as a calm start to the New Year gave way to an intensification of the euro zone debt crisis. The bond purchases face renewed scrutiny after Standard & Poor's mass euro zone rating downgrades on Friday, though the ECB has resisted political pressure from within and beyond the euro zone to step up the program on a major scale.
  • Yahoo(YHOO) Co-Founder Yang Resigns. Yahoo Inc co-founder Jerry Yang has quit the Internet company he started in 1995, appeasing shareholders who had blasted the Internet pioneer for pursuing an ineffective personal vision and impeding investment deals that may have transformed the struggling company.
  • Asian Hedge Funds Down in Dec., Capping 2011 Slump. Asian hedge funds tumbled 1.09 percent in December, further depressing returns in 2011, the industry's first negative year in the region since the 2008 financial crisis, figures showed on Wednesday. Performance in Asia ex-Japan last year tumbled 12.7 percent, compared with a decline of 6.46 percent in Europe, a drop of 1.27 percent in Japan and a 0.97 percent fall in North America, research firm Eurekahedge said in a report. Latin American hedge funds posted gains of 2.39 percent last year, buoyed by high interest rates in Brazil, the report said. The Eurekahedge Hedge Fund Index, which measures returns globally, dropped 4.15 percent for the year, the second-worst return since it was launched in 2000.
Financial Times:
  • Portugal Moves Into Default Territory. Portugal is trading in default territory after investors offloaded the country’s bonds this week amid rising fears of contagion. Worries are mounting that the private sector and Greece will fail to agree a restructuring package for Athens’ debt.
  • Hungary Faces Ruin as EU Loses Patience. The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible.
  • Greece Prepares to Give Way to Banks to Secure Debt Deal. Greek government and international officials have signalled they will yield to the demands of banks and hedge funds in order to secure a bond deal before the end of the week. Amid fresh warnings of Greek default, Charles Dallara, director of the Institute of International Finance (IIF), flew from Washington to Athens on Tuesday night to try to agree a deal before the European finance minister's summit on Monday. Sources close to the bondholders told The Daily Telegraph there was "enough movement" from officials representing Greece, the International Monetary Fund (IMF), European Central Bank (ECB) and the European Union (EU) to persuade Mr Dallara to meet with them. Bondholders are resisting pressure to take losses of more than 50pc on their bonds. They are also pushing for higher coupons on fresh Greek paper.
  • Plans to leverage the EFSF to as much as EU1.5t from EU440b "are practically dead", citing sources close to the talks.
Passauer Neue Presse:
  • Debt, Not S&P Ratings the Euro-Area's Problem, DIHK Tells Paper. Calls in Europe for the creation of a new rating agency after S&P downgraded nine states in the single currency area miss the point, Germany's DIHK chamber of industry group said. Setting up such an agency may create more transparency in the rating process but "wouldn't change the core problem of the debt crisis," citing DIHK Chief Economist Alexander Schumann.
Chosun Ilbo:
  • North Korea shelled the South Korean border island Yeonpyeong in November 2010, knowing that the South wouldn't retaliate for fears that tensions would affect the South Korean economy, citing e-mails between N. Korean leader Kim Jong Un's older brother, Kim Jong Nam, and Japanese journalist Yoji Gomi.
China Securities Journal:
  • The "downward trend" for China's economy has slowed and monetary policy will keep a "stable tone," China Securities Journal says in an editorial today. There may not be an interest -rate cut in the first quarter, according to the editorial.
Evening Recommendations
  • Rated (RL) Outperform, target $168.
Night Trading
  • Asian equity indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 200.0 -2.5 basis points.
  • Asia Pacific Sovereign CDS Index 156.50 -3.5 basis points.
  • FTSE-100 futures -.13%.
  • S&P 500 futures +.25%.
  • NASDAQ 100 futures +.29%.
Morning Preview Links

Earnings of Note
  • (SCHW)/.13
  • (STT)/.94
  • (PNC)/1.49
  • (USB)/.63
  • (NTRS)/.68
  • (BK)/.53
  • (GS)/1.23
  • (FAST)/.29
  • (FFIV)/1.00
  • (KMP)/.61
  • (XLNX)/.37
  • (EBAY)/.57
  • (FUL)/.59
  • (SLM)/49
  • (KMI)/.29
Economic Releases
8:30 am EST
  • The Producer Price Index for December is estimated to rise +.1% versus a +.3% gain in November.
  • The PPI Ex Food & Energy for December is estimated to rise +.1% versus a +.1% gain in November.
9:00 am EST
  • Net Long-Term TIC Flows for November are estimated to rise to $40.0B versus $4.8B in October.

9:15 am EST

  • Industrial Production for December is estimated to rise +.5% versus a -.2% decline in November.
  • Capacity Utilization for December is estimated to rise to 78.1% versus 77.8% in November.

10:00 am EST

  • The NAHB Housing Market Index for January is estimated to rise to 22.0 versus 21.0 in December.

Upcoming Splits

  • (EL) 2-for-1
Other Potential Market Movers
  • The weekly retail sales reports, weekly MBA Mortgage Applications report, (SPW) Investor Meeting and the CIBC Institutional Investor Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and automaker 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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