Tuesday, February 28, 2012

Tuesday Watch


Evening Headlin
es
Bloomb
erg:
  • Greece Cut to Selective Default by S&P. Greece’s credit ratings were cut to “Selective Default” by Standard & Poor’s after it negotiated the biggest sovereign debt restructuring in history. S&P dropped Greece’s rating from CC, two levels above default, after the government added clauses to its debt designed to mop up investors unwilling to take part in the exchange, the New York-based company said in a statement today. The downgrade follows a reduction last week by Fitch Ratings to C, while Moody’s Investors Service has said it will cut the nation to its lowest rating. Greece published the formal offer document last week for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so-called collective action clauses to discourage holdouts, the use of which would trigger credit- default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.
  • ECB Special Lender Status Threatens Bond Backlash: Euro Credit. The ECB's willingness to ride roughshod over bondholder rights risks pushing up borrowing costs for indebted governments by making investors less willing to lend. The ECB swapped about $67 billion of Greek bonds for new notes, identical to the old ones in every way save for their identification numbers, according to Moritz Kraemer, head of sovereign ratings at S&P. The switch exempts the central bank from the largest sovereign restructuring in history as Greece rewrites the terms of its securities to ensure lenders forgive 53.5% of the debt. "Bondholders are effectively being subordinated," said Saul Doctor, a credit strategist at JPMorgan Chase & Co. in London. "Foreign investors are going to be less willing to buy sovereign bonds when the ECB can exert itself."
  • Rajoy Faces Tougher Budget Task This Year After Spain's 2011 Deficit Miss. Spain missed its 2011 deficit target by a wider-than-estimated margin, adding to the task facing the government to meet budget targets as the economy shrinks. The deficit narrowed to 8.5 percent of gross domestic product from 9.3 percent in 2010, overshooting the government’s previous estimate of around 8 percent, and a European Union target of 6 percent, Budget Minister Cristobal Montoro said in Madrid late yesterday. “We are going to promote budget stability as soon as possible with a credible path,” Montoro said. “We are in a recession and that must be recognized, which means implementing a budget policy that’ll lift us of this recession.”
  • Credit Swaps Panel Asked If Greek Parliament Triggered Payouts. A committee of banks and investors that governs credit-default swaps was asked to rule whether Greece’s parliament triggered payouts on contracts that protect against losses on the country’s debt. The International Swaps and Derivatives Association’s determinations committee was asked whether a so-called restructuring credit event was caused by publication today of legislation that the Greek parliament passed as part of its agreement to exchange bonds for new securities, the trade group said on its website. The restructuring, in which bondholders take a 53.5 percent reduction in the value of their investments, uses collective action clauses to discourage holdouts. The use of such clauses would trigger swap contracts, according to ISDA rules. The committee is being asked whether the contracts have already been triggered because the deal gives the European Central bank and national central banks “a change in the ranking in priority of payment” by allowing them to exchange out of their eligible debt prior to the collective-action clauses taking effect, according to the ISDA website. The committee will decide whether to accept the question by Feb. 29, ISDA said in a statement today.
  • Europe Puts Highest Since July Before ECB Loan Package: Options. Options traders, concerned a three-month rally in European equities is ending, pushed bearish contracts to the highest level since July on an ETF that gets most of its value from the region's equities. Options to protect against a 10% drop in the iShares MSCI EAFE Index Fund cost 71% more than contracts betting on a 10% gain, according to data compiled by Bloomberg. Put volume jumped to a record on Feb. 24. The ETF has gained 16% since global equities bottomed last year on Oct. 4.
  • FHA to Increase Cost of Up-Front Mortgage Insurance Premiums. The Federal Housing Administration will increase the cost of up-front mortgage insurance premiums by 75 basis points as part of efforts to rebuild the agency’s insurance fund. The increase will apply only to new 30-year, single-family FHA loans and won’t affect the cost of streamlined refinancings, FHA Acting Commissioner Carol Galante said today in a call with reporters. The refinancing program allows FHA borrowers in good standing to qualify for a new, lower-rate FHA loan with minimal paperwork.
  • Syria Shells Northern Towns After Referendum. Syrian forces bombarded towns in the north of the country as the government of President Bashar al- Assad said voters had backed a referendum designed to introduce political pluralism after almost a year of violence. Assad, facing international pressure to end his crackdown on dissent, is seeking to affirm his mandate as Syria’s leader with a new constitution. The European Union decided to tighten sanctions yesterday as EU politicians dismissed the validity of the previous day’s vote. The state-run Syrian Arab News Agency said 89.4 percent of voters backed the charter, which promises democratic elections while limiting presidents to two seven-year terms. “The referendum in Syria is nothing more than a farce,” German Foreign Minister Guido Westerwelle said in a statement. “Phony votes cannot contribute to a solution to the crisis.”
  • Goldberg: Anti-Israel One State Plan Gets Harvard Outlet. For many years, Palestinian politics turned on a single idea: Palestine was stolen by the Jews, and so the Jews must be expelled -- “thrown into the sea,” the expression went. This week, Harvard University’s Kennedy School of Government will host a conference called “Israel/Palestine and the One State Solution,” whose goal is to “educate ourselves and others about the possible contours of a one-state solution and the challenges that stand in the way of its realization.” The conference will feature speakers such as Ali Abunimah, a veteran anti-Israel agitator, and Harvard’s own Stephen M. Walt, co- author with John Mearsheimer of the scapegoating Ur-text of anti-Israel argumentation, “The Israel Lobby.” In the best case, this new dystopia by the sea would be paralyzed by endless argument: “Two nationalities who have desperately sought a political frame for cultural and social independence would wrestle over control of language, art, street names, and schools.” In the worst case, Gorenberg writes, political tensions “would ignite as violence.” There are people, perhaps including some of the Harvard students organizing the conference, who advocate “one-statism” out of naivete. But the leaders of the movement are not naive. They understand their project shares a goal with Hamas: the elimination of Israel as a homeland and haven for Jews.
  • Oil Tankers Seen Falling 42% as Japan Weakens Most Since Tsunami: Freight. The largest drop in Japanese oil consumption since last year’s earthquake and tsunami may cause tanker rates to plunge 42 percent next quarter, threatening the biggest rally in shares of shipping companies since 2005. Demand in Japan, the second-largest destination for supertankers after China, will drop 19 percent in the second quarter from now, according to the International Energy Agency in Paris. Daily rates for the 1,000-foot-long ships will average $17,000, compared with $29,280 now, the median of nine analyst estimates compiled by Bloomberg show.
Wall Street Journal:
  • Europe's Narrow Credit-Crunch Escape. It may be asking too much to expect the LTROs to spur an increase in lending overall. Most analysts expect banks to continue to deleverage, despite the offer of unlimited cheap funding. That is partly because banks will worry about extending new loans beyond three years since this would leave them with a potentially tricky refinancing risk when the ECB loans mature. Banks may also be reluctant to tie up collateral for ECB facilities since an over-encumbered balance sheet could restrict future access to senior unsecured bond markets. And while there is no stigma to borrowing from the LTRO, some banks may worry that too much reliance on subsidized funding may invite a political backlash. For example, HSBC, which borrowed in the first LTRO to fund euro-denominated assets, will keep profits from the trade out of its bonus pool. That suggests the LTRO may not deliver much of a kick to the real economy. For that, governments must repair balance sheets, push through structural reforms and strengthen institutions. All the ECB liquidity has done is to buy the real economy some time.
  • Lilly(ELY) Faces Payment Delays From Health Systems In Italy, Spain. Drug maker Eli Lilly & Co. (LLY) said it has experienced delays in payments for its products from national health systems in Spain and Italy--the latest example of pressure on the pharmaceuticals industry stemming from the European financial crisis. Indianapolis-based Lilly, which makes the antidepressant Cymbalta, has seen the payment delays in certain countries including, but not limited to, regions within Spain and Italy.
  • Did These Stocks Have 'Mini Flash Crashes' Last Week? The folks at Themis Trading, who have been among the most outspoken critics of high frequency trading, point to some irregular trading activity in the shares of Thermo Fisher Scientific and Pall Corporation last week.
  • U.S. Considers New Message on Iran. Complaints from Israel about the U.S.'s public engagement with Iran have pushed the White House to consider more forcefully outlining potential military actions, and the "red lines" Iran must not cross, as soon as this weekend, according to people familiar with the discussions. President Barack Obama could use a speech on Sunday before a powerful pro-Israel lobby to more clearly define U.S. policy on military action against Iran in advance of his meeting on Monday with Israeli Prime Minister Benjamin Netanyahu, these people said.
Fox News:
MarketWatch:
  • Chinese Real-Estate Facing Pressure: Credit Suisse. Price cuts by mainland Chinese real-estate developers suggest profits will be under increasing pressure this year, according to Tuesday research published by Credit Suisse, which said the consensus view has been too optimistic on the earnings outlook for the property sector. In the note, the broker maintained its underweight view on Chinese real-estate developers, citing price reductions.
Business Insider:
Zero Hedge:

IBD:

NY Times:

  • Yahoo(YHOO) Warns Facebook(FB) of a Potential Patent Fight. As Yahoo struggles to keep up with younger competitors, the Web portal company is weighing a new tactic: threatening legal action over its patent holdings. Yahoo is seeking to force Facebook into licensing 10 to 20 patents over technologies that include advertising, the personalization of Web sites, social networking and messaging, people briefed on the matter told DealBook.
  • Pressure Grows on Fannie and Freddie to Reduce Principal on Some Loans. California’s attorney general, Kamala D. Harris, has ratcheted up the pressure on Fannie Mae and Freddie Mac to allow debt reduction on their home loans by asking the mortgage finance giants to halt foreclosures in the state.
CNN:
Chicago Tribune:
Real Clear Politics:
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -16 (see trends). That’s the president’s lowest rating in over a month.
AP:
  • Israel Won't Warn US Before Iran Strike. The pronouncement, delivered in a series of private, top-level conversations, sets a tense tone ahead of meetings in the coming days at the White House and Capitol Hill. The apparent decision to keep the U.S. in the dark also stems from Israel's frustration with the White House. After a visit by National Security Adviser Tom Donilon in particular, they became convinced the Americans would neither take military action, nor go along with unilateral action by Israel against Iran. The Israelis concluded they would have to conduct a strike unilaterally -- a point they are likely to hammer home in a series of meetings over the next two weeks in Washington, the official said.
Reuters:
  • Priceline(PCLN) Quarterly Profit Jumps, Bookings Rise. Online travel agency Priceline.com on Monday reported a stronger-than-expected fourth-quarter profit as the value of its bookings gained more than 50 percent from a year ago, sending its shares up more than 6 percent.
  • Sina(SINA) Revenue View Misses Street, Shares Down. Sina Corp, the operator of China's largest Internet portal, posted a quarterly profit in line with analysts' estimates, but forecast a disappointing first quarter, sending its shares down 5 percent in aftermarket trade.
  • German Court to Rule on MP's Rights on Euro Bailouts. Germany's Constitutional Court will rule on Tuesday whether a small sub-committee in parliament is representative enough to take decisions over whether the country should grant help to heavily indebted euro zone countries such as Greece in future.
Financial Times:
Telegraph:

Tagesspiegel:
  • Germany's opposition leader Frank-Walter Steinmeier said the lack of an absolute majority in a vote on Greek aid shows Chancellor Angel Merkel's authority is "severely damaged," citing an interview.
People's Daily:
  • China will set up an electricity price policy "soon" that punishes companies for exceeding limits for industrial energy use, citing a Ministry of Industry and Information Technology official.
Xinhua:
  • China's National Development and Reform Commission will continue to introduce measures to stabilize prices and ensure the supply of basic necessities, citing Zhou Wangjun, deputy director at the price department of the commission.
Apple Daily:
  • Macau Feb. Gaming Revenue Growth May Slow to 15.8% Y/Y. The percentage growth may be the lowest in over 3 years, the report said. Macau Jan. casino revenue growth rose 35% y/y.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 164.0 +3.0 basis points.
  • Asia Pacific Sovereign CDS Index 134.0 +2.25 basis points.
  • FTSE-100 futures +.03%.
  • S&P 500 futures +.10%.
  • NASDAQ 100 futures +.12%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (VPHM)/.55
  • (TECD)/1.66
  • (RDC)/.30
  • (CVC)/.23
  • (SAFM)/.18
  • (AZO)/4.04
  • (ODP)/.00
  • (DWA)/.31
  • (WRC)/.99
  • (CPRT)/.59
  • (FSLR)/1.56
  • (DPZ)/.49
Economic Releases
8:30 am EST
  • Durable Goods Orders for January are estimated to fall -1.0% versus a +3.0% increase in December.
  • Durables Ex Transports for January are estimated unch. versus a +2.1% gain in December.
  • Cap Goods Orders Non-Defense Ex Air for January are estimated to fall -1.4% versus a +2.9% gain in December.
  • Cap Goods Shipments Non-Defense Ex Air for January are estimated to fall -2.0% versus a +2.9% gain in December.

9:00 am EST

  • S&P/CS 20 City MoM% SA for December is estimated to fall -.35% versus a -.7% decline in November.

10:00 am EST

  • Consumer Confidence for February is estimated to rise to 63.0 versus 61.1 in January.

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Fed's Duke speaking, Fed's Pianalto speaking, results of the latest LTRO program, weekly retail sales reports, Italian/German Bond Auctions, Richmond Fed Manufacturing Index for February, Morgan Stanley Tech/Media/Telecom Conference, RBC Healthcare Conference, (JPM) Investor Day and the (JNPR) Analyst Meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and industrial 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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