Wednesday, September 26, 2012

Wednesday Watch

Evening Headlines
Bloomberg: 
  • Rajoy Nemesis Opens Catalonia Front in Europe Debt-Crisis Fight. Spanish Prime Minister Mariano Rajoy’s dispute with the leader of his country’s richest region erupted into the newest front of Europe’s effort to extinguish the financial crisis. Catalan President Artur Mas yesterday called early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25, saying the time has come to seek “self-determination.” The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to 25 percent. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance. “It’s the very last thing Rajoy needed right now, and the last thing Europe needed,” said Ken Dubin, a political scientist who teaches at Carlos III University and IE Business School in Madrid. The standoff may mark the end of the rally in Spanish bonds triggered by the European Central Bank’s decision to buy struggling nations’ debt on condition they accept the terms of a bailout from euro-area governments.
  • Rajoy Bets Italian Woes May Ease Spain Rescue Terms: Euro Credit. Spanish Prime Minister Mariano Rajoy may be delaying a bailout request on a bet that renewed market tension will also force Italy to seek aid, strengthening his bargaining power and giving political cover. Spain will have more leverage if it can fend off a rescue until Italy joins it in needing ECB help to bring down the cost of servicing its debt, said Raphael Gallardo, head of macroeconomics at Rothschild Asset Management in Paris.
  • ECB’s Bond Buying May Hinder Reforms, Weidmann Tells Zuercher. The European Central Bank’s bond purchasing program could hinder a recovery in the euro zone if it eases pressure on governments to implement reforms, German Bundesbank President Jens Weidmann said in an interview with Swiss newspaper Neue Zuercher Zeitung. Weidmann questioned whether bond-purchase programs are the appropriate mechanism for solving structural problems, such as the lack of competitiveness and loss of trust in an individual country’s fiscal policies, according to the interview. Weidmann was the only member of the ECB Governing Council to oppose the so-called Outright Monetary Transactions program. Weidmann said the ECB’s fiscal policy seeks to keep risk low and buying back bonds causes the opposite. Maintaining price stability is the bank’s primary purpose, he said.  
  • Barclays(BCS) Sued by U.S. Regulator Over Mortgage Security Sales. Barclays Plc is being sued by the U.S. regulator of credit unions, which says the bank sold $555 million in misrepresented mortgage-backed securities that contributed to two lender failures. The National Credit Union Administration announced the suit filed in federal court in Kansas in a statement today. 
  • China-Japan Foreign Ministers Meet as Island Tensions Hurt Trade. The foreign ministers of China and Japan met in New York in an attempt to ease rising tensions over a territorial dispute that is hurting trade between Asia’s two biggest economies. China’s Yang Jiechi held talks with Japanese counterpart Koichiro Gemba on the sidelines of the United Nations General Assembly. Yang reiterated China’s “solemn position” over claims to islands in the East China Sea, the official Xinhua News Agency said. Gemba told reporters that the atmosphere in the meeting was “severe,” Japan’s Kyodo News reported 
  • Buffett-Backed BYD Tumbles as CLSA Cuts Share-Price Target 94%. BYD Co., the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc., fell the most in two months in Hong Kong trading after CLSA Asia Pacific Markets cut the stock’s price target by 94 percent. BYD dropped 5.2 percent to HK$13.94 at 9:33 a.m., headed for its biggest drop since July 16. CLSA lowered its 12-month price goal for the Hong Kong-traded shares to HK$0.41, from a previous estimate of HK$7.40. The electric-car maker, based in Shenzhen in southern China, reported on Aug. 27 first-half profit plunged 94 percent as sales of handset components and batteries shrank. Net income for the first nine months is expected to fall by as much as 95 percent, the company said. MidAmerican Energy Holdings Co., a unit of Buffett’s Berkshire Hathaway, bought 9.9 percent of BYD in September 2008 to tap rising demand for clean technology. “The company will likely deteriorate further due to declining business in mobile phone components, rechargeable batteries and new energy,” Scott Laprise, a Beijing-based analyst at CLSA, wrote in a research note yesterday. “We see few positive catalysts going forward and maintain our conviction” to sell the stock, Laprise wrote 
  • China’s Stocks Fall, Poised for Biggest Quarterly Loss in Year. China’s stocks fell, sending the benchmark index toward its biggest quarterly decline in a year, on speculation the economic slowdown is deepening and measures by global central banks won’t be enough to boost growth. China Vanke Co. (000002) and Poly Real Estate Group Co. dropped more than 1 percent on earnings concerns after the southern city of Guangzhou restricted sales of homes before they are completed. BYD Co. (002594), the automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., slid to a five-week low after CLSA Asia Pacific Markets cut its share-price estimate of the company’s Hong Kong- listed stocks by 94 percent. “The market has no confidence in China’s old growth model of investment and exports any more,” said Wang Zheng, Shanghai- based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “With the two growth drivers fading, we haven’t found a new engine. That’s why stocks are performing so poorly.” The Shanghai Composite Index (SHCOMP) fell 0.3 percent to 2,023.75 as of 10:41 a.m. local time, heading for a 9.1 percent slump this quarter.
  • Iron Ore Unlikely to Rebound as China Slows, Shale-Inland Says. Iron-ore prices, down 25 percent this year, probably won’t rebound as the economy slows in China, the world’s biggest importer and steelmaker, according to Shale- Inland Holdings LLC. Prices for steel, which have dropped 10 percent in 2012, also won’t recover, said Craig Bouchard, the chief executive officer of Shale-Inland, which fabricates and distributes metals. China’s economy will grow less than analysts expect, at 5 percent to 6 percent in 2013, Bouchard said. That compares with a Bloomberg survey of as many as 45 analysts, which showed a median forecast of 7.7 percent growth this year and 8 percent in 2013. There’s a 50 percent chance that the U.S. will slide into a recession next year as consumer spending ebbs, he said. “There’s not going to be a recovery in steel in the next six months,” Bouchard, who founded Schiller Park, Illinois- based Shale-Inland in 2010, said in a telephone interview. “You can’t expect a recovery in iron-ore prices until we see a recovery in the world economy.” 
  • CMBS Selling Like It's 2007 in Pre-Crisis Spirit: Credit Markets. Commercial-mortgage bond sales are surging to the most in almost five years with yields at record lows, fueling a lending boom. Banks have arranged $6.9 billion this month in sales of bonds linked to skyscrapers, shopping malls and hotels, the most since December 2007, according to data from Bank of America Corp. Securities in the Barclays Investment Grade CMBS index yield 2.15%, the lowest since the index started in 1997. Property owners are benefiting as investors chase riskier assets with Federal Reserve Chairman Ben S. Bernanke saying this month that interest rates will likely hold near zero at least through mid-2015.
  • SEC Says New York Firm Allowed High-Speed Stock Manipulation. A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission. Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines. The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics. “Direct access firms like these are the gatekeeper to our markets,” Sang Lee, managing partner at research firm Aite Group LLC in Boston, said today in a phone interview. “That’s why the SEC is doing this. This is certainly the area that they need to focus on, and on a larger scale.”
Wall Street Journal: 
  • Spanish Leader Outlines Fresh Overhauls. Rajoy, in Interview, Pledges to Limit Early Retirement, Set Budget Monitor. The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country's debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday. In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations.
  • Alan Dershowitz: The Message Obama Should Have Sent. Forget about a 'red line.' Try a warning to Iran in black-and-white.
Barron's:
MarketWatch.com: 
  • UBS chairman sees risks in QE programs: report. Widespread central bank action to support economies by printing money is distorting market prices and may create asset bubbles, said UBS Chairman Axel Weber, according to a report in the Australian Financial Review.
 CNBC: 
  • Romney's Take-Home-Pay Message. In a 60 Minutes interview this past Sunday, Romney did mention tax cuts, and take-home pay, too. Whoa. (Read More: Obama and Romney Offer Possible Preview of Their First Debate.) “Take-home pay” is an old Reagan line. The Gipper appealed to middle-class voters who clearly understood that if you keep more of what you earn, and your take-home pay goes up, that’s the benefit of a tax cut.
  • Bet You Don't Know About These Obama Gaffes.
Zero Hedge:
Business Insider: 
Reuters: 
  • China carrier a show of force as Japan tension festers. China sent its first aircraft carrier into formal service on Tuesday amid a tense maritime dispute with Japan in a show of force that could worry its neighbours. China's Ministry of Defence said the newly named Liaoning aircraft carrier would "raise the overall operational strength of the Chinese navy" and help Beijing to "effectively protect national sovereignty, security and development interests". 
  • Euro zone will struggle to create fiscal union-former UK PM. Europe is enjoying a moment of calm due to the European Central Bank's plan to buy debt of euro zone countries, but the region will struggle to solve more fundamental problems, former British Prime Minister Gordon Brown said on Tuesday.  
  • Syrian rebels bomb security building in Damascus. Syrian insurgents detonated bombs at a building occupied by pro-government militias in Damascus on Tuesday and France called for U.N. protection of rebel-held areas to help end Syria's bloodshed and rights abuses. Activists say that more than 27,000 people have been killed in the 18-month-old uprising against President Bashar al-Assad but jostling for regional advantage by world powers has thwarted effective U.N. Security Council action to defuse the conflict.
Financial Times: 
  • ‘Big disparity’ in banks’ loan risk ratings. European banks are using such different estimates of risk that some are holding between double and four times as much capital as their competitors hold against potential losses from apparently similar loans, analysis by Barclays shows. Lloyds Banking Group assigns a risk weighting of 28 per cent to its portfolio of A-rated corporate loans, while BNP Paribas gives the same category a 14 per cent risk rating. As a result, BNP is required to hold half as much capital.
Telegraph:
Kathimerini: 
Asahi:
  • Toyota to Cut Planned China Output to Zero in October. The company has scrapped production plans for October as sales of new vehicles in China are expected to be difficult due to the islands dispute. The company will also halt exports of finished vehicles including Lexus models from Japan to China. Difficulty in importing parts from Japan due to tightened customs checks may also be a factor. The company produced 78,000 vehicles in October of lats year.
Nikkei: 
  • Toyota, Nissan to Cut China Output on Islands Dispute. The companies will lengthen a planned suspension of output for the forthcoming national holidays as anti-Japanese consumer sentiment in China is expected to impact sales. Honda is also considering cutting operating hours at plants.   
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.50% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 145.0 +8.0 basis points.
  • Asia Pacific Sovereign CDS Index 118.25 +1.75 basis points.
  • FTSE-100 futures -.80%.
  • S&P 500 futures +.07%.
  • NASDAQ 100 futures +.02%.
Morning Preview Links

Earnings of Note

Company/Estimate
  • (PRGS)/.23
  • (FUL)/.53
  • (WOR)/.47
Economic Releases
10:00 am EST
  • New Home Sales for August are estimated to rise to 380K versus 372K in July.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,900,000 barrels versus a +8,534,000 barrel gain the prior week. Distillate inventories are estimated to rise by +500,000 barrels versus a -322,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +500,000 barrels versus a -1,407,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.25% versus a +4.2% gain the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The weekly MBA mortgage applications report, Italian retail sales report and the 5Y T-Note auction could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and automaker shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

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