Friday, April 12, 2013

Friday Watch

Evening Headlines 
  • Italy’s bond rally threatened by political reality. As an Italian bond rally wraps up a sixth week, investors risk having their enthusiasm jolted by the country’s political gridlock. Italian bonds delivered returns of 3.4 percent since inconclusive elections on Feb 24-25 produced a hung parliament. Prime Minister Monti’s caretaker government has little scope to combat the longest recession in more than two decades and said this week its debt will reach 130.4 percent of gross domestic product this year, more than twice the euro-region limit. The Bank of Japan’s unprecedented bond-buying stimulus coupled with the European Central Bank’s renewed pledge to defend the euro have underpinned the gains even as Italy’s political stalemate and recession deepen
  • Merkel’s One-Time Ally Steinbrueck Forges Platform to Unseat Her. German opposition candidate Peer Steinbrueck’s drive to become chancellor is going into reverse. Steinbrueck’s Social Democratic Party gathers this weekend in the Bavarian town of Augsburg as the gap with Chancellor Angela Merkel’s bloc widens. The SPD’s answer is a platform that appeals to core Socialist values through reining in banks, taxing the rich and reducing social inequality it says has grown under Merkel. Delegates will vote on the platform on April 14.
  • N Korea May Be Able to Make Nuclear Missiles, U.S. Says. The U.S. Defense Intelligence Agency has reported that North Korea now has some nuclear weapons small enough to be delivered by its ballistic missiles. The DIA cautioned in a classified report last month that it has only “moderate confidence” in that finding, which also said that the reliability of North Korea’s missiles “will be low.” 
  • China Rebound at Risk as Xi Curbs Officials’ Spending. Chinese President Xi Jinping’s campaign to rein in lavish spending by officials and state-owned companies is proving so effective that it risks helping end the nation’s economic rebound after one quarter. Xi’s efforts are restraining consumer spending and making it tougher for the new government to boost domestic demand as factory output slows. Large-restaurant and catering sales fell for the first time in more than three decades in the first two months of the year, while demand and prices for luxury items such as Moutai liquor and Longjing tea have slumped.
  • China Customs Official Apologizes for Incorrect Data. A Chinese government spokesman said he gave incorrect and “groundless” investment data sourced from the Internet at a briefing this week, underscoring concern that official numbers may not be credible. Zheng Yuesheng, spokesman and head of the statistics department at the Beijing-based General Administration of Customs, said in a statement yesterday that he “expresses deep apologies” for citing unconfirmed figures from online sources he didn’t identify. Zheng was referring to remarks he made at a customs administration press conference on April 10 where he also acknowledged concerns that China’s export data may be overstated.
  • Kerry Said Ready to Ask China to Obey UN North Korea Sanctions. The U.S. will ask China to abide by United Nations sanctions against North Korea and shut off the flow of money that could be used to develop weapons of mass destruction, a State Department official said. Secretary of State John Kerry, on his first trip to Asia as the top U.S. diplomat, is scheduled to meet with leaders in Beijing, Seoul and Tokyo as the region confronts threats of war by North Korea. Two U.S. officials briefed reporters accompanying Kerry on the condition of not being named. The U.S. wants to convince China, North Korea’s main ally, that it’s in China’s economic and political interests to reverse a long-standing practice of looking the other way regarding banned cross-border trade with its Communist neighbor, an administration official said. Kerry will also urge China to toughen its message to leaders in Pyongyang and will seek information about conversations between China and North Korea as well as what kind of leverage the new Chinese leader, Xi Jinping, has on North Korean dictator Kim Jong Un, the State Department official said. There will be no quid pro quo in U.S.-China discussions and the U.S. won’t soften its criticism of China’s human-rights record and assertiveness over disputed areas in the South China Sea in exchange for greater cooperation on North Korea, the official said. 
  • Japan, World Economy at Risk If Abenomics Fails. The Bank of Japan’s strategy to end almost two decades of stagnation through unprecedented monetary stimulus may set off a ticking time-bomb for financial markets if it’s not followed by extensive structural reforms. Such reforms, critical to the success of Prime Minister Shinzo Abe’s economic program — dubbed Abenomics — have historically proved difficult to implement. The combination of a debt load accounting for more than 200 percent of GDP and diminishing domestic demand for government bonds may sound the death knell for Japan’s economy, with or without Abe’s new economic policy. This would have global consequences. Click here to continue reading.
  • Infosys Plunges as Sales Forecast Lags. Infosys Ltd. (INFO), India’s second- largest software services exporter, fell in Mumbai trading as it forecast annual sales will rise slower than analysts estimated. Shares plunged 15 percent to 2,491.7 rupees as of 9:16 a.m. The company expects revenue to increase 6 percent to 10 percent in the year that started April 1, it said. Analysts estimated sales to grow 12.7 percent to 454.7 billion rupees, based on the average of 66 estimates compiled by Bloomberg.
  • Asian Stocks Fall From 20-Month High as Yen Strengthens. Asian stocks fell from the highest level in 20 months, paring the biggest weekly advance since September. Japan’s Topix Index (TPX) dropped for the first time in eight days as the yen strengthened against the dollar. Canon Inc. (7751), a Japanese camera maker that gets 80 percent of sales abroad, slid 2.3 percent. GS Engineering & Construction Corp. (006360) tumbled by the daily 15 percent limit in Seoul for a second day after reporting an unexpected loss.
  • Bovespa Index Tumbles Most in the World on Brazil Growth Concern. The Bovespa index tumbled the most among the world’s major equity gauges as a report showing retail sales unexpectedly dropped in February rekindled concern that Brazil’s economic recovery will falter. Lojas Americanas SA led losses among retailers, sinking the most since August. Oil services provider Lupatech SA tumbled after missing a $6.79 million bond payment. OGX Petroleo & Gas Participacoes SA, the crude oil producer controlled by billionaire Eike Batista, declined to a record low. The Bovespa fell 1.4 percent to 55,400.91 at the close of trading in Sao Paulo, the most in dollar terms among 94 major global stock measures tracked by Bloomberg. Fifty-four stocks dropped on the gauge while 14 advanced. The real dropped 0.1 percent to 1.9756 per dollar.
  • IMF Trims U.S. Growth Outlook in Draft Report. U.S. gross domestic product will expand 1.7 percent this year compared with a previously forecast 2 percent advance, according to the draft report obtained by Bloomberg News. The draft, which was presented to the IMF board last week, may be subject to revisions before its scheduled April 16 release. The global economy will expand 3.4 percent this year, compared with 3.5 percent forecast in January, according to projections in the report.
  • JPMorgan(JPM) Analysts Say Big Investment Banks Are ‘Uninvestable’. JPMorgan Chase & Co., the largest U.S. bank by assets and the top investment bank by fees, is questioning the so-called universal bank model’s future. Top-tier investment banks are “uninvestable at this point with a risk of spinoff from universal banks,” JPMorgan analysts led by London-based Kian Abouhossein wrote in a research note today. They cited potential rule changes and curbs on capital and funding. Investors should avoid Goldman Sachs Group Inc., once the world’s most profitable securities firm, and Deutsche Bank AG, Germany’s largest bank, because of pressure on earnings and the unknown impact of new regulations, according to the report. Both firms rank among the biggest sales and trading rivals for New York-based JPMorgan, which isn’t mentioned in the report. The bank is scheduled to report first-quarter results tomorrow.
  • Oil Outlook ‘Bearish’ on Demand Drop, U.S. Shale Boom. Crude prices will probably drop, at least in the first half, amid rising U.S. shale-oil production and slowing economic growth, according to analysts. “I’d stay moderately bearish from here,” Seth Kleinman, head of energy strategy at Citigroup Inc., said at the Bloomberg Oil Forum in London today. “Everything looks pretty weak,” he said, citing downward revisions to global demand growth forecasts by the International Energy Agency and the Organization of Petroleum Exporting Countries. Global crude production will be “robust” this year as output rises in the U.S., Iraq and Kazakhstan, while demand growth may slow in consuming nations including China, he said.
Wall Street Journal: 
  • John Paulson to Start New Hedge Fund. John Paulson took flack for considering a move to Puerto Rico, one that would have cut his tax bill. Mr. Paulson dropped the idea of a move. But the hedge fund manager seems more determined to help his clients reduce their own tax bills. On Thursday, Mr. Paulson, who is trying to turn around his hedge-fund firm after a period of difficult trading, sent an invitation to clients and potential clients, announcing the launch of the Paulson Partners Premium L.P. Fund. The invitation said the fund is for investors “looking to mitigate income taxes.” 
  • New Drive for Tougher Testing of European Banks. Europe is embarking on a new attempt to pull its banks out of the molasses of its debt crisis, hoping an aggressive cleanup of toxic assets will get banks to lend again and kick-start its flailing economies. The push is being led by several key officials in Brussels and Frankfurt, who want to see a new round of much-tougher stress tests before the European Central Bank becomes the euro zone's main banking policeman next year, according to four European officials familiar the talks.
  • Two Firms Amass Much of World's Copper Supply. Commodities Traders Pay to Divert Shipments From Other Warehouses; Manufacturers Worry About Access. Two major commodities-trading firms have amassed much of the world's copper supplies in their warehouses, partly by paying to divert shipments away from other storage hubs, traders and analysts say. This concentration of copper supplies has sparked concerns among industrial consumers of the metal
  • Can We Afford Another Housing Boom? With prices rising, now is the time to prevent over-investment. With prices rising again, now is precisely the time to begin reducing the federal subsidies that encourage over-investment in housing. In some areas of the country Fan and Fred still back mortgages of more than $600,000, while the FHA backs loans of more than $700,000. Reform-minded lawmakers may not be able to stop Fed Chairman Ben Bernanke from dropping money from helicopters, but they can begin reducing the conforming loan limits at Fan, Fred and FHA to put some guardrails around Washington's reckless credit policies.
Fox News: 
  • IRS tells agents it can snoop on emails without warrant, internal documents show. The Internal Revenue Service believes it doesn’t need permission to root through emails, texts or other forms of electronic correspondence, according to recently released internal agency documents. The documents, which were obtained through a Freedom of Information Act request by the American Civil Liberties Union, reveal that tax department agents have been operating under the assumption that they can bypass warrants. The ACLU claims this would in turn violate the Fourth Amendment. According to a 2009 IRS employee handbook, though, the tax agency said the Fourth Amendment does not protect emails because Internet users don’t “have a reasonable expectation of privacy in such communications.” A lawyer for the agency reiterated the policy in 2010. And the current online version of the IRS manual says that no warrant is required for emails that are stored by an Internet storage provider for more than 180 days.
  • Shorts Getting Longer as Stock Market Bears Throw In the TowelShort interest as a percentage of total available shares reached a 12-month low of 3.6 percent as a profitable March ended, according to Bespoke Investment Group. The finding sends two potentially important messages: that investors are finally buying into the rally (a contrarian signal); and that a good portion of the recent move probably came from a short-squeeze in which those betting against the market had to cover their positions.
  • Suckers! Tech Execs Selling Stock as Nasdaq Hits High. Insider selling at the biggest technology companies hit a record pace over the last six months even as investors snatched up shares, pushing the Nasdaq Composite Index to a 12-year high. More than 55 million shares were sold versus 1,780 shares bought for a sell-buy ratio of an eye-popping 31,109 to 1 at the 10 biggest tech companies, including Microsoft, Oracle and Qualcomm, according to Alan Newman, editor of the Crosscurrents newsletter and market analyst for 49 years.
Zero Hedge:
Business Insider:
New York Times:
  • Herbalife(HLF) Ties to ‘Work From Home’ Promoters May Draw New Scrutiny. Entities that promote “work from home” opportunities could be a new source of scrutiny for Herbalife, the nutritional products company that has become the subject of a pitched battle on Wall Street. The Federal Trade Commission has received scores of complaints from people who paid money to operations with names like Income At Home and Online Business Systems, according to materials the agency released under the Freedom of Information Act. In many of the complaints, consumers who contacted such companies said they discovered at a later stage that they were being recruited to sell Herbalife products, an opportunity many did not wish to pursue.
  • Chinese officials even more pessimistic on local debt than Fitch. Fitch Ratings' estimate of China's local government debt is vastly more pessimistic than other analyses, but recent statements from government officials suggest that even Fitch may be too optimistic. The agency, which downgraded the country's sovereign credit rating this week, puts China's overall sovereign debt at 74 percent of GDP by the end of 2012, of which 49 percent is central government and 25 percent is local. Recent data indicates that, after stabilizing in 2011, local debt surged again last year as policymakers launched a new wave of infrastructure spending to stabilize the world's No.2 economy amid its slowest growth in 13 years. Even Fitch's relatively pessimistic estimate may be too rosy. The head of China's National Audit Office (NAO), which published a detailed survey of local debt in 2011, recently estimated current local debt outstanding at 15 to 18 trillion yuan -- equal to 29 to 35 percent of GDP -- by the end of 2012. That's well ahead of Fitch's estimate of 12.85 trillion yuan and an increase from the NAO's previous estimate of 10.7 trillion yuan in local debt outstanding by end-2010. A former finance minister, Xiang Huaicheng, said at a forum last week that local debt may total as much 20 trillion yuan. Fitch's calculation of China's total non-financial debt is broadly in line with other analysts at 198 percent of GDP. The disagreement arises from the lack of clarity over how large swathes of Chinese debt should be classified. 
  • U.S. Fed balance sheet grows again in latest week. The U.S. Federal Reserve's balance sheet liabilities reached a fresh record size on an increase in the central bank's holdings of U.S. government debt, Fed data released on Thursday showed. The Fed's balance sheet liabilities, a broad gauge of its lending to the financial system, stood at $3.210 trillion on April 10, compared with $3.198 trillion on April 3.
  • China's shadow banking boom rings alarm bells. Loan growth in China’s shadow banking system surged to near record levels in March, prompting fresh warnings that the country’s credit bubble is spinning out of control.  
  • German Financial Advisers Call for Abolition EU500 Note. Reiner Holznagel, president of Germany Taxpayers Association, says move would make it harder to take money out of the country.
  • Singapore's GDP contacts in Q1. Singapore's economy unexpectedly contracted in the first quarter of 2013, hurt by a sharp decline in manufacturing. Singapore: Advance estimates indicate that in the first quarter of 2013, the Singapore economy contracted by 0.6 per cent compared to the 1.5 per cent growth in the preceding quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, the economy contracted by 1.4 per cent, down from the 3.3 per cent growth in the previous quarter noted the Trade and Industry Ministry. Market watchers had expected 1 per cent growth and point out worries in the manufacturing sector.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -.75% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 112.0 -4.0 basis points.
  • Asia Pacific Sovereign CDS Index 90.5 -2.0 basis points.
  • FTSE-100 futures -.53%.
  • S&P 500 futures -.16%.
  • NASDAQ 100 futures -.16%.
Morning Preview Links

Earnings of Note

  • (JPM)/1.38
  • (WFC)/.88
Economic Releases
8:30 am EST
  • Advance Retail Sales for March are estimated unch. versus a +1.1% gain in February.
  • Retail Sales Less Autos for March are estimated unch. versus a +1.0% gain in February.
  • Retail Sales Ex Autos & Gas for March are estimated to rise +.3% versus a +.4% gain in February.
  • The Producer Price Index for March is estimated to fall -.2% versus a +.7% gain in February.
  • The PPI Ex Food & Energy for March is estimated to rise +.2% versus a +.2% gain in February.
9:55 am EST
  • Preliminary Univ. of Mich. Consumer Confidence for April is estimated to fall to 78.5 versus 78.6 in March.
10:00 am EST
  •  Business Inventories for February are estimated to rise -.4% versus a +1.0% gain in January.
Upcoming Splits
  • (RDWR) 2-for-1
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Rosengren speaking, Eurozone industrial production data, EU Finance Ministers Meeting and the (IMGN) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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