Wednesday, June 12, 2013

Wednesday Watch

Evening Headlines 
  • Italy Debt Trading Like Bunds Spells Pain for Spain: Euro Credit. Italian borrowing costs are rising in parallel with German yields for the first time in two years, exacerbating the risk that Europe's debt crisis will worsen. "For the first time in a while, German and Italian bonds are moving in the same direction as global bonds are facing the same threat and that's central banks pulling back from extra stimulus," said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. "It will become more expensive for everyone to borrow money, but Germany can perhaps handle this far better than Italy and Spain. The biggest risk is when yields keep rising when there's still no growth in peripheral nations." 
  • North Korea Scraps Talks on Industrial Zone, S. Korea Says. North Korea “unilaterally” called off the highest-level talks since Kim Jong Un took power in protest over the rank of South Korea’s proposed delegate, the South’s Unification Ministry said. The North insisted that South Korea’s Unification Minister meet its “much lower-ranking” official and rejected the South’s revised proposal for vice minister-level discussions, Unification Ministry spokesman Kim Hyung Suk said in a televised briefing last night. The two-day talks were due to begin today in Seoul and focus on the reopening of a joint factory park.
  • Emerging-Market Anxieties Jump by Most Since '08: Credit Markets. The biggest drop in perceived creditworthiness for emerging-market borrowers since the credit crisis is deepening as speculation intensifies that central banks will scale back record stimulus. Prices on the Markit CDX Emerging Markets index, a credit-default swaps benchmark for debtor nations from Latin America to the Middle East and Asia, have tumbled 4 cents in the two weeks through yesterday to 107 cents on the dollar. The decline is the biggest since the failure of Lehman Brothers Holdings Inc. reverberated across financial markets and caused the index to plunge 6.7 cents in the period ended Nov. 18, 2008. Investors who eight weeks ago were willing to lend Rwanda $400 million at an interest rate of 6.625 percent in its first debt offering are now struggling to find any haven as developing countries bear the brunt of the global bond rout. 
  • Indonesian Stocks Fall as Investors Sell Most Shares Since 2011. Indonesia stocks dropped for a fifth day after overseas investors sold the most shares in the nation yesterday since March 2011 as rising U.S. Treasury yields lure capital from emerging markets. The Jakarta Composite Index sank 2 percent at 9:14 a.m. local time, taking its decline from its May 20 record to 13 percent.
  • Asia Stocks Drop, Extend Global Rout, on Stimulus Concern. Asian stocks fell, extending a rout that wiped out about $400 billion from the value of global equities yesterday, as Japanese machinery orders declined more than expected and concern grew that central banks from Tokyo to Washington are increasingly reluctant to add stimulus. Toyota Motor Corp., the world’s largest carmaker, retreated 3.2 percent in Tokyo after the yen gained the most in three years. Hitachi Construction Machinery Co. lost 0.7 percent in Tokyo. Hyundai Merchant Marine Co. plunged 14 percent in Seoul after North Korea called off talks yesterday on a joint industrial zone. The MSCI Asia Pacific Index dropped 0.8 percent to 130.54 as of 12:21 p.m. in Tokyo, with more than four shares falling for each that advanced. Markets in China, Hong Kong, Taiwan and the Philippines are closed for holidays
  • Goldman Maintains Neutral Recommendation on Commodity Prices. Goldman Sachs Group Inc. maintained its neutral recommendation on commodity prices, predicting a significant decline in agriculture in the second half of the year even if the summer weather is worse than in 2011. “Prices are unlikely to collapse from current levels as demand is not weak enough to create large unexpected inventory builds while supply rarely creates a surge in inventory like what demand can do when it falls unexpectedly,” they said.
  • Copper MACD Measure Signals Drop to 2010 Low: Technical Analysis. Copper futures in New York are poised to reach the lowest price since mid-2010 in the next two months, according to technical analysis from Paul Kavanaugh at FuturePath Trading LLC. The moving average convergence-divergence graph, or MACD, shows the 26-week and 12-week moving averages traded below a nine-week measure known as the signal line since June 7. The crossover is a bearish sign, Kavanaugh said.
  • Rubber Drops to 9-Month Low as Yen Rally Saps Investor Appetite. Rubber slumped to the lowest level in nine months after the Japanese currency rallied the most in three years against the dollar, sapping investor appetite for yen-denominated futures. The contract for delivery in November lost as much as 3.9 percent to 239 yen a kilogram ($2,476 a metric ton) on the Tokyo Commodity Exchange, the lowest since Sept. 12. Futures traded at 240.6 yen at 11 a.m., extending losses this year to 20 percent.
  • Record U.S. Soybean Crop Seen Extending Bear Market: Commodities. Stockpiles (US09ESUS) at the end of August 2014 will have gained 116 percent to 7.29 million metric tons in 12 months, according to the average of 30 analyst estimates compiled by Bloomberg. U.S. production will jump 12 percent to 91.74 million tons, adding almost enough extra supply to feed India for a year. The U.S. government updates its estimates tomorrow.
  • Metacapital in Worst Slide as Bloodbath Roils Funds: Mortgages. Deepak Narula rose to fame as manager of the best-performing hedge fund last year by navigating the government’s stimulus efforts. He’s having a far harder time as the Federal Reserve moves closer to an exit. Metacapital Management LP’s flagship $1.5 billion fund lost an estimated 6.4 percent last month, the worst decline since it started in 2008, according to a letter to investors obtained by Bloomberg News. That followed drops of 0.5 percent in April and 0.1 percent in March, after 17 months of consecutive gains including a 41 percent return last year. Narula, like other investors in government-backed mortgage bonds, is being punished by speculation the Fed will scale back its debt-buying program. That has caused the securities to underperform Treasuries by the most since 2008. Rising home prices, President Barack Obama’s nomination of Democratic congressman Mel Watt to oversee Fannie Mae and Freddie Mac, and other issues have further roiled the market. “It’s been a bloodbath the last four to six weeks,” said Troy Gayeski, a senior portfolio manager who helps invest client money in hedge funds at SkyBridge Capital, which manages about $7.7 billion. “It was a confluence of just about everything” from investors’ concerns that refinancing would pick up among some borrowers who’ve had trouble qualifying to the slump in the mortgage debt that the Fed is buying, he said. 
  • Medicare Pays $900 Million a Year Too Much for Lab Tests. Medicare, the U.S. health program for the elderly and disabled, spends $900 million more a year than it should for medical lab services and should seek authority from lawmakers to cut its bills, auditors said. Medicare spent about $8.2 billion on lab services in 2010, more than any other insurer in the nation, while paying from 18 percent to 30 percent more for 20 of the highest-volume and most expensive tests, according to the Health and Human Services Department’s inspector general. The Centers for Medicare & Medicaid Services, which runs the $574 billion health program, said the agency is exploring whether it can revise payments to labs, according to a report issued today by Daniel Levinson, the HHS inspector general. “The lab test payment rate structure is outdated and should be changed,” Levinson said in his report. Quest Diagnostics Inc. (DGX) and Laboratory Corporation of America Holdings, the two largest lab services companies in the U.S., each receive at least 15 percent of their annual revenue from Medicare, according to data compiled by Bloomberg.
Wall Street Journal: 
  • Global Tumult Grips Markets. Question for Investors: Bumpy Return to Normal or New Volatility as Central Banks Step Back? The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.
  • Turkish Police Move to Evict Demonstrators. Security Forces Fire Tear Gas, Water Cannons at Protesters in Istanbul Square After Premier Condemns 'Illegal Uprising'. Turkish police stormed a landmark Istanbul square in a bid to evict entrenched protesters on Tuesday, sparking daylong clashes in the heart of the city, as Prime Minister Recep Tayyip Erdogan clamped down after two weeks of nationwide demonstrations. Hundreds of security forces moved into Taksim Square, the epicenter of protests, around 7:30 a.m., firing tear gas and water cannons, sending thousands of overwhelmingly peaceful protesters scattering from the area. Battalions of police, which had ceded control of the area the day after nationwide protests flared May 31, secured the square's perimeter by 8 a.m.
  • Stores Prepare to Widen Access to Plan B Pill. Drugstores are preparing to change how they stock and sell a widely used emergency contraceptive after the Obama administration agreed to allow the pill to be sold over the counter to customers of all ages.
  • Immigration Bill Advances in Senate. The push to rewrite the nation's immigration laws easily advanced in the Senate Tuesday, lending the effort a burst of momentum as lawmakers prepare to spend the rest of the month debating the issue. The Senate voted 82-15 on a motion that lets lawmakers formally debate the bill and begin offering amendments. All 15 "no" votes came from Republicans. The measure, which required 60 votes to pass, won support from 28 Republicans.
  • Monsanto(MON) Eyes Spring Launch in South America for New Soy Seeds. Biotechnology company Monsanto Co. (MON) plans to debut its second-generation of genetically modified soybean seeds in its key South American market during the next growing season. South America produces just over half the world's soybeans, with Brazil and Argentina among the top three global producers of the oilseed, according to U.S. Department of Agriculture data.
  • Bank Indonesia Raises Overnight Deposit Rate. Bank Indonesia raised its overnight deposit facility rate by a quarter of a percentage point to 4.25%, to help ease downward pressures on the rupiah. The central bank said Wednesday it is "ready to take any necessary step" to maintain monetary stability following the rupiah's recent depreciation, Bank Indonesia said in a news release. The surprise increase in the rate, called the Fasbi, comes ahead of the central bank's policy meeting Thursday. Analysts have said the central bank was likely to hold its benchmark rate at 5.75% for the 16th consecutive month.
Fox News: 
  • Post 9-11 terror fighting legislation under attack. In the dozen years that have passed since the Sept. 11 terror attacks, Congress has enacted a series of laws aimed at keeping the country safe.  But today, the same measures and mandates that were once put in place for the country’s protection have come under attack. Hardest hit: the Patriot Act.
Zero Hedge:
Business Insider: 
New York Times:
  • Insurers Inflating Books, New York Regulator Says. New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout. Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm. 
The Blaze:
  • Analysis - Asia's ticking time bonds; Time to cut and run? Efforts to make the global financial system safer could be making Asia more - not less - vulnerable to any credit market shocks, leaving bond traders worried that a sharp selloff since late May could turn into a rout. Low global interest rates have made it easier than ever to sell new bonds denominated in dollars, euros or yen, resulting in a boom in issuance that has made Asia and its companies ever more dependent on debt. But the market for trading those bonds is slowly drying up, leaving it susceptible to a sharper selloff if holders of these so-called G3 bonds decide it is time to head for the exit. "The issue is that if any of them choose to sell their holdings, the market may not have the capacity to absorb these flows. If we reach a stage like that then liquidity could dry up very quickly and that can have a spiralling effect," said Dhimant Shah, a fund manager at Mackenzie Investments in Singapore.
  • MSCI lowers Greece to emerging market status. Equity index provider MSCI on Tuesday lowered European Union member Greece to emerging market from developed market status, citing failure to qualify on several criteria for market accessibility. 
  • Decline in Yum's(YUM) China restaurant sales eases in May. KFC parent Yum Brands Inc reported on Tuesday an estimated 19 percent drop in May sales at established restaurants in China, a smaller decline than in April when the country's bird flu outbreak caused diners to shun chicken. That result just matched the average of eight analysts, as compiled by Consensus Metrix. Shares in Yum fell 1.3 percent at $70.80 in after-hours trading.
  • Nasdaq short interest down 1.1 pct in late May. Short interest on the Nasdaq dipped 1.1 percent in the last half of May, the exchange said on Tuesday, suggesting a decrease in bearish sentiment in the stock market. As of May 31, short interest declined to about 7.489 billion shares, compared with 7.574 billion shares as of May. 15. 
  • Germans accuse U.S. of Stasi tactics before Obama visit. German outrage over a U.S. Internet spying program has broken out ahead of a visit by Barack Obama, with ministers demanding the president provide a full explanation when he lands in Berlin next week and one official likening the tactics to those of the East German Stasi.
  • Chinese local governments are padding their balance sheets with billions in fake assets. Even China’s most prominent cities and provinces are increasingly relying on high-risk and murky forms of borrowing. That’s according to a new report from China’s National Audit Office on the finances of 36 provincial and municipal governments (link in Chinese). The report covered the governments of cities including Shanghai, Chongqing and Tianjin, and the provincial governments of Guangdong, Jiangsu and others. Here’s a roundup of the most notable numbers:
  • UK challenges 'illegal' EU power to ban short-selling. The Government has challenged new European Union powers to regulate financial markets as "unlawful" and an "institutional revolution" by the back door, during a legal challenge in Europe's Luxembourg court
  • Apple(AAPL) Raises Macbook Pro, IMac Prices in Japan. Co. raised notebook and desktop computer prices by as much as 40,000 yen in Japan yesterday on weakening yen. Price of 13-inch, 750GB Macbook Pro increased by 10,000 yen to 148,800 yen; iMac's most expensive model now costs 198,000 yen, 30,000 yen more than before.
Evening Recommendations 
  • Rated (BOBE) Outperform, target $57.
Night Trading
  • Asian equity indices are -1.25% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 141.0 +8.0 basis points.
  • Asia Pacific Sovereign CDS Index 117.5 +12.5 basis points.
  • FTSE-100 futures -.46%.
  • S&P 500 futures +.15%.
  • NASDAQ 100 futures +.19%.
Morning Preview Links

Earnings of Note

  • (MW)/.55
  • (HRB)/2.61
  • (FIVE)/.04
  • (PVH)/1.38
Economic Releases
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -6,267,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +500,000 barrels versus a -366,000 barrel decline the prior week. Distillate inventories are estimated to rise by +1,500,000 barrels versus a +2,611,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.3% versus a +2.0% gain the prior week.
2:00 pm EST
  • The Monthly Budget Deficit for May is estimated to widen to -$136.5B versus -$124.6B in April.
Upcoming Splits
  • (HOMB) 2-for-1
  • (SAIA) 3-for-2
Other Potential Market Movers
  • The Eurozone Industrial Production data, German CPI report, US 10Y T-Note auction, Australia Unemployment report, USDA Crop Report, weekly MBA Mortgage Applications report, Piper Jaffray Consumer Conference, Goldman European Financials Conference, Deutsche Industrials/Basic Materials Conference, (EA) analyst event and the (TAP) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and financial shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

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