Wednesday, March 19, 2014

Wednesday Watch

Evening Headlines 
  • Russia Shrugs Off Sanctions as It Seals Claim to Crimea. Russia cemented its claim to Crimea as President Vladimir Putin showed no sign of backing down in the standoff over Ukraine’s breakaway Black Sea region, prompting Western leaders to vow further sanctions this week. Putin signed an accord yesterday setting in motion Crimea’s accession to Russia, while British Prime Minister David Cameron vowed to push European leaders to agree on additional measures against Russia when they meet tomorrow in Brussels. As tensions rose, Ukraine accused Russian forces of being involved in a shooting that killed a Ukrainian soldier.
  • Short Sellers Target Chinese Developers as Rout Deepens. Stock traders have doubled bearish bets against some of the biggest Chinese developers amid growing concern that a weaker real-estate market will curb property sales just as borrowing costs surge. Short interest in Evergrande Real Estate Group Ltd. (3333), the nation’s fourth-largest developer by market value, was at 8.4 percent yesterday, up from 3.2 percent a year ago, according to data compiled by Bloomberg and Markit Group Ltd. It reached a record 8.6 percent of shares outstanding on March 4. Wagers against Hong Kong-listed Guangzhou R&F Properties Co. and Agile Property Holdings Ltd. have both reached the highest since December 2012.
  • China Mobile Under Pressure as IPhones, WeChat Curb Profit. China Mobile Ltd. (941) faces a triple whammy of apps, iPhone subsidies and regulations that likely will cost the world’s largest carrier as much as $1.8 billion in profit this year. The state-run phone company is contending with falling income as customers flock to free messaging applications like Tencent Holdings Ltd.’s WeChat and buy Apple Inc. devices at a subsidized discount. The government also will impose a new telecommunications tax as part of an effort to lower prices and improve customer service. 
  • Japan Posts Bigger-Than-Forecast Trade Deficit for February. Japan’s trade deficit exceeded analysts’ estimates in February, underscoring drags on the nation’s recovery as a sales-tax increase looms in April. The 800 billion yen ($7.9 billion) shortfall reported by the finance ministry in Tokyo today was more than the 600 billion yen median estimate in a Bloomberg News survey of 31 economists. Imports (JNTBIMPY) expanded 9 percent from a year earlier, and exports rose 9.8 percent. Import volumes fell 0.5 percent from a year earlier, the first decline since September, today’s report showed.
  • Japan Display Slumps in Trading Debut After $3.1 Billion IPO. Japan Display Inc. plunged in its debut after the supplier of screens for Apple Inc. devices priced shares through an initial public offering at the bottom of a planned range. The IPO raised 318.5 billion yen ($3.1 billion) with an offer price of 900 yen. The stock declined as much as 22 percent and traded at 749 yen as of 10:04 a.m. in Tokyo.
  • Asian Stock Gauge Fluctuates Before Fed Policy Statement. Asia’s benchmark stock gauge fluctuated as investors weighed the prospect of further sanctions against Russia and awaited the Federal Reserve’s policy statement. Japan Display Inc. sank in its trading debut. Nufarm Ltd. climbed 4.3 percent in Sydney as Credit Suisse Group AG and UBS AG raised their ratings on Australia’s biggest supplier of agricultural chemicals after the company said it would close two manufacturing sites. Japan Display tumbled 17 percent on its first trading day in Tokyo after the supplier of screens for Apple Inc. devices raised 318.5 billion yen ($3.1 billion) through an initial public offering. Newcrest Mining Ltd. advanced 3.6 percent in Sydney after CLSA Asia Pacific Markets raised its rating on the stock to buy. The MSCI Asia Pacific Index was little changed at 135.06 as of 10:23 a.m. in Tokyo, after rising 0.2 percent and falling 0.1 percent.
  • VIX Trader Pays $8 Million on Bet Gauge to Rally 60% by May. An investor paid about $7.95 million for a trade that will pay off if the Chicago Board Options Exchange Volatility Index rallies at least 60 percent by May. The trader bought 150,000 bullish contracts on the VIX expiring in May with a strike price of 22, while selling the same number of May 30 calls in a strategy known as a call spread, according to New York-based Miller Tabak & Co. The trade cost 53 cents to put on for each contract and it will profit if the volatility gauge rises above 22.53 from the current level around 14, data compiled by Bloomberg show. It has a maximum payoff if the VIX more than doubles to 30. 
  • Junk Bonds at $2 Trillion as Gundlach Pulls Back: Credit Markets. The junk-bond bonanza that's doubled the market to almost $2 trillion since the credit crisis has Jeffrey Gundlach heading toward the exit. With borrowing costs for the least-creditworthy companies approaching a record low, junk bonds no longer provide enough of a buffer from rising Treasury yields as the Fed scales back its bond buying, said Gundlach, whose firm oversees $49 billion. "They've squeezed all the toothpaste out of the tube," the bond manager said in a telephone interview from Los Angles. "There is interest-rate risk that's just being masked by fund flows holding up the prices of junk bonds." Junk bonds, which have returned 148% since the end of 2008, are showing signs of froth as five years of easy-month policies by central banks caused investors to pour unprecedented amounts of money into the high-yield market. That's helped push the amount of junk bonds worldwide to $1.97 trillion from less than $1 trillion in March 2009, Bank of America Merrill Lynch index data show.
  • Corporates Surpass ’07 Mortgage Bonds as Risk Escalates. Corporate debt is accounting for the biggest portion of the U.S. bond market ever, with $9.8 trillion of debentures surpassing the 2007 peak of the mortgage-securities boom that triggered the financial crisis. Debt issued by companies from Verizon Communications Inc. (VZ) to Caesars Entertainment Corp. (CZR) made up almost 25 percent of the $39.9 trillion in U.S. bonds outstanding at year-end, up from 19 percent five years earlier, according to data published March 14 by the Securities Industry and Financial Markets Association. Outside the $11.9 trillion of Treasuries, corporates are the largest component of the world’s biggest debt market. Obligations are mounting as the Federal Reserve pulls back from more than five years of easy-money policies that spurred the borrowing glut. With economists forecasting benchmark yields will rise, that’s raising concern companies facing $3.5 trillion of maturities by the end of 2018 will find it more costly to refinance, similar to what U.S. homeowners faced six years ago. “The market is getting more and more similar to that 2007 time period,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. Investors “are going down in credit quality to the point that it’s detrimental to potentially getting back the principal.”
  • IRS Employee Took Home Data on 20,000 Workers at Agency. A U.S. Internal Revenue Service employee took home a computer thumb drive containing unencrypted data on 20,000 fellow workers, the agency said in a statement today.
Wall Street Journal:
  • Fed transparency boils down to 16 dots on a page. Of all the Federal Reserve’s moves toward transparency since Ben Bernanke took over the central bank in 2006 , the one with the most impact this week will be 16 dots on a piece of paper, said  Joseph Lavorgna, chief U.S. economist at Deutsche Bank.
Zero Hedge: 
Business Insider:
NY Times:
  • Costly Loans Are Drawing Attention From States. The crackdown gained momentum on Tuesday when the Illinois attorney general, Lisa Madigan, accused All Credit Lenders of misleading borrowers into taking out expensive loans that come with insurance products that they do not need or cannot use.
  • Adobe(ADBE) forecasts results above estimates as web subscriptions rise. Adobe Systems Inc, the maker of Photoshop and Acrobat software, forecast current-quarter profit and revenue above analysts' estimates, citing strong demand for its Creative Cloud suite and digital marketing software. Shares of the company, which also posted better-than-expected results for the first quarter ended Feb. 28, rose 1 percent in extended trading.
  • Oracle(ORCL) quarterly results disappoint Wall Street; shares fall. Oracle Corp(ORCL) posted higher third-quarter revenue and profit that failed to satisfy investors looking for signs of a sustained turnaround and its shares fell about 4 percent. Shareholders had grown more optimistic after Oracle's previous quarterly results, but still worried about slow IT spending and growing competition from smaller, nimble rivals.
  • Tymoshenko Says Putin Speech 'Fascist Propaganda'. Ukraine hoping for "more" when it comes to Western sanctions against Russia, Yulia Tymoshenko is cited as saying in an interview. Says Putin speech sends message he doesn't care about the Western opinion of Ukraine crisis.
Liquidity crunch a catalyst for big China slowdown – analysts The mini liquidity crunch is the early warning sign of a substantial economic correction long overdue, amid rising leverage and a broken growth model, say bearish analysts.

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Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 128.0 unch.
  • Asia Pacific Sovereign CDS Index 96.25 -1.25 basis points.
  • FTSE-100 futures +.03%.
  • S&P 500 futures -.12%.
  • NASDAQ 100 futures  -.07%.
Morning Preview Links

Earnings of Note

  • (GIS)/.61
  • (KBH)/.08
  • (FDX)/1.46
  • (VRA)/.46
  • (XONE)/.01
  • (GES)/.79
  • (JBL)/.11
  • (CTAS)/.69
  • (MLHR)/.34
Economic Releases
8:30 am EST
  • The 4Q Current Account Deficit is estimated at -$88.0B versus -$94.8B in 3Q.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,315,000 barrels versus a +6,180,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -1,245,000 versus a -5,230,000 decline the prior week. Distillate supplies are estimated to fall by -745,000 versus a -533,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.47% versus a -1.4% decline the prior week.
2:00 pm EST
  • The FOMC is expected to leave the benchmark fed funds rate at .25%.
  • The Fed's QE3 pace for March is estimated at $55B versus $65B in February.
Upcoming Splits
  • (WLK) 2-for-1
Other Potential Market Movers
  • The FOMC Economic Projections, Fed's Yellen speaking, BoE Minutes, weekly MBA mortgage applications report, weekly retail sales reports, (GRA) investor day and the (FSLR) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and financial 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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