Late-Night Headlines
Bloomberg:
- European Central Bank President Jean- Claude Trichet is struggling to convince investors that the euro region shouldn’t be punished for Greece’s budget problems. As the Greek government tries to control its record deficit and the country’s bonds slide, Trichet yesterday said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The euro nevertheless fell more than half a cent against the dollar and Spanish and Portuguese stocks dropped on concern they are in a similar predicament to Greece. Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.” Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved. “Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”
- Benchmark gauges of corporate credit risk in North America and Europe jumped to the highest in about nine weeks as growing concern that governments will fail to close budget gaps sparked a global drop in stocks and bonds. Credit-default swaps on the Markit CDX North America Investment-Grade Index, which banks and money managers use to speculate on creditworthiness or to hedge against losses, climbed the most in four months. In London, the Markit iTraxx Europe index rose to the highest in more than nine weeks. A swaps index tied to Western European government debt traded at the highest since it was introduced in September. Debt strains in Greece, Portugal and Spain are spreading into markets for corporate borrowing as investors weigh the potential impact on all asset values if a government funding crisis erupts. “If you want to point to the one thing in the market that has people on edge, it’s definitely sovereign risk,” said Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “The level of uncertainty surrounding the sovereign situation continues to increase. It feels like it’s moving faster than people expected, so risk in general is repricing.” The Markit CDX investment-grade index tied to 125 U.S. and Canadian companies jumped 7.25 basis points to 99.5 basis points as of 4:57 p.m. in New York, according to broker Phoenix Partners Group. The index, which typically rises as debt-market confidence deteriorates, was last at that level on Dec. 4, CMA DataVision prices show. In London, the Markit iTraxx SovX Western Europe Index of credit-default swaps on the debt of 15 governments rose 13 basis points to 107 basis points, according to CMA. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5 basis points to 86.5 basis points, the highest since Nov. 30, JPMorgan Chase & Co. prices show. Credit swaps on Goldman Sachs Group Inc. climbed 15 basis points to 131 basis points, according to CMA. Contracts on Morgan Stanley jumped 18 basis points to 147, Citigroup swaps rose 23 basis points to 220 and Bank of America Corp increased 23 to 130. Swaps on JPMorgan gained 17 basis points to 84, CMA data show.
- Hungary’s “uncertain” fiscal prospects, overshadowed by elections in 10 weeks, and a “very weak” economic prognosis are the biggest obstacles to an increase in its credit rating outlook, Fitch Ratings said. Fitch is in “wait-and-see mode” regarding the negative outlook on Hungary’s BBB rating, the second-lowest investment grade, said David Heslam, a director at the credit evaluator that on Feb. 2 raised the outlook on neighboring Romania. The threat of a “double-dip” recession, Hungary’s mounting debt levels and an unrealistic 2010 budget target will limit Fidesz’s ability to jumpstart the economy, which shrank an estimated 6.7 percent last year, the party’s Deputy Chairman Mihaly Varga said on Feb. 2. Yields on Hungarian government bonds jumped 34 basis points to a two-month high of 2.64 percentage points over similar maturity U.S. Treasuries yesterday, according to JPMorgan Chase & Co.’s EMBI Global Indexes. The benchmark BUX stock index dropped 4.6 percent and the forint fell to a month-low of 273.95 against the euro. The cost to protect against a Hungarian default rose 4.5 basis points to a five-month high of 251.5, according to credit- default swap prices from CMA Datavision in London. The yield on Hungary’s 4.75 percent U.S. dollar bonds due in 2015 climbed 13 basis points to 5.09 percent, according to prices on Bloomberg.
- The California State Teachers’ Retirement System, the second-biggest U.S. public pension, is considering investments in commodities to boost returns and provide a hedge against inflation and slumping equities. The governing board of the fund, with $134 billion under management, is scheduled to hear today a staff report in Sacramento that recommends its first-ever commodity investment. Investors poured about $60 billion into commodities through index-tracking and exchange-traded funds and medium-term notes last year, and should add at least that much in 2010, according to a December survey of 250 investors by Barclays Capital. A possible move into commodities comes three years after the California Public Employees’ Retirement System, the largest public pension fund in the U.S. with $202 billion of assets under management, made its first push into commodities, including oil and metals.
- China’s stocks fell, sending the benchmark index to its longest weekly losing streak since October, on concern an unexpected jump in U.S. jobless claims and rising sovereign debt will slow demand for Chinese exports. Energy and metal stocks led the decline, with PetroChina Co. falling to the lowest since September and Jiangxi Copper Co., the nation’s biggest producer of copper, sliding 4 percent after commodity prices slumped the most since August. “The situation is a bit grim: the government is internally adopting tightening measures and externally the demand still looks fragile,” said Tu Hai, a strategist at Guoyuan Securities Co. in Shanghai. “The market may next reach a consensus that corporate earnings growth will be slower than previously expected.” The Shanghai Composite Index dropped 2.2 percent to 2,929.79 as of 9:31 a.m. local time.
- Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, as earnings and Greece’s debt woes raised concerns that the global recovery may falter, according to EPFR Global. Investors removed almost $1 billion from global emerging market stock funds in the week ended Feb. 3, the most in more than a year, and withdrew $516 million from Asian equities outside of Japan, the research company said in a statement. Latin American funds also posted outflows, while those buying emerging Europe, Africa and the Middle East shares reported “modest” net inflows, according to the statement.
- China will impose anti-dumping measures on imports of broiler chicken products from the U.S., the Ministry of Commerce said in a statement on its Web site today citing a preliminary ruling following an investigation. The measures will become effective from Feb. 13, it said.
- Copper slumped in Shanghai to a 12- week low, tracking declines in London, as rising job losses in the U.S. and widening deficits in Europe fueled investor concern that the global economic recovery is slowing. “Copper is rapidly shedding its appeal as a financial asset,” Ni Yaoxiang, an analyst at Guojin Futures Co., said from Shanghai today. “Anxiety about the U.S. and Europe is increasing.”
- India, South Korea and Thailand are "behind the curve" in fighting inflation after a doubling in crude oil prices in the past year, according to Generation Alfa SA, a Geneva-based wealth management company. Inflation exceeds benchmark interest rates in the three countries, as central bankers focus on supporting economic growth. "Central banks could be behind the curve by acting a little late just to extract a bit more aggressive growth," said Joseph Di Virgilio, a fund manager at Generation Alfa, which overseas $400 million and advises hedge-fund clients with more than $1 billion of assets.
Wall Street Journal:
- As the government mulls banking reform efforts officials hope will prevent a replay of the financial crisis of recent years, more than a few observers are worried about the growing threat created by those who trade stocks at lightning speed. This so-called high-frequency trading engages in extremely fast buying and selling of stocks to generate profits. The few who do it account for significant amounts of volume for the word’s major stock exchanges, and as a result, are a potential source of system wide trouble. A new paper published Wednesday by the Federal Reserve Bank of Chicago takes a look at the issue. While much of the piece, written by staffer Carol Clark, simply explains what high-frequency trading is, it also offers a few suggestions that could mitigate the risks of the strategy. The threat is potentially real–some 70% of U.S. stock market’s total volume was driven by high-frequency trading, despite only 2% of trading firms engaging in the pursuit, according to research cited by the paper. While this style of trading has an upside in creating liquidity in the stock market, critics worry that bad programming and human error could create catastrophic market moves.
- Countries have dealt with debt woes before. But the latest fears about government debt now riling some European markets are being fueled by a relatively new trading tool that lets investors bet against nations' bonds. Credit-default swaps, or CDS, enable investors to protect themselves from a default of the debt of a range of nations or wager on the likelihood of such a scenario. In recent weeks, prices for CDS contracts have soared as investors snapped them up on worries about the bulging debt of nations including Spain, Portugal, Greece and Latvia. The CDS moves—highly visible and widely watched—have compounded the angst of stock and bond investors, analysts say, helping to pressure global markets. The market for CDS has boomed in recent years. Seven years ago, there was less than $3 trillion of CDS contracts outstanding; today there are more than $25 trillion of these contracts, according to the International Swaps and Derivatives Association. When prices for CDS on the debt of firms like American International Group Inc. and Lehman Brothers Holdings Inc. soared in 2008, investors interpreted the moves as signals of troubles ahead. Now the same is happening with CDS prices rise for a variety of nations, marking one of the first potential government-debt crises in which CDS contracts are helping to spread unease. That is creating another real-time measure of investor worries—a barometer that itself can generate more anxiety. "It's easier to buy protection and transact a 'short' position, that's half the reason CDS were developed, so people can hedge risk," says Tim Backshall, chief strategist at Credit Derivatives Research, an independent research firm in New York. "You can move [other markets] with those trades." It has always been possible to sell short—or bet against—government bonds directly. But investors say buying CDS can be an easier way for them to quickly enter a wager. For one thing, CDS can be purchased by investors who don't own the underlying debt but want to wager that it is likely to weaken, meaning they can be bought not only by people hedging other bets but also by investors making straight wagers. And a CDS buyer usually doesn't have to produce as much collateral to make a bearish trade as the investor would to make a similar wager in the government-bond market. Some have criticized CDS as a sentiment indicator, noting the swaps sometimes suggest that countries are headed for a default though yields on bonds issued by those countries don't indicate such a dire outcome. They also don't always see heavy trading, opening the door to potentially sharp price moves.
- The London Real Estate Bubble Is Back - and It's Scary.
MarketWatch.com:
- China's current-account surplus in 2009 shrank by 35% from a year earlier, the first decline since 2001, according to preliminary figures released by the State Administration of Foreign Exchange on Friday.
CNBC:
- The growing sovereign debt problems in Europe will continue to keep markets under pressure, Bill Gross, co-CIO and founder of Pimco, told CNBC Thursday. “The magnitude is not the same as the subprime crisis, but to a certain extent, they're similar,” Gross said in a live interview.
NY Times:
Dow Jones:
- China's banking regulator said Thursday it has urged banks in Shanghai to closely monitor property loans and recall some loans, because a surge in Shanghai's real-estate prices in the past decade has resulted in a potentially large credit risk. There are mounting concerns about a possible asset bubble as real-estate prices have surged beyond what most people can afford, which spurred the government to remove some of the measures it took to revive the property sector during the financial crisis. A recent stress test by the banking regulator's Shanghai branch showed the bad loans ratio for mortgages would rise by 0.73 percentage point if the city's property prices fall 10%, and the ratio would rise by 1.63 percentage points if property prices tumble 30%, the regulator said in a statement. "Shanghai is one of the important indicators of the nation's property industry. The CBRC Shanghai branch has asked all banks in the city to attach great importance to controlling credit risks in the market," the regulator said. The regulator said it has banned banks from issuing loans to speculative buyers of residential properties and property developers with a shortfall in capital. It has also asked banks to stop extending loans to developers that hoard land or withhold the sale of new apartments in the hope of selling them at a higher price in the future. "Banks should also recall loans that have been issued to these companies," the CBRC added. It reiterated that individuals who buy second residential properties will have to pay a minimum down payment of 40%, double the level for first-time buyers.
Business Insider:
- This morning, the EU announced that it stands by Greece's new budget. Great, maybe that will give investors confidence that they don't have to worry about Greece actually missing a payment. But now there's a new loser: Portugal. It's the weak link for Europe to throw to the wolves.
Business Week:
Politico:
- Democrats Protect Backroom Deals. The health care bill is in trouble, but a series of narrow deals — each designed to win over a wavering senator or key interest group — is alive and well, despite voter anger over the parochial horse-trading that marked the rush toward passage before Christmas. With the exception of Nebraska Democratic Sen. Ben Nelson’s “Cornhusker Kickback,” which alienated independent voters and came to symbolize an out-of-touch Washington, none of the other narrow provisions that Senate Majority Leader Harry Reid inserted into the bill appear to be in any kind of danger as Democrats try to figure out the way ahead. Not only that, House liberals want to reopen the labor deal struck just days before Democrats lost their 60-vote majority — not to dial it back but to provide more generous protections from the tax on Cadillac insurance plans. “For those of us who, in principle, are opposed to it, this gives us another chance to push for our basic principle,” said Rep. Sander Levin, a Michigan Democrat with strong ties to organized labor who sits on the tax-writing Ways and Means Committee. “It remains unsatisfactory.” The flurry of last-minute deals helped sour Americans on the entire process, and the Massachusetts Senate election altered the trajectory of reform. But Washington being Washington, none of that has cooled the appetite of senators and House members to tailor the bill to their specific needs — even though some Democrats worry that it could help destroy any chances of resurrecting reform, if lawmakers seem oblivious to voters’ concerns.
Real Clear Politics:
- The United States of Fiscal Folly. On Day One of his vow to take "meaningful steps to rein in our debt," Barack Obama asked Congress to freeze portions of discretionary domestic spending. This would follow an astonishing permanent expansion: Republicans on the House Budget Committee say appropriations bills Obama has signed, along with his stimulus spending, have increased discretionary domestic spending 84 percent. He almost certainly will not keep his promise to veto spending bills when Congress, as it almost certainly will, largely disregards his request. On Day Two, taking a break from the rigors of austerity, he was in Tampa, Fla., promising $8 billion for high-speed rail projects there and in a dozen other places. Four days later, he released a $3.8 trillion fiscal year 2011 budget that would add another $1.3 trillion to the national debt. The budget reveals that the deficit emergency is not so great as to preclude another stimulus, aka "jobs bill."
Market Ticker:
- Derivative Fraud? Where Are OUR Cops? We will not see true economic progress or recovery until we rid the system of the parasitic vampires that are literally draining the blood from our economic system. While some degree of embezzlement and fraud is always present in an economy when you reach the point that so-called "lending" has turned into a Ponzi-style circus with everyone looking for a greater sucker to offload their latest piece of trash upon at a profit (for them) you've also reached the stage where that nation's economy becomes subject to outright collapse. We stared into that abyss in 2008 and early 2009, but rather than learn from it, revoking the business and banking licenses of the worst offenders, breaking up the monolithic businesses that threatened to blow up the world unless their demands for (even more) money were met, banning the opaque products and jailing the principals we have instead coddled them and saddled our children and grandchildren with the costs of bailing out the (proper and appropriate) detonation of these bogus transactions. We have fixed exactly nothing that led to the implosion. Instead we erected a wall around the burning building claiming that the building inside the wall is not really on fire and then piled up barrels of nitroglycerine around the outside! Unless we get off our duffs and address the actual underlying cause of the mess - the rampant and outrageous scams throughout corporate America we will have not just another collapse as we witnessed in 2008 but a worse one, and it will come sooner rather than later. Choose America.
USAToday:
- Foreign officials with potential corruption links are exploiting weaknesses in federal anti-money-laundering safeguards to move millions of dollars into U.S. bank accounts and properties, according to a Senate report released Thursday. The officials, known internationally as "politically exposed persons," are aided by lawyers, banks, escrow and real estate agents, lobbyists and others who didn't report or weren't required to question transactions, the Senate Permanent Subcommittee on Investigations report alleges."For the United States, which has so much riding on global stability, corruption is a direct threat to our national interests," said Sen. Carl Levin, D-Mich., the panel chairman. "If we want to credibly lead efforts to stop illegal money abroad, we've got to stop it here at home, as well." Examples to be cited at a panel hearing include:
Daily Beast:
TechCrunch:
Reuters:
- The Pentagon is mulling ways to curb its reliance on its eyes and ears in space, concerned about a perceived threat to its satellites from China, a top Air Force official said Thursday. Gary Payton, deputy under secretary for space programs, voiced concern at Beijing's display last month of technology aimed at destroying missiles in mid-air, an area in which Washington has invested hundreds of billions of dollars to build a layered antimissile bulwark. "They're still openly testing them in a very dynamic environment above the atmosphere," he said of a reportedly successful Chinese missile-defense test. He equated this with Beijing's demonstration of antisatellite technology that pulverized one of its own weather satellites in January 2007. "It wasn't that much different," Payton told a forum on the space budget organized by the Space Foundation, a nonprofit that promotes the use of space. "It's a threat that we have to learn how to overcome." Asked whether China had been trying to jam U.S. satellites or to use lasers to disrupt them, as U.S. officials have alleged in the past, Payton said: "I can't talk about that."
Financial Times:
- Jamie Dimon, JPMorgan Chase’s(JPM) chief executive, on Thursday received shares worth about $10m after exercising 10-year-old stock options, just days before he was due to be granted a 2009 pay package estimated at $15m-$20m. At Goldman Sachs(GS), which has become a lightning rod for criticism of the industry, several executives said that they expected Lloyd Blankfein, chief executive, to receive a similar bonus of about $20m in stock and options. JPMorgan and Goldman have emerged as winners from the crisis on the back of a rebound in capital markets that was fostered by governments’ huge injections of liquidity into the financial system. Their shares have rallied in the past year while their profits surged. Goldman’s shares are up more than 70 per cent over the past 12 months, while JPMorgan’s stock has gained nearly 60 per cent. Goldman’s share price and its record profits for 2009 have deepened the controversy surrounding the bank. Critics argue that its close ties to governments and widespread presence in capital markets enabled it to derive disproportionate benefits from the rescue of the banking sector. JPMorgan declined to comment but industry observers expect Mr Dimon to receive a package of $15m-$20m, all in stock, for 2009.
- To most casual observers, it might seem as if the main reason why Greek bonds have recently tumbled in price is that investors have suddenly, and belatedly, woken up to the dire state of Greece’s fiscal problems. But that tells only part of the tale: another factor that has also been hurting the Greek bond price is a subtle, albeit geeky, discussion that is quietly underway at the European Central Bank in relation to its collateral policy. Back in the autumn of 2008, after the collapse of Lehman Brothers, the ECB loosened the rules which govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of merely accepting bonds rated A-, or more. This was initially presented as a “temporary” policy, slated to last until late 2009. But last year the ECB extended the policy until the end of 2010. Thus, during 2009, banks which were holding Greek bonds have been merrily exchanging these for other assets via the ECB. This, in turn, has helped to support Greek bond prices (and, by extension, Greek banks that hold a large chunk of outstanding Greek bonds). Until recently, many observers thought – or hoped – that this policy would be extended again, perhaps until 2011 or beyond. For although Greek debt currently has a credit rating that meets the old ECB rules, there is a good chance the debt will be downgraded this year. This creates the risk that Greek bonds will be excluded from any newly tightened ECB regime. Earlier this year, senior ECB officials indicated that they intended to “normalize” the policy, as planned, at the end of 2010, as part of their exit strategy. That has removed one key source of support for Greek debt (and spooked investors, such as German insurance companies, which also hold large chunks of bonds.) Now I would not suggest for a moment that this collateral debate is the only reason for the Greek bond shock: there are clear macro-economic reasons for alarm too. Moreover, the market gyrations have almost certainly been magnified by the sheer volume of speculative, hedge fund money now swirling around. And in the coming weeks, it will be fascinating to watch what happens to those hedge funds. For there is a fascinating transatlantic divide at work in the investment world. In the eyes of many Wall Street players it now seems entirely logical, if not inevitable, that Greece will eventually default on its bonds or exit the euro, given the underlying fiscal maths. To many European bankers and politicians, however, the focus on raw numbers misses the point. To them, this story is not just about economics, but politics, and the determination of a generation of leaders traumatized by the second world war to maintain European unity, almost at any cost. And as the price of Greek debt has tumbled, and yields have risen, doughty figures at the heart of Europe are increasingly likening this to an “attack” on the euro, on a par with, say, the attack on sterling launched by George Soros two decades ago. The potential for some form of political backlash is running high.
Der Spiegel:
- Peter Bofinger, a member of German Chancellor Angela Merke's council of economic advisers, said a bankruptcy of Greece would be "bearable" for the euro, citing an interview. Bofinger isn't afraid a bankruptcy would lead to a collapse of the euro, he said.
Financial Post:
- Terence Corcoran: The war on Toyota. The United States is turning Toyota's recall into a massive national industrial advantage. When top-line political gamesman such as U.S. Transport Secretary Ray LaHood, Congressional pit bull Henry Waxman, and conniving United Auto Workers executives start piling on, this is clearly much bigger sport that the usual ritual public lynching of auto executives, a routine occurrence in Washington. The attack on Toyota, at this time of U.S. economic weakness and populist excess, is fast turning into a great American nationalist assault on a foreign corporation, an economic war.
MoneyToday:
- South Korea is "closely monitoring" the financial markets amid heightening concern that Greece and other European nations will struggle to curb their budget deficits, citing a finance ministry official. The government expects "instability" in the markets for the time being.
Evening Recommendations
Citigroup:
- Reiterated Buy on (AEO), raised estimates, target $19.
- Reiterated Buy on (URBN), added to Top Picks Live list, target $42.
- Upgraded (GPS) to Buy, target $24.
Night Trading
Asian indices are -3.0% to -1.75% on avg.
S&P 500 futures +.19%.
NASDAQ 100 futures +.16%.
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Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for January is estimated at 15K versus -85K in December.
- The Unemployment Rate for January is estimated to remain at 10.0% versus 10.0% in December.
- Average Hourly Earnings for January are estimated to rise +.2% versus a +.2% gain in December.
3:00 pm EST
- Consumer Credit for December is estimated at -$10.0B versus -$17.5B in November.
Upcoming Splits
- None of note
Other Potential Market Movers
- The Treasury's Geithner attending G-7 meeting, Fed's Bullard speaking, (STJ) analyst meeting, (GLW) investor meeting, (EMR) investor conference and the CSFB Energy Summit could also impact trading today.