North American Investment Grade CDS Index 119.81 bps -.83%
European Financial Sector CDS Index 137.53 bps +1.33%
Western Europe Sovereign Debt CDS Index 147.50 bps -1.67%
Emerging Market CDS Index 264.60 bps -3.01%
2-Year Swap Spread 32.0 -4 bps
TED Spread 38.0 +1 bp
Economic Gauges:
3-Month T-Bill Yield .15% -1 bp
Yield Curve 237.0 +5 bps
China Import Iron Ore Spot $126.60/Metric Tonne -1.09%
Citi US Economic Surprise Index -20.80 -.3 point
10-Year TIPS Spread 1.73% +1 bp
Overseas Futures:
Nikkei Futures: Indicating +231 open in Japan
DAX Futures: Indicating +20 open in Germany
Portfolio:
Higher: On gains in my Biotech, Medical, Technology and Retail long positions
Disclosed Trades: Covered some of my (IWM)/(QQQQ) hedges, covered some of my (EEM) short, added to my (ISRG) long
Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is very bullish as the S&P 500 trades substantially higher, as it pushes to session highs this afternoon. On the positive side, Airline, REIT, Bank, Semi, Computer, Coal, Disk Drive and Oil Service stocks are especially strong, rising 4.0%+. Cyclicals are outperforming today. (IYR) trades much better, rising +4.66%. (XLF) also trades well, rising +4.0%. Copper is rising another +1.77%. The S&P GSCI Ag Spot Index is jumping another +3.0% today to 315.68 and is now close to its 200-day moving average at 319.50. Weekly retail sales remain firm, rising +3.0% versus a +3.0% gain the prior week. The 10-year yield is rising +5 bps to session highs, which is also a positive at this point. On the negative side, Telecom, Drug, Biotech, HMO and Hospital shares are underperforming, rising less than 1.5%. Despite improvements in some gauges of European credit angst, three-month euro Libor is rising another +.19 basis point today to another multi-month high of 74.19 bps. The TED spread has also been trending higher again over the last few days. China Import Iron Ore Spot prices continue to decline. Weekly retail sales have held up well even as retail stocks have been crushed over the last few months. This could be one of the better performing groups during the upcoming earnings season. The broad market has likely begun a short-term move higher. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less real estate sector pessimism, bargain-hunting and diminishing economic fear.
U.S. Retailers' Sales Rise at Fastest Pace in 4 Years. U.S. retailers’ sales are growing at the fastest pace in four years, a sign consumers may be overcoming concern about unemployment and depressed home values. Sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow.
State Street Rises as Operating Profit Beats Estimates. State Street Corp., the third-largest U.S. custody bank, rose the most in more than a year in New York trading after reporting second-quarter operating profit that beat analysts’ estimates. State Street gained as much as 11 percent after reporting earnings per share of 93 cents, excluding some one-time items. The mean estimate of 15 analysts in a Bloomberg survey was for profit of 72 cents.
EU Stress Tests May Include 17% Loss on Greek Debt. European banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks. There are unlikely to be so-called haircuts on German government securities under the stress tests being overseen by the Committee of European Banking Supervisors, said the people, who declined to be identified because the talks are private. CEBS is still weighing how much data to disclose and when, a European Union official familiar with the talks said. “If they set the criteria so stringently that the majority of the participants fail, then the financial industry in Europe fails with it,” said Ralph Silva, an analyst at London-based Silva Research Network, which specializes in financial-services firms. “These kind of numbers do not seem particularly robust,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “The stress on Greek and Spanish bonds seems too modest.”
Market Sets Greek Debt Losses at Three Times Stress-Test Level. Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by European banking regulators. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or debt restructuring. So-called stress tests designed to gauge banks’ strength will assume a loss, or haircut, of just 17 percent on the bonds, according to two people briefed on the regulators’ talks before an official announcement.
China Seeks to Tighten Liquidity Even as Growth Slows. The People’s Bank of China signaled it remains focused on reining in liquidity and stemming inflation even after evidence of slowing growth in the world’s third-biggest economy contributed to a global stock sell-off. A surfeit of cash is still the main problem facing monetary policy, and PBOC should at an appropriate time use interest rates to address it, Yang Guozhong, director of the bank’s business management department, wrote in China Finance magazine. Zhang Jianhua, director of the research bureau, wrote in the China Daily that the PBOC must “deal with” excess liquidity. “Price pressures have been building for almost a year now,” and inflation will likely accelerate in coming months, said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “Today’s comments suggest that inflation and easy liquidity remain at the top of the PBOC’s agenda.”
U.S. Commercial Property Sales Trail Average as Supply Limited. U.S. commercial real estate sales in the first half totaled about a quarter of the average of the previous six years as owners kept properties off the market, impeding investors with record funds for purchases. Buyers and sellers completed $34.2 billion of deals through June, or 26 percent of the average first-half dollar volume since 2004, according to preliminary figures from Real Capital Analytics. The total was about 12 percent of the 2007 peak, when $277.7 billion of properties changed hands in the same period, data from the New York-based real estate research firm show.
China Says Treasury Holdings Shouldn't Be Politicized. The manager of China’s foreign- exchange reserves said the U.S. bond market is important and changes in holdings of Treasuries “shouldn’t be politicized.” The benefits of investing in U.S. government debt include “relatively good” safety, liquidity and low trading costs, the State Administration of Foreign Exchange said today in a statement on its website. China increasing or cutting the amount of U.S. debt it owns “is normal” and decisions are made based on market conditions, it said.
Merkel's Cabinet Back $103 Billion Budget-Cut Plan. German Chancellor Angela Merkel’s Cabinet approved a four-year package of budget cuts, stepping up pressure on fellow European governments to reduce debt that risks tearing apart the euro area. Ministers meeting in Berlin today backed spending cuts and revenue-raising measures worth 81.6 billion euros ($103 billion) from 2011 through 2014. Snubbing President Barack Obama’s calls to focus on economic growth, Merkel says the cuts, equivalent to about 2.7 percent of gross domestic product in Europe’s biggest economy last year, aren’t deep enough to threaten the recovery. “Germany feels the responsibility to signal that it will continue to push strongly for fiscal discipline within the euro area,” Marco Annunziata, chief European economist at UniCredit Group in London, said in a telephone interview. “The only way to do it is to exercise leadership.”
Allstate(ALL) CEO Says State Borrowing 'Out of Control'. Allstate Corp. Chief Executive Officer Thomas Wilson said a surge in borrowing by U.S. state and local governments may trim the value of municipal debt holdings, and called for political leaders to cut costs. “Government borrowing is way out of control.” Wilson, 52, said yesterday in a Bloomberg Television interview from Aspen, Colorado. “We need to get our house in order.”
Fisher Says Fed Has 'Done Enough' to Spur Growth. Federal Reserve Bank of Dallas President Richard Fisher said that while the economy is slowing, there’s little risk it will sink back into a recession and policy makers have “done enough” to spur growth. “I don’t think we’re going to go backwards,” Fisher said in an interview with CNBC today. “I think we’ve done enough,” Fisher said. “We ought to be very careful about not going too far. Interest rates are zero. It’s not the cost of money that’s the issue.” Fisher said companies are holding back on investment because of uncertainty over government regulations in areas such as health care. He also said he expects the world’s largest economy to slow in the second half of the year as the contribution from business inventories wanes. Companies are “hoarding cash, they’re holding back, they’re not hiring people, they’re not building plant and equipment at the pace we’d like to see,” Fisher said. “This has nothing to do with monetary policy. We have been as accommodative as possible.” Asked about the prospect of additional asset purchases, Fisher said: “I’m not ruling it out, I’m just saying we have provided a lot of accommodation, there’s a lot of buildup of liquidity, there’s a lot of cash.” “Now it has to be utilized,” Fisher said. “It will be utilized only if there is confidence in the future.”
Prisoner-Swap Deal Expected in Russia Spy Case. In an apparent throwback to the Cold War, Moscow and Washington are discussing a deal to swap the 10 suspected deep-cover Russian agents arrested last month in the U.S. for prisoners held in Russia, according to people familiar with the talks.
Russia-To-Asia Pipeline Take Detour to U.S. Russian oil has taken an unexpected turn to the U.S., where it is making inroads on the West Coast. Oil refineries spanning the area between the Puget Sound in the Pacific Northwest and greater Los Angeles have been quick to try out oil that is landing in tankers sent from Russia's eastern coast. Imports have gone from zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bringing crude from deep inside Eastern Siberia came online.
BP(BP) Open to Abu Dhabi Stake. BP PLC's Chief Executive Tony Hayward met this week with Abu Dhabi's powerful Crown Prince Mohammed bin Zayed Al Nahyan and would be open to seeing the oil-rich sheikdom buy a stake of up to 10% in the U.K. oil giant, a person with knowledge of the meeting told Zawya Dow Jones.
McDonald's(MCD) Blasts Criticism of Happy-Meal Toys. McDonald's Corp. Chief Executive Jim Skinner vowed to vigorously defend the company in its use of toys to promote Happy Meals against a threat by a consumer group to sue the fast-food giant over the practice.
Bloomberg Businessweek:
Euro's Downtrend Resistance May Halt Rally: Technical Analysis. The euro’s rebound versus the dollar to above its 55-day moving average will probably fade as the currency approaches resistance to further gains formed by its 16 percent slump since the beginning of December, according to Bank of Tokyo-Mitsubishi UFJ Ltd. “With such strong resistance still in place, it appears unlikely that the euro’s recent bounce will gain further momentum,” Hardman wrote. “It appears reasonable to expect the euro to now experience a period of undervaluation in the years ahead.” The shared European currency may fall below parity with the dollar, an “extreme undervalued level,” if Greece were to restructure its debt or one of the euro members left the currency union, Hardman wrote.
CNBC:
US Mortgage Applications Soar on Refinance Demand. Refinancing drove total U.S. mortgage applications to a nine-month high last week, while demand for loans to purchase homes sunk to a near 13-year low as buyers remained sidelined after the expiration of federal tax credits.
Financial Reform Has More Holes Than Swiss Cheese. Whew! That was close! After 18 months of threats, saber rattling, and posturing about the demise of the competitiveness of the American banking system, we finally have a financial reform bill, although it has more holes than a hunk of Swiss cheese. There is no return of Glass-Steagall, no breakup of the big banks. Crucial definitions, like one for “proprietary trading”, got lost in the Bermuda Triangle. An industry that was sweating bullets poured tens of millions of dollars into lobbying efforts to render this bill toothless, $6.7 million from JP Morgan (JPM) and $5.5 million from Citicorp (C) alone, and they certainly got their money’s worth. Hedge funds nearly got off Scot free, merely getting stuck with a fraction of the $20 billion tab for regulation if they manage over $10 billion. As I write this, teams of lawyers are burning the midnight oil, creating subsidiaries and special purpose vehicles to sidestep the most onerous aspects of the 1900 page opus, which we are assured, no one has read in its entirety.
Sources: Rolling Stone Quotes Made by Jr. Staff. Mag also accused of misrepresenting communications with McChrystal's HQ; e-mails support claim. The impolitic comments that torpedoed Gen. Stan McChrystal’s career were “almost all” made by his most junior staff — men who “make tea, keep the principal on time and carry bags” — who had no reason to believe their words would end up in print, according to a staff member who was on the trip to Europe during which the comments were made.
FINalternatives:
Hedgies Cool to Democrats As Wall Street Cuts Donations. Democrats bankrolled their successful efforts to retake Congress in 2006 and the White House in 2008 with huge donations from Wall Street, and especially from the hedge fund industry. But to defend those gains in 2010, they’ll have to make do with much less from the same people. Despite the big donations over the past several election cycles, Democrats pushed ahead with major financial reform legislation seen as hitting big banks. And it seems those big banks are hitting back, with donations from New York and its suburbs falling by 65% from two years ago, the Washington Post reports. New York-area residents have given the Democrat’s two Congressional campaign committees just $8.7 million this cycle, down from $23.9 million. In 2008, a whopping 28% of the committees’ money came from the New York area. In 2010, the figure is less than 10%. Despite their newfound coolness towards Democrats, Wall Street hasn’t exactly rushed to embrace the Republicans. The Republican Congressional committees have taken in just $2.7 million from the New York area, slightly more than in 2008, but still less than a third of what Democrats have taken in. The Democratic committees have raised more than 50% more than Republicans this cycle.
Hedge Funds Drop .94% As Distressed, Equity Hedge Funds Take Toll. Hedge funds shed 0.94% last month, extending their year-to-date loss to 1.2%, according to new figures from Hedge Fund Research. Just four of the 18 HFRX strategy indices ended the first half with a positive month. Distressed securities and fundamental growth funds, in particular, wilted in the summer heat, shedding 3.73% (up 0.38% year-to-date) and 2.85% (down 9.73% YTD, the worst of any strategy index), respectively. Equity hedge funds were no great shakes, either, declining 1.38% (down 3.42% YTD) in June. Macro funds lost 1.32% (down 2.32% YTD), market directional funds lost 1.14% (down 0.01% YTD) and the HFRX Equal Weighted Strategies Index dipped 0.99% (down 0.09% YTD). The strongest performer on the month was systematic diversified, which rose 0.64% to hit 4.53% on the year. The other strategies in the black in June were relative value arbitrage (0.29% on the month, 1.29% YTD), convertible arbitrage (0.11%, 1.92% YTD) and relative value arbitrage multi-strategy (0.1%, 3.23% YTD).
Lloyd's List:
Bulker Binge Sparks Fears of Oversupply. More than $6bn of new orders placed as bullish owners secure newbuilding prices at seven-year lows. A BULK carrier ordering binge has seen more than $6bn in new orders placed in Asian shipyards in May and June, stoking fears of a major oversupply of dry bulk vessels in 2011 and beyond.
McCain to Vote No on Kagan. Sen. John McCain (R-Ariz.) will vote against confirming Supreme Court nominee Elena Kagan, he announced Wednesday in an op-ed piece to be published in Thursday's USA Today. The main beef McCain cites, in fact his only beef, is with Kagan's move in 2004 to ban military recruiters from official recruiting channels at Harvard Law School.
Stop the Oil, Not Job Creation. Here in the Gulf, where Washington policy decisions have a real impact on the people and businesses most affected by BP’s Deepwater Horizon oil spill, we were thrilled by a federal judge’s recent decision to overrule President Barack Obama’s moratorium on deepwater drilling. We hope this gives the Obama administration time to reevaluate its drastic decision to cut off the nation’s access to important sources of oil and natural gas from the Gulf of Mexico.
The Elite Turn Against Obama. Even the Aspen Ideas Festival, an annual gathering of the country's brightest lights, isn't Obama country anymore. Lloyd Grove on the president's waning support among the intelligentsia. You’d think the well-heeled and enlightened eggheads at the Aspen Ideas Festival—which is running all week in this fashionable resort town with heady panel discussions and earnest disquisitions involving all manner of deep thinkers and do-gooders—would be receptive to an intellectually ambitious president with big ideas of his own. In a way, the folks attending this cerebral conclave pairing the Aspen Institute think tank with the Atlantic Monthly magazine might even be seen as President Obama’s natural base. Apparently not so much. during Monday’s kickoff session, offering a withering critique of Obama’s economic policies, which he claimed were encouraging laziness. “If you’re asking if the United States is about to become a socialist state, I’d say it’s actually about to become a European state, with the expansiveness of the welfare system and the progressive tax system like what we’ve already experienced in Western Europe,” Harvard business and history professor Niall Ferguson declaredFerguson was joined in his harsh attack by billionaire real estate mogul and New York Daily News owner Mort Zuckerman. Both lambasted Obama’s trillion-dollar deficit spending program—in the name of economic stimulus to cushion the impact of the 2008 financial meltdown—as fiscally ruinous, potentially turning America into a second-rate power. Zuckerman added that he detects in the Obama White House “hostility to the very kinds of [business] culture that have made this the great country that it is and was. I think we have to find some way of dealing with that or else we will do great damage to this country with a public policy that could ruin everything.” This was greeted by hearty applause from a crowd that included Barbra Streisand and her husband James Brolin. “Depressing, but fantastic,” Streisand told me afterward, rendering her verdict on the session. “So exciting. Wonderful!” The consensus was similar in an afternoon panel discussion on the decline of the American middle class. “He said jobs were going to be his No. 1 priority—there’s a huge disconnect between Washington and what’s going on out in the country,” nominal Obama supporter Arianna Huffington said.
Reuters:
U.S. Cancer Death Rates Continue Drop: Report. U.S. cancer death rates are falling, with big decreases in major killers such as colon and lung cancer, the American Cancer Society said on Wednesday.
Financial Times:
Cooling Chinese Demand to Hit Hard Commodities. A near-halving in the Baltic Dry Index since the end of May suggests that hard commodity prices will fall in the second half of the year, says Melissa Kidd at Lombard Street Research. She acknowledges that the recent drop in the BDI – a gauge of the cost of shipping dry bulk cargoes, such as iron ore and coal – pales in comparison to a 93 per cent slump during the financial crisis. She also says it reflects to some extent an oversupply of shipping following a surge in freight prices in 2008. “But examining underlying trends in hard commodity markets and world production suggests the BDI retains at least some of its value as a leading indicator,” she says, noting its historically close correlation with the S&P GSCI commodities index. “China has been the world’s engine of growth for coal and iron ore, and other commodities, over the last 12 to 18 months,” says Ms Kidd. “A cooling off in Chinese demand growth – prompted by ongoing monetary tightening – will impact heavily on global price developments. For some hard commodities, the process may already have started. “Recent falls in the Baltic Dry Index, in combination with signs of weakening hard commodity demand in China and softening global survey data, point to a slowing down in the global recovery. Hard commodity prices will find little support going forward in this environment.”
Bloomberg to Launch Derivatives Valuation Tool. Bloomberg, the privately held news and information company, is making a further push into over-the-counter derivatives amid growing calls from regulators and lawmakers for increased transparency in the $615,000bn market. A new derivatives valuation service expected to be launched by Bloomberg this week will analyse derivative instruments and price them, allowing users to also look at the models and assumptions that underpin the instruments. The new service, which will charge users according to complexity and the size of the derivatives portfolio that has to be valued, is aimed at tapping into demand for more independent valuations of these contracts, which have been widely criticised for being too opaque.
We Have Yet to Address the Cause of the Crisis. With the debate about US financial reform finally, it appears, about to end, should we all feel safer and more confident that a crisis will not recur? After all, the root causes of this crisis (including derivatives) have been identified and addressed. Measures have been taken to prevent system-wide bail-outs. We agree wholeheartedly with the need for financial reform and support many of the derivatives provisions in the bill. But have we addressed what actually happened in the financial crisis? Or have we left the real culprit lurking, ready to resurface and create more instability in the financial system? It’s clear today – and it was clear three years ago – that the culprit is real estate exposure. Bad lending, driven by poor underwriting standards and awful risk management, created and drove the crisis.
The Scotsman:
North Sea investment to top £16bn on oil industry bounce. A BUMPER £16 billion in potential investment in the North Sea could be "kick started" this year by a resurgent oil and gas industry, it was revealed yesterday. The latest economic report published by Oil & Gas UK, the pan-industry trade body, has highlighted signs of growing confidence across the sector with plans to develop a potential 70 fields in the pipeline. Both exploration work and development drilling is expected to exceed last year's levels in the search for oil and gas discoveries in the UK continental shelf (UKCS). Overall investment in the North Sea this year alone is expected to rise above £5.5bn, compared with £5bn in 2009.
El Mundo:
A new law that the Spanish government is preparing to overhaul rules governing savings banks, or cajas, will allow private investors to own as much as 50% of the lenders. Political influence on boards will be reduced and the new law will allow cajas to become commercial banks.
Expansion:
Spanish officials informed builders associations that the government would put 70 building projects for roads and railways on hold as part of its attempts to save money.
PAP:
Poland plans to freeze salaries for public workers and raise a tobacco excise tax next year to cut the budget gap and tame the growth of public debt, citing a Finance Ministry document on the 2011 budget plan. The measures are needed because of the risk of public debt exceeding 55% of gross domestic product.
Mercurio:
Codelco, Chile's state-owned copper producer, may increase annual production to 1.8 million metric tons between 2010 adn 2012. Production was 1.78 million tons last year.
DigiTimes:
HDD Prices Dropping Since End of June. Hard drive quotes in Taiwan at the end of June dropped 10-20% compared to levels seen at the beginning of the second quarter, according to sources from hard drive players. Supply had been tight since the second quarter of 2009 causing quotes to remain at a high level until the second quarter of 2010, when Europe's bond crisis occurred and started affecting PC demand. As PC brands started downwardly adjusting their shipment forecast for the third quarter, it relatively helped relieve the shortage of hard drives and even turned the market status to over-supply, as a result, the hard drive makers started reducing their quote. For the third quarter, the sources expect hard drive shipments will remain at levels seen in the second quarter, though previous years had generally seen strong growth in this time frame. Since the total number of hard drive suppliers worldwide has been reduced to only 4-5 players, the market is unlikely to see a price war this year, helping the industry to become healthier, the sources noted.
Sina:
China's coal output may rise 20% to 1.57 billion metric tons in the second half from a year earlier, citing Dong Yueying, vice director of economic operations at the China National Coal Assoc.
Al Eqtisadiah:
A Saudi business team is to hold direct talks with BP Plc(BP), which faces a large bill for the Gulf of Mexico oil spill. The team, including investors from the energy industry, is seeking to acquire between 10 and 15% of BP's shares.
Samsung Posts Record Operating Profit on Chip Prices. Samsung Electronics Co., Asia's biggest maker of semiconductors, flat screens and mobile phones, posted record profit last quarter, fueled by a recovery in demand for computer-memory chips that drove up prices. Second-quarter operating income jumped 87 percent to 5 trillion won ($4.1 billion), plus or minus 200 billion won, from 2.67 trillion won a year earlier, the Suwon, South Korea-based company said in a statement today. Sales increased about 14 percent, it said. Profit beat the 4.74 trillion won average of 14 analyst estimates compiled by Bloomberg. The higher earnings may help Samsung fund a record 18 trillion won capital spending plan to widen its lead over Micron Technology Inc. and Hynix Semiconductor Inc. The Dramexchange Index, which tracks prices of the most widely used computer- memory chips, rose 9.3 percent this year as the global economic recovery spurred demand for electronics, lifting earnings for chipmakers.
Lumber Falls Most Allowed on Declining Construction Demand, Ample Supplies. Lumber fell the most allowed by the Chicago Mercantile Exchange on declining construction in the U.S. and Canada and speculation that wood processors will not curb production, adding to already ample supplies. The value of Canadian building permits tumbled more than five times as much as expected, falling 11 percent, because of drops in single-family houses and commercial buildings, Statistics Canada said today. Economist surveyed by Bloomberg News expected a 2 percent drop. “We’re not seeing anything good on the housing-demand side, and people are nervous about how much production there is out there,” said Paul Quinn, an analyst at RBC Capital Markets in Vancouver. “I see us staying in this $180 to $220 range for a while until get some direction in the housing market.” Lumber futures for September delivery fell the limit of $10, or 4.6 percent, to $209.40 per 1,000 board feet in Chicago. Lumber has plunged 38 percent since its 12-month high on April 21 on sluggish demand for building materials.
Bartels Abandons Bullish Forecast for Stocks in U.S.: Technical Analysis. Mary Ann Bartels, the Bank of America Corp. analyst who had forecast the Standard & Poor’s 500 Index to rise to 1,300 this year, reversed her bullish call and said stocks may extend their biggest decline since the rally began. Bartels, ranked second among analysts who study price charts in Institutional Investor magazine’s most recent survey, shifted her view after the S&P 500 last week broke the February intraday low of 1,044.50 on increased volume while its 50-day moving average fell below the 200-day average in a so-called “dark cross.” The benchmark may sink as low as 950 and that “would fit with an economic slowdown scenario.” Should the market fail to stay above 950, Bartels said, the S&P 500 may retreat to as low as 869 -- the July 2009 low -- and that would suggest “the market is discounting a potential double dip for the U.S. economy.” Investors should favor “defensive stocks,” or companies whose earnings are less affected by economic swings, such as utility and phone shares, she said.
Excessive Debt May Push Stocks Down, First State Says. The stimulus-driven global economic recovery is threatened by excessive corporate and government debt that may push global stocks to below their post-credit- crisis lows, said Alistair Thompson of First State Investments. This could occur within the next 18 months, according to Thompson, who co- manages First State’s Asia Pacific (ex-Japan)/Global Emerging Markets fund. First State managed about $126 billion as of December 31, according to its website. The fund is skewed toward “defensive” stocks, he said.
Ctrip.com(CTRP), Chinese Travel Agencies Tumble on Report Commission Rates Cut. Ctrip.com International Ltd., a consolidator of hotel and airline bookings in China, tumbled in New York after Goldman Sachs Group Inc. said the nation’s three biggest carriers cut commission rates paid to travel agencies. Ctrip.com declined 14 percent to $32.81, the biggest drop since December 2008. eLong Inc., a Chinese web-based travel service company, fell 8.4 percent to $12.
Wall Street Journal:
Revived Push for Drilling Ban. The Obama administration asked a federal appeals court Tuesday to reinstate a moratorium on deepwater petroleum drilling, saying it is needed to reduce the chance of a second spill similar to the one now spewing crude into the Gulf of Mexico.
The Massachusetts Health-Care 'Train Wreck'. The future of ObamaCare is unfolding here: runaway spending, price controls, even limits on care and medical licensing. President Obama said earlier this year that the health-care bill that Congress passed three months ago is "essentially identical" to the Massachusetts universal coverage plan that then-Gov. Mitt Romney signed into law in 2006. No one but Mr. Romney disagrees. As events are now unfolding, the Massachusetts plan couldn't be a more damning indictment of ObamaCare. The state's universal health-care prototype is growing more dysfunctional by the day, which is the inevitable result of a health system dominated by politics.
Blackstone Group(BX) Delays Final Close For Mega Fund. Blackstone Group LP (BX) has delayed the final close of its latest mega fund until later this year, hoping to raise more capital, said two people familiar with the matter. The firm was slated to wrap up Blackstone Capital Partners VI LP on June 30, after two and a half years of fund-raising.
European Governments to Ramp Up Property Sales. Questions of Asset Quality and Disposal Strategies Could Undermine Efforts; a Greek Real-Estate Investment Trust. As debt-laden European governments push in on measures to cut spending and raise funds, a number of countries are preparing to accelerate efforts to sell public property. European countries for years have been selling public assets such as office buildings and residential units in order to raise money. However, the global banking crisis and subsequent recession have caused such a sharp deterioration in public finances that a number of countries—including Germany, the U.K., France and Greece—are expected to sell assets more actively and on a larger scale in the coming years.
Behold, the Subprime Shmoe. It helps never to have been a household name in the first place, but somebody who perhaps is getting his reputation back is Joseph Cassano. He can thank Phil Angelides. Mr. Cassano ran AIG's Financial Products unit and was creator of the portfolio of credit default swaps that contributed to bringing down the company and necessitating a government bailout. Mr. Cassano, who lived and worked in London, has been the Harry Lime of the subprime drama, invisible, uncommunicative and all the easier to vilify for that reason. His appearance before Financial Crisis Inquiry Commission was his first public surfacing and, lo, he was neither groveling nor defiant. In his written statement, he acknowledged that AIG had been "long" on housing going into the greatest housing meltdown in memory. When quizzed about his compensation, he minced no words: "I made over $300 million during my career at AIG." It helped, of course, that both SEC and Justice Department investigations, which many had expected to expose the ultimate subprime malefactor, recently evaporated overnight, apparently clearing Mr. Cassano of wrongdoing. It doesn't hurt either that it now appears clearer than ever that a big chunk of the losses that doomed AIG were run up by its securities lending operation, not by Mr. Cassano. Most of all, it doesn't hurt that Mr. Angelides is apparently a man with a bone in his teeth. Evidence increasingly suggests that a more shrewdly structured AIG bailout would have been as costless to taxpayers as the bailouts of other large financial institutions ultimately proved to be. Costless, that is, in terms of any long-term cash expenditures, so unlike those world-historical rat holes Fannie and Freddie. But there's another lesson here. If AIG, which before 2008 was mentioned exactly once in the Factiva database in connection with the phrase "too big to fail," proves anything, it proves the folly of pretending that Washington is out of the business of bailing out large financial institutions in an emergency. We can perhaps make such emergencies less likely by correcting some of the system's bad incentives. But that would require a Congress that thinks before it acts. Notice that the Congress we have is busy legislating even as the Angelides commission is months away from completing its work.
Bloomberg Businessweek:
Schonfeld to Fire 50 Traders as Speed Curbs Profits. Schonfeld Group Holdings LLC, the firm founded in 1988 by Steven Schonfeld, plans to fire 50 traders as competitors with computer-driven strategies and linkages between asset prices wipe out potential profits. The cuts represent 15 percent of the staff at the Jericho, New York-based firm’s proprietary trading division, CNBC reported today, citing an e-mail sent last week by Schonfeld. Schonfeld’s employees, who use the firm’s money to wager on securities instead of managing money for clients, are facing competition from companies using high-frequency trading strategies that account for 65 percent of U.S. equities volume, according to data compiled by Aite Group LLC. “There is no doubt that manual point-and-click-type day traders are at a disadvantage,” said Paul Zubulake, a senior analyst at Aite, a Boston-based research firm. “It just is that if you are in a marketplace, especially arbitrage, if you are not trading at a high speed, you cannot compete, you have no chance. A few years ago you could maybe survive by seeing something visual, but now the machine will take out the price inconsistency very quickly.”
Commodities May Extend Drop on 'Open Gap': Technical Analysis. Commodities may extend the worst slump since 2008 this quarter after an advance in June proved short-lived, Barclays Capital said, citing trading patterns. The Reuters/Jefferies CRB Index of 19 raw materials ended the second quarter with a decline of 5.4 percent, the most since the final three months of 2008, after the first quarter’s 3.5 percent loss. The gauge may fall to 251, compared with 253.80 on July 6, and a break of that level may lead to further declines to near the 2010 low of 247.25 in July, Dhiren Sarin, Barclays’ technical analyst said. “The outlook is bearish for the CRB Index,” London-based Sarin said in an interview. The trend “is likely to remain in play into this quarter as the market is caught within its weekly cloud and is still within a larger bearish channel.”
Author Is Threatened Over Book on Chinese Premier. A best-selling Chinese author and democracy advocate detained by security agents on Monday said Tuesday that the agents threatened to imprison him if he proceeded with plans to publish a book criticizing Wen Jiabao, China’s prime minister. The author, Yu Jie, said in a telephone interview that he still intended to publish the book, titled “China’s Best Actor: Wen Jiabao,” by autumn. Because his books are banned in mainland China, Mr. Yu said, he is negotiating with a Hong Kong publisher. Mr. Yu, 36, said he was questioned for four hours on Monday by police officers and agents of Beijing’s public security bureau who specialize in dealing with political dissidents. One security agent “told me that Wen Jiabao is not some ordinary guy,” he said, “and my criticism against him will be considered as harming state security and the national interest.”“ ‘If you insist on publishing this book,’ ” he said he was told, “ ‘you will probably end up like Liu Xianbin, who suffered imprisonment of many years.’ ” Mr. Liu, another writer and rights activist, was sentenced last December to 11 years in prison after leading a public movement calling for democratic reforms and an end to Communist Party rule.
US Ends June with $13.2 Trillion in Debt, Adds $210 Billion in Total Debt, On Track to Breach Debt Ceiling in Under Six Months. In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2.
CNNMoney:
Job Gloom at All-Time High. More Americans than ever before feel they have no hope of finding a job. A record 1.21 million people want to work, but said they aren't looking because of the weak labor market, according to federal statistics released Friday. The June figure is up from 793,000 a year ago.
Institutional Investor:
Galleon Wiretap Hearing Casts Shadow Over Insider Trading Investigation Tactics. On July 27, U.S. District Court Judge Richard Holwell will hold a hearing on whether the wiretap evidence at the center of the case against Rajaratnam should be suppressed. It’s a decision that could shape the way white-collar enforcement officials do their job — and how Wall Streeters, in turn, do theirs. “The Department of Justice is increasingly using blue-collar tactics to investigate white-collar cases,” says Frank Razzano, a former assistant U.S. attorney and Securities and Exchange Commission enforcement official who now defends securities clients at Washington law firm Pepper Hamilton. Whereas the feds would once send a gentlemanly subpoena and wait for a suspect to appear with his or her lawyer, FBI agents now get a warrant to rip suspects’ offices apart or camp in their driveways to scare them into talking, says Razzano.
Obama to Bypass Senate on CMS Head. The White House announced late Tuesday that President Barack Obama will use a recess appointment to make Donald Berwick administrator of the Centers for Medicare and Medicaid Services, angering Republicans who had opposed his nomination. A Harvard professor and pediatrician, Berwick has won endorsements from most major medical societies. But his nomination has drawn vicious criticism from Republicans, who have seized on his professed admiration for Britain's National Health Service as an "example" for the United States to follow. "This recess appointment is an insult to the American people," said Sen. John Barrasso (R-WY), a physician and leading Berwick opponent. "Dr. Berwick is a self professed supporter of rationing health care and he won't even have to explain his views to the American people in a hearing. Once again, President Obama has made a mockery of his pledge to be accountable and transparent." "It would confirm the obvious, which is the direction in which we're headed," Minority Leader Mitch McConnell (R-Ky.), has previously said of Berwick's nomination. "Massive rationing."
USA Today:
EU Suggests Raising Retirement Age to 70. The European Union's executive says Europeans should not retire before 70 to save cash-strapped state pension funds. In a paper to be published Wednesday, the European Commission says it now takes four workers' contributions to state pensions to help support two retirees. Lower birth rates and longer life expectancy mean retiring earlier will not be sustainable.
Small-Stock Index Russell 2000 in Bear Market. On the outer fringe of the stock market, there's no longer a debate over if we're headed for a bear market. We're already here. The Russell 2000, a key measure of small-company stocks, on Tuesday fell 1.5%, leaving it 20.5% below its recent high in April. While Tuesday's drop was minor, a decline of 20% or more is an attention-grabber because it meets the unofficial definition of a bear market.
Reuters:
China Commentary Slams U.S. for Steel Suspicions. China's official Xinhua news agency on Tuesday criticised a group of 50 U.S. lawmakers for calling for a probe into Chinese investment in the U.S. steel sector, saying protectionism was rearing its ugly head again. The bipartisan group of U.S. lawmakers pushed for an investigation into whether the Chinese investment in the U.S. steel sector should be blocked on national security grounds.
Alcon(ACL) to Buy Laser-Surgery Firm LenSx for $362 Mln. U.S. eyecare group Alcon Inc (ACL), which Swiss drugmaker Novartis AG will take over this year, plans to buy laser eye-surgery company LenSx Lasers Inc for $361.5 million.
Netflix(NFLX) Signs Movie Deal With Relativity Media. Netflix Inc (NFLX) has struck a deal with Relativity Media LLC to screen its movies ahead of pay-TV channels for the first time, putting it in competition with the likes of Time Warner's (TWX) HBO or Showtime.
Financial Times:
Global Investment Bank Earnings Set for Steep Dip. Global investment banking earnings are expected to drop sharply for the second quarter after brutally tough market conditions saw trading commissions dry up and the market for takeovers and initial public offerings freeze. Analysts are predicting that many European banks will see a drop of 50 per cent year on year in sales, trading and advisory revenues from April to June. In the US, the boom in trading commissions that powered earnings in the past year also appears to have ground to a halt. Howard Chen, an analyst at Credit Suisse, expects revenues from operations in fixed income, currency and commodities at Goldman Sachs and Morgan Stanley to have fallen more than 30 per cent from the first three months of the year. Diversified banks like JPMorgan Chase, Bank of Americaand Citigroup are also expected to have suffered in their securities businesses, although their retail units and the UK retail banks such as Lloyds and Royal Bank of Scotlandare likely to show signs of improvement as defaults on credit cards and other loans drop.
Telegraph:
China's Property Market Braces for 30% Drop. Standard Chartered has told clients to prepare for a fall in property prices of up to 30pc in Beijing, Shanghai, Shenzen, and other large cities in China as the delayed effects of monetary tightening begin to bite. Stephen Green, the bank's China economist, said a glut of newly built homes were hitting the market just as buyers are restrained by higher down-payments and curbs on speculation. "We believe developers will be forced to cut prices," he said. Kenneth Rogoff, ex-chief economist for the IMF, told Bloomberg Television in Hong Kong that the denouement could prove abrupt after such a torrid boom. "You're starting to see that collapse in property and it's going to hit the banking system," he said. The government is trying to deflate the housing market gently, mostly using tools known as "financial repression" rather than Western style rate rises. Xu Shaoshi, land minister, said sales are already dropping. "In another quarter's time or so, the property market will probably come to a full correction and prices will fall. It's hard to say to what extent they will fall," he said. China views soaring house prices as a threat to social stability, since workers are shut out of the market. The price-to-earnings ratio is 13 in Beijing and Shanghai, four times Western levels. Charles Dumas from Lombard Street Research said China's boom had been driven by its fiscal stimulus of 13pc of GDP, the largest ever by major country in such a short period. The boost was concentrated in 2009, with credit growth running at 25pc of GDP. "The Chinese had nowhere to put their savings since real interest rates were negative and capital controls stopped them investing abroad, so they bought apartments," he said. Wealthier families often hold three, four, or more properties as a hard asset to store wealth, leaving many vacant. This has disguised the scale of excess inventory. It is unclear what will happen if there is the same sort of investor flight seen already on the Shanghai bourse, which is down 55pc from its peak.
Business Standard:
India Iron Ore Exports Dip 15% in April-June. Slow offtake by Chinese steel mills and decline in spot prices. India’s iron ore exports declined 15 per cent in the first quarter of the financial year 2010-11 on slow offtake by Chinese steel mills. According to an estimate by the industry body, the Federation of Indian Mineral Industries (Fimi), the country’s exports of iron ore slipped to nearly 20.8 million tonnes in the first quarter of the current financial year as compared to 24.5 million tonnes in the corresponding quarter of the previous year.
Nikkei:
Japan Prime Minister Naoto Kan suggested the government may raise income tax for high-income earners. Kan said the tax system's income redistribution needed to be made more effective if the rate of consumption tax was increased. The government is considering raising the 40% rate for income of more than $206,000.
South China Morning Post:
Chinese dissident Liu Xianbin has been re-arrested on charges of subversion 19 months after he was released from prison for subversion of state power, citing Chen Mingxian, Liu's wife. Liu was taken into custody on June 28th after police raised his home and confiscated his computer and some documents. Liu, 41, a founding member of the China Democracy Party, was sentenced to 13 years in 1999 for subversion of state power.
China Business News:
Shanghai Home Sales Hit 5-Year Low. New home sales in Shanghai in the first half of 2010 plunged to a five-year low, shrinking 60 percent compared with the same period last year, yicai.com reported Monday. The average price was 20,983 yuan ($3,098) per square meter, up 50.31 percent year-on-year, the report said, citing statistics by Centaline Property.
China News Service:
China will implement a resource tax in the western regions of the nation on coal, oil and natural gas, citing Permier Wen Jiabao. The tax will be levied based on the sales price of the resources.
Evening Recommendations Citigroup:
Reiterated Buy on (ACL), target $165.
Reiterated Buy on (CLF), target $87.
Night Trading
Asian equity indices are -1.0% to unch. on average.
Asia Ex-Japan Investment Grade CDS Index 138.0 -2.0 basis points.
Asia Pacific Sovereign CDS Index 133.75 +3.25 basis points.
The Fed's Kocherlakota speaking, weekly retail sales reports and the weekly MBA mortgage applications report 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 modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.
North American Investment Grade CDS Index 120.81 bps -1.0%
European Financial Sector CDS Index 137.85 bps -3.65%
Western Europe Sovereign Debt CDS Index 150.0 bps -1.2%
Emerging Market CDS Index 272.10 bps -1.3%
2-Year Swap Spread 36.0 -1 bp
TED Spread 37.0 unch.
Economic Gauges:
3-Month T-Bill Yield .16% unch.
Yield Curve 232.0 -4 bps
China Import Iron Ore Spot $128.0/Metric Tonne -3.18%
Citi US Economic Surprise Index -21.10 -1.2 points
10-Year TIPS Spread 1.72% -5 bps
Overseas Futures:
Nikkei Futures: Indicating -3 open in Japan
DAX Futures: Indicating -36 open in Germany
Portfolio:
Slightly Lower: On losses in my Biotech and Retail long positions
Disclosed Trades: Added to my (IWM)/(QQQQ) hedges, added to my (EEM) short
Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 reverses morning gains and trades at session lows, despite a bounce in the euro, the market's oversold state, falling sovereign debt angst and a rally in overseas shares. On the positive side, Software and Coal stocks are relatively strong, rising 1.0%+. Copper is rising another +1.56% despite this morning's poor economic data, which is a positive. As well, the Spain sovereign cds is falling another -3.0% to 255.16 bps. On the negative side, REIT, Road & Rail, Restaurant, Hospital, Biotech, Drisk Drive, Paper, Gold and Oil Tanker shares are under meaningful pressure, falling 1.50%+. Small-cap and Cyclical stocks are underperforming. (IYR) has been heavy throughout the day, falling -2.4%, which is a large negative. Moreover, the Transports are very weak again today, falling another -1.4% to the lowest level since February. Despite improvements in some gauges of European credit angst, three-month euro Libor is rising another +1.3 basis points today to another multi-month high of 74.0 bps. The decline in the 10-year TIPS spread and the fall in the 10-year yield are also unwelcome at this point and indicate deflation worries continue to rise despite today's overseas stock rally and recent bounce in the euro. China Iron Ore Spot prices have now declined over -30% since April. Lumber looks like it is rolling over again, falling -4.5% today. Based on some of the investor angst gauges I follow, it appears too many may be positioned for the bounce higher I had expected, which is also a negative. I expect US stocks to trade mixed-to-lower into the close from current levels on technical selling, more shorting, rising economic fear and increasing real estate sector pessimism.
