Fed Wants to Hoodwink Public, Only Fools Itself: Caroline Baum. If I were a central banker, I would be afraid. If I were a central banker getting ready to embark on another round of quantitative easing, I would be very afraid. Here’s why. Central bankers in the U.S. are being bombarded with market-based signals suggesting their fears of deflation, or falling economy-wide prices, may be misplaced. Gold prices continue to set new highs. The U.S. dollar, the global reserve currency, keeps sinking amid expectations the Federal Reserve will dilute the existing stock starting at its Nov. 2 to 3 meeting. Commodity prices, both industrial and agricultural, are on a tear. The CRB Spot Raw Industrial Price Index, which includes scrap metals, cotton and rubber -- but not oil -- hit an all- time high this week. Junk bond issuance already set a record for the year, with demand for high-yield debt narrowing spreads to Treasuries. Investors are pouring money into emerging markets debt issued in local currencies by countries that used to be considered banana republics. Mexico sold $1 billion of 100-year bonds last week, double the announced issue size, at a yield of 6.1 percent. Just ask yourself: Would you lend money to Mexico for 100 years? Exactly. If the Fed’s goal was to make investors move out the risk curve, it succeeded. An alternate interpretation: Zero-percent interest rates are causing a misallocation of capital, a nice way of saying, “asset bubbles.” The markets aren’t validating the Federal Reserve’s preoccupation with a deflationary spiral. In fact, the message is just the opposite. Maybe the Fed can fool some of the people some of the time, but it can’t fool all of the people all of the time. In the process, policy makers may end up fooling themselves that they can create expectations of a little more inflation without delivering a lot of the real thing.
Bank of America(BAC) Downgraded by Bonds on Loans: Credit Markets. Bondholders are penalizing Bank of America Corp. the most of any of the largest U.S. financial firms as the investigation into the foreclosure crisis expands. Credit-default swaps on the country’s largest bank by assets are above those of its peers by a record margin, according to data provider CMA. The contracts, which imply Bank of America has lost its investment-grade rating, exceed Citigroup Inc.’s by the most ever and surpassed Morgan Stanley’s this week for the first time in a year.
Seagate(STX) is Said to Be in Talks With TPG, Partner About Buyout. Seagate Technology Plc, the world’s largest maker of disk drives, is in talks to be purchased by former owner TPG Capital and another buyout firm, according to two people familiar with the matter. The stock rose 22 percent.
Big Banks May Escape Capital Surcharge as Global Talks Founder. Leaders of the world’s largest economies, divided over how to curb risk-taking by their biggest banks, will likely fail to agree on a capital surcharge. Instead, the Financial Stability Board, which is weighing measures to prevent such institutions from causing another economic crisis, will recommend a range of options without setting a level of extra capital to be imposed globally, said members of the group who declined to be identified because the discussions are private. The FSB will meet in Seoul next week.
Obama Spending Rules for UnitedHealth, WellPoint Draw Exemption Requests. Health insurersmay abandon some markets unless the Obama administration waives a rule set to take effect next year on how much companies must spend on patient care, state insurance commissioners said. The rule, part of the new health law, mandates that UnitedHealth Group Inc., WellPoint Inc. and rivals spend at least 80 percent of customer premiums on medical care, or return the difference in rebates. Insurers that sell to the 14 million people who buy their own coverage may be hurt because those policies cost more to administer, the commissioners said in a letter to U.S. health secretary Kathleen Sebelius. The correspondence urges delaying the rule in some markets until as late as 2014, when provisions take effect that may cut insurer costs. The waiver request is the latest adjustment sought in the overhaul as President Barack Obama’s allies in Congress face midterm elections next month. The administration last month waived rules affecting 1 million part-time workers who won’t be eligible for subsidized coverage for four years. The premium rule “could threaten the solvency of insurers or significantly reduce competition in some insurance markets,” an effect that may “limit consumer choices,” according to the letter, from the National Association of Insurance Commissioners.
Harvard Stem Cell Scientists Retract paper on Aging in Periodical 'Nature'. Scientists at the Harvard Stem Cell Institute retracted a paper published Jan. 28 in the journal Nature after the lead author, Amy Wagers, became aware of information she said “undermined” her confidence in the data. The Nature paper, examining the role of blood stem cells in the aging process, was retracted by Wagers, a researcher at the Harvard-affiliated Joslin Diabetes Center in Boston, and two of her co-authors. The research appeared to uncover an “aging mechanism” that “could be reversed” by rejuvenating the blood stem cell population of old mice, according to a Joslin center press release issued at the time of the paper’s publication.
UBS Says It's in Talks With Dozens of Prop Traders Considering Hedge Funds. UBS AG, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders worldwide who are considering setting up hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk. “A lot of it is just talk and chatter, but there are very advanced discussions as well,” Stuart Hendel, UBS’s global head of prime brokerage, said in an interview in Singapore yesterday. “In the next 12 months, there is going to be much more of a startup phase than there has been in the last couple of years.”
Wall Street Journal:
Foreclosure Crisis Slams Into Banks. After Days of Shrugging Off the Debacle, Financial Markets Start to Penalize U.S. Banks. The mortgage-foreclosure crisis spilled into the financial markets on Thursday, driving down bank stocks and weighing on mortgage bonds as investors took a grim view of the potential costs.
Public Unions Step Up Spending. Public-sector unions have remained a bulwark for Democrats this fall while other left-leaning donors have kept their wallets shut, according to a Wall Street Journal analysis of Federal Election Commission data. Unions have long bankrolled Democratic campaigns, but some of the biggest public unions are spending more this fall than they did during the prior midterm-campaign cycle in 2006.
OPEC Members Seek $100 a Barrel Oil to Counter US Dollar Weakness. The 13 percent decline in the dollar index since June has led some OPEC members to call for oil to rise to $100 a barrel. The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna.
China September Property Prices Rise, Sales Jump, Defying Curbs. China’s property prices rose and transactions jumped in September from the previous month, underscoring the need for further government curbs to discourage speculation and prevent asset bubbles in the fastest-growing major economy.
CNBC:
Google(GOOG) Earnings Handily Beat Wall Street Expectations. Googleshares leaped in extended trading Thursday as the company reported an adjusted profit that blew past what analysts expected, despite rising expenses. The online search and advertising giant said it earned $7.64 a share excluding one-time items in the third quarter, against $5.89 a share last year. Net revenue excluding traffic-acquisition costs for the most recent period rose to $5.5 billion, from $4.385 billion a year ago. Traffic-acquisition costs (TAC) include money that Web sites pay to advertisers and that they spend to draw traffic. Google's TAC for the quarter totaled $1.81 billion. Equity analysts who follow Google expected the company to turn in a profit of $6.69 a share on sales of $5.27 billion, according to Thomson Reuters.Google stock jumped almost 5 percent in late trading.
'Muted' Effect if Fed Buys More Bonds: Kocherlakota. The U.S. Federal Reserve Bank may get little bang for its buck if it tries to help boost the modest economic recovery with a renewed round of Treasury debt purchases, Minneapolis Fed President Narayana Kocherlakota said on Thursday.
The Sept. 30 shooting death of an American tourist on Falcon Lake, which straddles the U.S.-Mexico border in southern Texas, has grabbed international headlines in the past two weeks.
Government Approval Hits Lowest Point Since Watergate. Almost three-quarters of Americans — 72 percent — have a negative view of the federal government, according to a USA Today/Gallup poll released Wednesday. It is the highest level of dissatisfaction since the Watergate scandal that led to President Richard Nixon’s resignation in 1974.
Sovereign Debt Default Risk. Below we highlight the 5-year credit default swap prices for the debt of 39 countries and four high-risk US states. We also highlight how default risk has changed since equity markets bottomed at the start of July. As shown in the left column below, default risk has fallen the most for Japan, China, Australia, Chile, and South Korea since July 2nd. It has risen for just four countries -- Egypt, Portugal, Ireland, and the US. Yep, the US has seen default risk rise 15.7% since the start of July, even as the equity market has performed well. Germany has the lowest default risk of all the countries shown. Of the four high-risk states highlighted, Illinois currently has the highest default risk at 275 bps, followed closely by California at 269 bps. New York and New Jersey are both just above 200 bps.
Politico:
Judge Disses Dems' 'Alice in Wonderland' Health Defense. A federal judge in Florida on Thursday said he will allow some of the lawsuit challenging the constitutionality of the health care law to proceed — and criticized Democrats for making an “Alice in Wonderland” argument to defend the law. U.S. District Judge Roger Vinson allowed two major counts to proceed: the states’ challenge to the controversial requirement that nearly all Americans buy insurance and a required expansion of the Medicaid program.
Barack Obama: Economy Stokes 'Tribal Attitude'. President Barack Obama thinks that the recession has caused a temporary increase in racial tension by stoking “tribal attitude” among people in economic distress. During an hour-long town hall with young people simulcast on MTV, BET and CMT Thursday afternoon, Kishor Nagula, a graduate student at Johns Hopkins University, asked Obama about race relations, saying he was disappointed the president hadn’t ushered in a post-racial era, as some of his supporters had once suggested he would.
BOJ's Shirakawa: to take appropriate policy action. Bank of Japan Governor Masaaki Shirakawa reiterated on Friday that the central bank will take appropriate policy action as it carefully examines economic and price moves.
Japan's Noda: Will Act on FX to Curb Excess Moves. Japanese Finance Minister Yoshihiko Noda said on Friday that Japan will continue to take decisive steps on currencies if necessary to curb excessive moves in the foreign exchange market.
AMD(AMD) Eyes Stronger PC Demand, Holds Off on Tablets. Consumers will likely buy more PCs in the fourth quarter but manufacturers will continue to use up components they had over-accumulated in recent months, chipmaker Advanced Micro Devices Inc (AMD) said on Thursday.
Dollar Fall Sparks Stability Warnings. The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports. Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro. A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made US exports more competitive at the expense of its rivals.
Yomiuri:
Japan will downgrade its economic assessment this month for the first time since February 2009 as the yen continues to strengthen.
Container Volumes Suffer as Trade Slows. Lower trade growth caused by high unemployment in the United States and difficult economic conditions in Europe has hit container shipping lines, which have seen a steady fall in average container shipping rates over the past two months.
People's Daily:
The global currency war maybecome a trade war as countries may limit imports though more direct measures other than letting their currencies depreciate, Zhang Ming, a researcher with the Chinese Academy of Social Sciences, wrote in a commentary.
Evening Recommendations Citigroup:
Reiterated Buy on (GOOG), raised estimates, boosted target to $725.
Reiterated Buy on (INFN), boosted estimates, added to Top Picks Live list, target raised to $16.50.
Reiterated Buy on (CIEN), target $24.
Wells Fargo:
Rated (ICE) Outperform.
BMO Capital Markets:
Rated (VIT) Outperform, target $40.
Rated (LFT) Outperform, target $50.
Rated (CRM) Outperform, target $130.
Rated (SFSF) Outperform, target $30.
Night Trading
Asian equity indices are -.50% to +.25% on average.
Asia Ex-Japan Investment Grade CDS Index 103.0 +5.5 basis points.
Asia Pacific Sovereign CDS Index 94.0 +.5 basis point.
The Consumer Price Index for September is estimated to rise +.2% versus a +.3% gain in August.
The CPI Ex Food & Energy for September is estimated to rise +.1% versus unch. in August.
Advance Retail Sales for September are estimated to rise +.4% versus a +.4% gain in August.
Retail Sales Less Autos for September are estimated to rise +.3% versus a +.6% gain in August.
Retail Sales Ex Auto & Gas for September are estimated to rise +.3% versus a +.5% gain in August.
Empire Manufacturing for October is estimated to rise to 6.0 versus a reading of 4.1 in September.
9:55 am EST
Preliminary Univ. of Mich. Consumer Confidence for October is estimated to rise to 68.9 versus a reading of 68.2 in September.
10:00 am EST
Business Inventories for August are estimated to rise +.5% versus a +1.0% gain in July.
2:00 pm EST
The Monthly Budget deficit for September is estimated at -$32.0 Billion versus -$46.6 Billion in August.
Upcoming Splits
None of note
Other Potential Market Movers
The Fed's Bernanke speaking, Fed's Lockhart speaking and Former Fed Vice Chairman Kohn speaking could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.
North American Investment Grade CDS Index 98.15 bps +4.69%
European Financial Sector CDS Index 97.0 bps +7.07%
Western Europe Sovereign Debt CDS Index 139.33 bps -2.45%
Emerging Market CDS Index 195.20 bps +2.74%
2-Year Swap Spread 18.0 +2 bps
TED Spread 15.0 -2 bps
Economic Gauges:
3-Month T-Bill Yield .13% +1 bp
Yield Curve 212.0 +6 bps
China Import Iron Ore Spot $152.70/Metric Tonne +1.26%
Citi US Economic Surprise Index -4.10 -7.0 points
10-Year TIPS Spread 2.14% +9 bps
Overseas Futures:
Nikkei Futures: Indicating -58 open in Japan
DAX Futures: Indicating +2 open in Germany
Portfolio:
Slightly Lower: On losses in my Medical, Retail and Biotech long positions
Disclosed Trades: None
Market Exposure: 100% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades just modestly lower despite meaningful financial sector weakness, rising economic fear and recent sharp equity gains. On the positive side, Alt Energy, Ag, Computer, Computer Service, Telecom and Restaurant shares are higher on the day. The MS Tech Index is slightly higher on the day. The S&P GSCI Ag Spot Index is rising +.6%. The Portugal sovereign cds is falling -1.53% to 374.31 bps, the Greece sovereign cds is declining -1.11% to 682.04 bps and the Ireland sovereign cds is falling -2.49% to 407.93 bps. Moreover, the US sovereign cds is falling -3.49% to 42.19 bps. On the negative side, Education, Bank and Oil Tanker shares are under pressure, falling more than 2.0%. (XLF) is underperforming badly again. Cyclicals are also underperforming. The Hungary sovereign cds is climbing +4.22% to 268.53 bps. The euro financial sector cds index is recouping some recent losses, which is also a negative. Copper is falling -.76% despite more euro strength. Given today's news, the market's resilience is very impressive and the bears remain unable to gain any traction. (AAPL) is trading well around the $300 level and, after a brief pause, should move towards $325 over the coming weeks. One of my longs, (GOOG), reports after the close today. Its put/call open interest ratio is currently 1.20, which is near the highest over the last few years. As well, short interest in the shares has moved back to the high-end of its recent range. I expect US stocks to trade mixed-to-higher into the close from current levels on falling sovereign debt angst, buyout speculation, rising QE2 expectations and tax policy/election optimism.
Initial Jobless Claims in U.S. Rose 13,000 Last Week to 462,000. The number of Americans filing first-time applications for unemployment benefits unexpectedly increased last week, indicating the U.S. job market is struggling to mend. Jobless claims rose by 13,000 to 462,000 in the week ended Oct. 9, Labor Department figures showed today in Washington. Persistent dismissals show it will take longer for employers to add enough workers to reduce unemployment that’s close to a 26-year high. The prospect of joblessness holding above 9 percent through next year is among the reasons Federal Reserve policy makers may ease monetary policy. The four-week moving average of claims, a less volatile measure, rose to 459,000 from 456,750. It was the first increase since the week ended Aug. 21.
Mortgage Rate on 30-Year Loan Falls to Record 4.19%. U.S. mortgage rates fell for a third straight week to the lowest level on record, extending a slide in borrowing costs as housing demand slumps. Rates for 30-year fixed loans declined to 4.19 percent in the week ended today from 4.27 percent, Freddie Mac said in a statement. It is the lowest rate since the McLean, Virginia- based company began tracking the data in 1971. The average 15- year rate tumbled to 3.62 percent from 3.72 percent.
Swaps Dealers May Create Credit Futures as Regulation Looms. Deutsche Bank AG(DB), Goldman Sachs Group Inc.(GS) and Morgan Stanley(MS) are talking to exchanges including CME Group Inc. to create futures contracts on credit-default swaps indexes, according to people familiar with the matter. The banks are coordinating with index owner Markit Group Ltd. to potentially offer exchange-traded futures linked to benchmarks that hedge funds and money managers use to speculate on corporate creditworthiness or to protect against losses, said the people, who asked not to be identified because the talks are private. Futures would open the $25 trillion credit derivatives market to small hedge funds, equity investors and other money managers that, unlike bigger firms such as Pacific Investment Management Co., don’t trade the contracts enough to justify the cost of negotiating two-party agreements with banks, the people said.
Pimco Sells Treasuries on Prospect Fed Easing Round to Have Limited Impact. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it sold Treasuries on expectations a second round of debt purchases by the Federal Reserve will have limited impact. “The market is very clearly anticipating that the Fed is going to act,” Douglas Hodge, chief operating officer, said in an interview at the World Knowledge Forum in Seoul today. “The challenge right now is the breadth of policy measures that can be taken by the U.S. is rather limited.”
Commodities Advance to a Two-Year High on Investor Demand for Dollar Hedge. Commodities extended a rally to the highest in two years on speculation the declining U.S. dollar will boost investments in metals, energies and agriculture futures. The dollar fell 0.8 percent against a basket of six major currencies. The Standard & Poor’s GSCI Index of 24 raw materials rose as much as 1.1 percent to 577.9490, the highest level since Oct. 3, 2008. The currency has weakened on speculation that the U.S. Federal Reserve will ease monetary policy further in an effort to boost the country’s economy. “The sharply lower dollar today is supporting most of the commodity complex,” said Doug Whitehead, an analyst at Rabobank in London. “As a whole, the weaker dollar is encouraging investment into the commodities sphere on an inflation play, and that’s going to keep demand for commodities as an asset class strong.”
EU Fails to Agree on Planned Regulation for Hedge Funds, Postpones Talks. The European Union canceled talks on regulation of hedge-fund and private-equity managers after governments clashed on the final shape of proposals. European nations disagree on the powers of the European Securities and Markets Authority to decide which hedge funds will be allowed to market to EU investors, Sharon Bowles, the European Parliament’s top financial lawmaker, said in a telephone interview.
Confidence Among U.S. CEOs Fell in October. Confidence among chief executive officers in the U.S. sank in October to the lowest level since May 2009, when the world’s largest economy was still in a recession, according to a survey from the Business Council. The Washington-based group’s sentiment gauge dropped to 51.2 this month from a two-year high of 66.6 in May, a report showed today. “The momentum in the U.S. and global economy evident in recent surveys has subsided,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co. in New York and vice chairman of the Business Council, said in a statement. “Members sent a strong message about increasing government regulation and intervention,” and “the federal budget deficit remains a critical concern,” he said. The group’s gauge of expectations for the economy six months from now fell to 51.7, the lowest since February 2009, while the executives’ outlook for their own industry dropped to 54.6 from 66.4. The report said the council’s members “believe that deficit reduction is the most important fiscal policy priority and most disagree that a second economic stimulus is needed.” Increased government regulation and intervention in the U.S, presented a “high” or “very high” risk to the business climate for nearly nine out of 10 surveyed.
Wall Street Journal:
Medicare Scheme Netted $35 Million, Officials Say. An Armenian-American crime ring defrauded Medicare of more than $35 million by using stolen doctor and patient identities and setting up dozens of phony clinics coast-to-coast, according to federal indictments unsealed Wednesday. Members of the group, based in New York and Los Angeles, were taken into custody as part of a nationwide Medicare fraud sweep that resulted in charges in California, Ohio, New Mexico and Georgia. Manhattan U.S. Attorney Preet Bharara said the case was among the largest-ever Medicare fraud enterprises. That is based on the more than $100 million in concocted bills authorities say participants submitted to Medicare beginning at least as early as 2006, though they obtained only $35.7 million in improper payments. It was the latest in a string of health-care fraud busts nationwide by the Department of Justice. In July, authorities announced charges against 94 people in separate schemes that allegedly involved $251 million in fraudulent billings.
Retail Group's Analysis Paints Dire Image of a Value-Added Tax. Piling a European-style sales tax on top of the existing U.S. tax structure would immediately destroy 850,000 jobs and damage retail spending for years to come, according to an economic analysis commissioned by the National Retail Federation, a leading trade group. The report studied the potential effect of a 10.3 percent value-added tax, or VAT, a form of sales tax applied at every stage of production. The tax is ubiquitous around the world, having been adopted in more than 130 countries. NRF president Matthew Shay said the study is intended to push back against what he views as a rising tide of interest in the VAT in Washington, where policymakers are eager to reduce record budget deficits. "Supporters claim a VAT is the solution to the nation's economic ills, but nothing could be further from the truth," said Shay, who represents an industry that has long opposed a value-added tax. "This report has found that a VAT would have negative economic consequences for most working Americans alive today."
Rasmussen Reports:
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends).
Reuters:
U.S. Banks Face $6-$10 Billion in Foreclosure Losses - FBR. The U.S. banking industry faces foreclosure-related losses of $6-$10 billion, but is prepared to "comfortably" absorb those losses, FBR Capital Markets said. "We would note this is an earnings issue and not a capital problem," analysts led by Paul Miller wrote in a note to clients. The analysts, however, said mortgage servicers may be in trouble as they have never been challenged by the judicial system as extensively as they are now.
Verizon(VZ) to Join AT&T(T) in Selling Apple(AAPL) iPads. Verizon Wireless will join rival carrier AT&T Inc (T.N) in selling Apple Inc's (AAPL.O) iPad later this month as it moves closer to disrupting the exclusive relationship between the device maker and AT&T. Apple's surprise announcement on Thursday comes weeks ahead of the holiday shopping season, with the company positioning the iPad touchscreen tablet as a must-have device. There is speculation that Verizon, the No. 1 U.S. wireless carrier, will soon sell Apple's iPhone. AT&T has been the sole carrier for the phone in the United States.
US Trade Deficit Swells Amid Record China Gap.The US trade deficit ballooned in August as the gap with China hit a fresh record, official data showed Friday, suggesting further weakness in the economic recovery. The Commerce Department said the August trade deficit rose nearly nine percent from July to 46.3 billion dollars. That was far worse than economists predictions of a 44.5 billion dollar gap.
Financial Times Deutschland:
German industrial companies are concerned that China may block their access to commodities such as rare earth metals, citing a document presented yesterday by a lobby group. China's export restrictions on rare earth metals are an "unfriendly act," German Economy Minister Rainer Bruederle said. A scarcity of metals such as tungsten and germanium is causing difficulties for sectors including wind turbine makers, makers of electronics and car companies.
Xinhua:
Chinese Defense Minister Liang Guanglie praised his country's "traditional friendship" with North Korea and agreed to increased cooperation between their armed forces.
Falling housing prices and the risk of loan defaults by local-government financing vehicles are Chinese bankers' top concerns, citing a survey by an industry association and PricewaterhouseCoopers.
China Business News:
Chinese Banks won't make large-scale loans in the fourth quarter, citing Zhu Xiaohuang, China Construction Bank Corp.'s vice president.
