North American Investment Grade CDS Index 96.21 bps -2.75%
European Financial Sector CDS Index 96.25 bps -1.16%
Western Europe Sovereign Debt CDS Index 137.75 bps -.36%
Emerging Market CDS Index 211.27 bps -.07%
2-Year Swap Spread 18.0 +2bps
TED Spread 17.0 +2 bps
Economic Gauges:
3-Month T-Bill Yield .12% -1 bp
Yield Curve 213.0 +1 bp
China Import Iron Ore Spot $151.80/Metric Tonne +.53%
Citi US Economic Surprise Index -4.90 -.1 point
10-Year TIPS Spread 2.11% +5 bps
Overseas Futures:
Nikkei Futures: Indicating +9 open in Japan
DAX Futures: Indicating -24 open in Germany
Portfolio:
Higher: On gains in my Tech, Ag and Retail long positions
Disclosed Trades: Added (IWM)/(QQQQ) hedges, added to my (EEM) short
Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite another sharp mid-day reversal lower in the major averages and commodity weakness. On the positive side, Retail, Medical Equipment, Defense, Paper and Internet shares are especially strong, rising 1.0%+. The Hungary sovereign cds is dropping -2.53% to 272.56 and the Eurozone Investment Grade CDS Index is falling -2.4% to 81.89 bps. Gold is falling -1.4%. The 10-year yield is rising +6 bps to 2.54%. On the negative side, Gold, Steel, Education, Road & Rail, Gaming, I-Banking, Oil Service, Alt Energy and Coal shares are under pressure, falling more than 1.0%. Small-caps are underperforming. Commodity weakness is noteworthy considering just a mild pullback in the euro and better US economic data. (XLF)/(IYR) are also relatively weak. Negative action in (BAC) shares is a broad market concern. The Greece sovereign cds is rising +1.48% to 687.51 bps and the Russia sovereign cds is rising +1.74% to 139.75 bps. Moreover, the California municipal cds is rising +3.07% to 280.0 bps. The AAII % Bulls rose to 49.62 this week, while the % Bears fell to 25.19, which is a negative. The Philadelphia Fed’s index of prices paid jumped to 31.5, the highest level since May, from 9.8. This is a huge jump. I continue to believe that any QE2 action by the Fed is a big mistake and will eventually be a large negative for the US economy and stocks if undertaken. The bears were once again unable to gain traction today despite another large negative reversal in stocks, however overall action is a bit concerning. I expect US stocks to trade mixed-to-higher into the close from current levels on tax policy/election optimism, short-covering, buyout speculation and earnings optimism.
Banks Face Two-Front War on Bad Mortgages, Foreclosures. Shoddy mortgagelending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion. While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks. Bank of America alone said this week that pending claims jumped 71 percent from a year ago to $12.9 billion of loans.
Philadelphia-Area Manufacturing Expanded in October. Manufacturing in the Philadelphia region expanded less than forecast in October as a measure of orders contracted for a fourth month. The Federal Reserve Bank of Philadelphia’s general economic index rose to 1 from minus 0.7 a month earlier. Less inventory rebuilding and consumers constrained by joblessness near 10 percent may restrain factories. The Philadelphia Fed bank’s shipments gauge rose to 1.4 from minus 7.1 in September. The employment index increased to 2.4 from 1.8 a month earlier. The new orders measure increased to minus 5 from minus 8.1, today’s report showed. The Philadelphia Fed’s index of prices paid jumped to 31.5, the highest level since May, from 9.8. The gauge of prices received increased to minus 9 from minus 13.9.
Oil Declines as Chinese Refinery Demand Growth Slows to Least in 18 Months. Crude declined as China’s oil processing grew the least in 18 months after government measures to cool the economy reduced fuel consumption. Oil slipped as much 2.1 percent following data from China Mainland Marketing Research Co. that showed refineries in the world’s biggest energy-consuming country processed about 8.5 million barrels a day in September. That’s a 6.6 percent gain from a year earlier and the smallest increase since March 2009. “The Chinese numbers didn’t knock the socks off of oil traders,” said Phil Flynn, vice president of research at PFGBest in Chicago. “You’ve got a China demand premium built into the oil price. The disappointing numbers overnight, together with slower GDP growth, higher inflation and higher interest rates, are putting a damper on bullish sentiment.” “We’re starting to see a bit more of a focus on the fundamentals of the market,” said Michael Fitzpatrick, a broker with MF Global in New York. “We’ve traded with the stock market and the dollar lately, but those correlations are staring to break down.” “If it weren’t for the Dow and dollar, oil would be getting hammered real hard because of the Chinese news,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Prices have been quite robust lately, and a large part of that was due to expectations of ever-faster Chinese growth.”
European Services, Manufacturing Growth Weakens. Europe’s services and manufacturingindustries expanded at the weakest pace in a year in October, suggesting a global slowdown and the rising euro are starting to undermine the region’s recovery. A composite index based on a survey of euro-area purchasing managers in both industries fell to 53.4 from 54.1 in September, London-based Markit Economics said today. Economists forecast a drop to 53.7, the median of 12 estimates in a Bloomberg survey shows.
Goldman(GS) Eyes Its Buffett Tab. Goldman Sachs Group Inc. is considering paying back a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc. that bolstered the securities firm during the worst of the financial crisis, according to people familiar with the situation.
Financial Regulation Overhaul Draws Weak Public Support. Many Democrats hoped this summer’s financial regulation overhaul would help them in elections this fall. A survey by economists at the University of Chicago and Northwestern University indicates they’re not getting much traction from it. Just 12% of respondents in the survey said they were satisfied with the Dodd-Frank law to revamp financial oversight, while 54% were dissatisfied. Two out of three people said they believe the measure is insufficient to protect against future bailouts. Even among only Democrats, the law has little support. Just 35% of Democrats said they were “satisfied” or “very satisfied” with the measure. The vast majority of Republicans, 80%, said they were dissatisfied, along with 54% of independents.
G-20 Seeks to Forge Elusive Consensus on Currencies. Finance ministers from the Group of 20 nations are under pressure to reach a truce in what's being called a global "currency war," but they will struggle to produce anything substantive this week. G-20 finance ministers and central bankers are seeking consensus at meetings Friday and Saturday on steps that could calm foreign-exchange markets, but they will likely leave any concrete measures to the leaders of the big industrial and developing countries, who meet in Seoul next month.
CNBC:
Americans Growing More Pessimistic About Economy: CNBC Survey. The American dream appears increasingly elusive to the average citizen, with the CNBC All-America Economic Survey finding continued high levels of pessimism in the nation’s outlook for incomes, home values and the future of the economy. After trillions of dollars were put to work for monetary and fiscal stimulus, just 8 percent of the nation views the economy as excellent or good and 92 percent see it as fair or poor, little changed from a year ago. But just 37 percent of the public believes the economy will improve in the next year, down five points from a year ago. Taken together, the combined percentage of Americans who are pessimistic about the economy now and for the next year is at the second highest for the three-year life of the CNBC survey.
Zero Hedge:
The Obama Recovery Has Finally Succeeded... If You Are a High Frequency Trader. A headhunter firm is either helping GETCO build the 21st century equivalent to the atom bomb, clustering every single HFT trader under one roof for the most destructive group of momo lemmings ever assembled, or the Obama recovery is truly working... for those who know nothing but how to frontrun what remaining traders are left. From a job search posting on LinkedIn:
Latest Hedge Fund Exposure Levels to Various Asset Classes. Societe Generale is out with their latest hedge fund watch and we see that overall, hedgies are very long the Swiss franc and have increased long positions in oil. Let's take a look at SocGen's round-up of hedge fund exposure to the various asset classes. With regard to equities, Societe Generale finds that hedge funds as a whole are astonishingly 'neutral' on the markets. While a few funds have net shorts on the S&P, the main area hedgies are maintaining short positions are in small caps with the Russell 2000 (which investors typically play via the IWM exchange traded fund). In our particular coverage, we've seen many hedge funds favor high quality stocks essentially as placeholders in a portfolio given the somewhat tepid economic environment. In bonds, they note that many funds had net short positions but they've been forced to square those positions as double-dip fears returned. SocGen notes that hedgies are somewhat long 10 year treasuries though as the second round of quantitative easing looms large. Possibly the most notably change in terms of asset class exposure would be the uptick in commodity positions. As the dollar has weakened, many hedge funds believe commodities will benefit from quantitative easing round two. Specifically, these funds prefer positions in oil with a large net long position.
Politico:
Right Declares War on NPR. NPR’s decision to fire Juan Williams over comments he made about Muslims on Fox News has prompted calls on the right for Congress to remove its funding, and concern on the left that NPR may have just handed its critics a powerful weapon for painting the broadcaster as liberal. The biggest names in conservative politics – including Mike Huckabee and Sarah Palin, both paid Fox News contributors like Williams — rushed to his defense after he said he gets “nervous” when he sees people in Muslim dress boarding an airplane.
Dow Jones:
Honda Motor Co.'s domestic sales are down 35% so far this month from the previous year, more than an expected 28% decline, citing a company executive.
Spain's government is considering a new social tax on banks, energy companies and telecommunications firms to help plug the budget deficit.
Der Spiegel:
How Speculators Are Crippling the Copper Industry. Hedge funds and other major investors are always looking for new places to park their cash. Now copper is attracting the hot money, causing the price of the metal to fluctuate wildly. Key industries are warning of the consequences.
DigiTimes:
DRAM Prices Still Have Room to Fall, Says Nanya. After having slid lately, contract prices of DRAM chips are likely to be further dragged down by another 10-20% in the fourth quarter of 2010, according to Pei Lin Pai, VP and spokesperson for Nanya Technology. The decline will be moderate later in 2010, when PC replacement demand from the enterprise sector emerges, said Pai.
Caijing:
China property price growth is expected to slow from the fourth quarter through the first half of next year, citing a report from the Chinese Academy of Social Sciences.
Fed's Lacker Says More Purchases 'Hard Case to Make'. Federal Reserve Bank of Richmond President Jeffrey Lacker said a new round of asset purchases by the central bank “would be a hard case to make” with economic growth in line with his outlook. The Beige Book report released by the Fed today shows “what I expected several months ago,” which is an economic expansion of about 2 percent during the second half, Lacker told reporters in College Park, Maryland. He said he would make up his mind on monetary policy when Fed officials meet in two weeks.
China Interest-Rate Boost May Take 'Hot Air' Out of Stocks, Aberdeen Says. A rally by China’s stocks may lose momentum after the government’s surprise decision to raise interest rates, according to Aberdeen Asset Management Plc. “It could take some hot air out,” Nicholas Yeo, who helps oversee China equities fund at Aberdeen Asset which manages $261 billion globally, said in a phone interview from Hong Kong.
'Savage' Austerity Is in US's Future, Buiter Says: Tom Keene. Fiscal austerity measures detailed today by the U.K. government will soon be needed in the U.S., according to Willem Buiter, Citigroup Inc.’s chief economist. Britain’s deepest budget cuts ever, outlined by Chancellor of the Exchequer George Osborne, will eliminate almost 500,000 public-sector jobs and impose a levy on banks. The moves are part of a plan to reduce the 156 billion-pound ($245 billion) deficit, which is forecast to be 10.1 percent of gross domestic product this year, to 2.1 percent in the 2014-15 fiscal year. “The only question was really the timing and the composition,” given the finite willingness of financial markets to endure budget shortfalls, New York-based Buiter said in a roundtable interview today on “Bloomberg Surveillance Midday” with Tom Keene. “This is very savage, but no more savage than what the U.S. will have to endure when it gets going.”
Death Rate From Strokes Dropped 26% in Hospitals. The death rate from strokes in U.S. hospitals fell 26 percent as treatment technology improved. The rate declined to 92 deaths per 1,000 stroke patients in 2007, from 125 deaths per 1,000 seven years earlier, according to data released today by the U.S. Agency for Healthcare Research and Quality.
ObamaCare's Incentive to Drop Insurance by Philip Bredesen. One of the principles of game theory is that you should view the game through your opponent's eyes, not just your own. This past spring, the Patient Protection and Affordable Care Act (President Obama's health reform) created a system of extensive federal subsidies for the purchase of health insurance through new organizations called "exchanges." The details of these subsidies were painstakingly worked out by members of my own political party to reflect their values: They decided who was to benefit from the subsidies and what was to be purchased with them. They paid a lot of attention to their own strategies, but what I believe they failed to consider properly were the possible strategies of others. Our federal deficit is already at unsustainable levels, and most Americans understand that we can ill afford another entitlement program that adds substantially to it. But our recent health reform has created a situation where there are strong economic incentives for employers to drop health coverage altogether. The consequence will be to drive many more people than projected—and with them, much greater cost—into the reform's federally subsidized system. This will happen because the subsidies that become available to people purchasing insurance through exchanges are extraordinarily attractive. In 2014, when these exchanges come into operation, a typical family of four with an annual income of $90,000 and a 45-year-old policy holder qualifies for a federal subsidy of 40% of their health-insurance cost. For that same family with an income of $50,000 (close to the median family income in America), the subsidy is 76% of the cost. One implication of the magnitude of these subsidies seems clear: For a person starting a business in 2014, it will be logical and responsible simply to plan from the outset never to offer health benefits. Employees, thanks to the exchanges, can easily purchase excellent, fairly priced insurance, without pre-existing condition limitations, through the exchanges. As it grows, the business can avoid a great deal of cost because the federal government will now pay much of what the business would have incurred for its share of health insurance. The small business tax credits included in health reform are limited and short-term, and the eventual penalty for not providing coverage, of $2,000 per employee, is still far less than the cost of insurance it replaces. For an entrepreneur wanting a lean, employee-oriented company, it's a natural position to take: "We don't provide company housing, we don't provide company cars, we don't provide company insurance. Our approach is to put your compensation in your paycheck and let you decide how to spend it." But while health reform may alter the landscape for small business in unexpected ways, it also opens the door to what is a potentially far larger effect on the Treasury.
U.S. Seeks Global Pact for Big Banks. A key plank of the U.S. financial overhaul, aimed at preventing a potential collapse of a large financial firm, is being complicated by international disagreement over what, if any, additional steps such firms should take to withstand potential losses.
Niche Lawyers Spawned Housing Fracas. The paperwork mess muddying home foreclosures erupted last month. But the legal strategy behind it traces to a lawyer's gambit in 2006 that has helped keep one couple in their home six years beyond their last mortgage payment.
WikiLeaks Prompts U.S. Alert to Iraqis. A Pentagon team has been reviewing copies of Iraq war documents the website WikiLeaks may release in coming days and plans to notify Iraqis named in the documents in an effort to minimize potential damage from the security breach, defense officials said.
Regulator for Fannie Set to Get Litigious. The federal regulator overseeing Fannie Mae and Freddie Mac hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms.
Geithner's Goal: Rebalanced World Economy. Treasury Secretary Timothy Geithner said he would use weekend meetings of G-20 finance ministers to advance efforts to "rebalance" the world economy so it is less reliant on U.S. consumers, to move toward establishing "norms" on exchange-rate policy, and to persuade others the U.S. doesn't aim to devalue its way to prosperity. In an interview with The Wall Street Journal, Mr. Geithner said the world sorely needs to agree on guidelines for exchange-rate policy. "Right now, there is no established sense of what's fair," he said.
Lenders Talking to States. Several lenders and their legal advisers have initiated discussions with state attorneys general as they take initial steps to resolve a nationwide investigation of foreclosure practices.
Apple's(AAPL) New MacBook Air is the Laptop I've Been Waiting For. I've never been a big fan of laptop computers, for the simple fact that they've always been too heavy to carry around on a daily basis, taking them everywhere I go. But the new MacBook Air seems to finally be lightweight enough to carry around all the time, and cheap enough to justify buying as a secondary computer.
Soros Gives $1 Million to Media Matters. So much for not wanting to get in the way of an avalanche. George Soros announced that he has given $1 million to Media Matters “to hold Fox News accountable for the false and misleading information they so often broadcast.” Fox commentators frequently describe Media Matters, a frequent Fox critic, of being funded by Soros, but Media Matters has long denied that connection. In today’s joint announcement, Soros denied it too – at least until today. Media Matters has received funding from or formed partnerships with several groups that Soros funds or has funded. These include the Tides Foundation, Democracy Alliance, Moveon.org and the Center for American Progress.
Reuters:
Netflix(NFLX) May Offer U.S. Web Service in 2010, Shares Up. Netflix Inc, which rose to success with its by-mail DVD rental service, may add a streaming-only service in the United States this year, as it expands its reach in the digital market. The company also reported on Wednesday another quarter of strong subscriber growth, and its shares rose in after-hours trading. Its Canadian streaming-only service -- where users pay to watch video instantly off the Internet -- is a hit and on track to become profitable in late 2011, encouraging Netflix to test this model in its home market. Shares in Netflix -- known for its signature red envelopes and mail-in DVD rentals -- jumped more than 9 percent after it posted better-than-expected third-quarter subscriber growth.
EBay(EBAY) Beats and Raises, Sees Improved Holiday. EBay Inc posted a better-than-expected quarterly profit and forecast stronger holiday earnings as the Internet commerce company enjoys robust growth at PayPal while striving to reinvigorate its main marketplaces unit. The company also raised its full-year revenue and profit forecast and its shares rose 7.3 percent in after-hours trading.
Obama Aides: US Mortgage Woes Not "Systemic". The Obama administration said it found no sign so far of "systemic" home foreclosure troubles that threaten U.S. financial stability, or structural problems that could undermine investments linked to mortgages.
Schnitzer Steel(SCHN) Q4 Profit Beats on Ferrous Metal Sales. n">Schnitzer Steel Industries' fourth quarter profit blew past estimates as its metal recycling business, the largest contributor to revenue, was helped by strong ferrous metal sales.
n">Billionaire Fisher Lambasts Dour Sentiment, Eyes US Bull Market. "The six and 12 months after mid-term elections have always been positive because political risk aversion falls and when political risk aversion falls, total risk aversion falls," said Fisher, who oversees $37 billion in assets as founder of Fisher Investments in Woodside, California.
Financial Times:
German Exporters Wary Over Currency Wars. German exporters are expressing growing anxiety about the appreciation of the euro against the US dollar and the prospect of a currency war. Germany, the world’s second-largest exporter after China, is on track for 16 per cent growth in foreign trade to €937bn ($1,307bn) this year, mostly spurred by buoyant demand from emerging markets.
Apple's(AAPL) iPhone and iPad Apps Move to Mac. Having succeeded beyond all expectations in making phones more like computers, Apple is now trying to make its computers more like phones. The company on Wednesday brought its free video calling service from the iPhone and iPod touch to Mac computers and said that a version of the App Store would come to its home and mobile computer lines within three months.
North Korea may be making preparations for a third nuclear test, citing an unidentified South Korean government source.
Asahi:
Japan may have a rare-earth shortage of 10,000 tons, or 30% of the country's annual demand, next year, citing an estimate by trading company Sojitz Corp. Since late September, only two companies were able to buy rare earths from China, citing Japan's Trade Ministry.
Shanghai Securities News:
China plans to allow brokerages to borrow stocks and cash for margin trading and short-selling.
Evening Recommendations Citigroup:
Reiterated Buy on (COF), target $55.
Reiterated Buy on (RHI), target $33.
Reiterated Buy on (ETN), target $105.
Reiterated Buy on (AAPL), target $390.
Reiterated Buy on (MDR), target $20.
Susquehanna:
Rated (MCK) Positive, target $78.
Rated (ABC) Positive, target $39.
Night Trading
Asian equity indices are -.25% to +.50% on average.
Asia Ex-Japan Investment Grade CDS Index 106.0 -12.0 basis points.
Asia Pacific Sovereign CDS Index 101.5 +2.5 basis points.
Initial Jobless Claims for last week are estimated to fall to 455K versus 462K the prior week.
Continuing Claims are estimated to rise to 4420K versus 4399K prior.
10:00 am EST
Leading Indicators for September are estimated to rise +.3% versus a +.3% gain the prior week.
Philly Fed for October is estimated to rise to 2.0 versus -.7 in September.
Upcoming Splits
None of note
Other Potential Market Movers
The Fed's Hoenig speaking, Fed's Bullard speaking, weekly EIA natural gas inventory report and the (PSS) investor conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly lower 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 98.93 bps +.69%
European Financial Sector CDS Index 97.08 bps -2.77%
Western Europe Sovereign Debt CDS Index 138.25 bps +.36%
Emerging Market CDS Index 210.69 bps -.71%
2-Year Swap Spread 16.0 -2bps
TED Spread 15.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .13% unch.
Yield Curve 213.0 +1 bp
China Import Iron Ore Spot $151.0/Metric Tonne -.79%
Citi US Economic Surprise Index -4.80 +.1 point
10-Year TIPS Spread 2.06% -2 bps
Overseas Futures:
Nikkei Futures: Indicating +134 open in Japan
DAX Futures: Indicating +17 open in Germany
Portfolio:
Higher: On gains in my Tech, Ag, Retail and Biotech long positions
Disclosed Trades: Covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short
Market Exposure: Moved to 100% Net Long
BOTTOM LINE: Today's overall market action is very bullish as the S&P 500 trades near session highs despite US bank sector and China hard-landing concerns. On the positive side, Airline, REIT, Coal, Gold, Oil Service, Road & Rail, HMO, Networking, Gaming, Wireless, and Energy shares are especially strong, rising 2.0%+. Cyclicals are outperforming. (IYR) has traded well throughout the day. (XLF) is at session highs and is now slightly outperforming the broard market. The Transports looked poised to make another assault on their May highs. Copper is rising +.96%, the S&P GSCI Ag Spot Index is gaining +2.96% and Lumber is up +.72%. The decline in the euro financial sector cds index is also a large positive. On the negative side, Bank, Oil Tanker and Homebuilding shares are underperforming. The 10-Year Yield is unch. at 2.47%, despite today's equity strength. Gold is rising +1.05%. The Greece sovereign cds is rising +2.08% to 688.12 bps and the Ireland sovereign cds is rising +1.38% to 400.04 bps. The bears were unable to gain traction from yesterday's equity slide. (WFC) and (BAC), which have been a huge focus for the bears, are trading at session highs with (BAC) recouping morning losses and (WFC) posting a substantial gain. The major averages still look poised to test their highs for the year before the election. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, tax policy/election optimism, short-covering, QE2 expectations, investment manager performance angst, buyout speculation and earnings optimism.
