Euro Crisis Enters New Phase With Credit Squeeze: Daniel Gros. The life-support system for Greece, Ireland, Portugal and Spain is now under threat. The highly indebted nations of the euro area can’t survive the deficit crisis without access to central-bank credit. Last month’s Franco-German agreement at Deauville, France, and the statement of European leaders on Oct. 29 have changed the ground rules for euro-area debt. All 27 member states have now signed up to the need for a revision of the Lisbon Treaty in exchange for a permanent crisis-resolution mechanism. The key new element is that Europe’s leaders have specifically said that future rescues might involve private creditors. Nothing is known about the magnitude of their required contribution, but it’s now certain that they might be asked to participate. The agreement by European leaders is reinforced by two additional recent developments.
Crude Oil Stockpiles Increase in Survey, Threatening Rally: Energy Markets. U.S. crude-oil inventories probably increased to the highest level in 18 months, threatening a rally in futures prices, as refineries idled units because of lower profit margins, a Bloomberg News survey showed. Supplies rose 1.75 million barrels, or 0.5 percent, in the seven days ended Nov. 5 from 368.2 million a week earlier, according to the median of 10 analyst estimates before an Energy Department report tomorrow. That would leave stockpiles at the most since May 8, 2009. Crude demand has slumped as refiners reduced operating rates to the lowest level in eight months, according to the Energy Department. The profit from making crude into fuel, or the crack spread, has decreased 44 percent in the past six months, according to data compiled by Bloomberg. “The lack of physical tightness is leaving the market vulnerable to another downdraft like we saw in May,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Prices climb, climb, climb and then ultimately find it impossible to stay there.”
Netanyahu Says U.S. Must Show a Military Strike Against Iran is Possible. Israeli Prime Minister Benjamin Netanyahu said the U.S. and the international community need to convince Iran that a military strike is possible in order to prevent the Iranian government from developing nuclear weapons. “The simple paradox is this,” Netanyahu said in a speech yesterday to Jewish activists in New Orleans. “If the international community, led by the U.S., wants to stop Iran without resorting to military action, it will have to convince Iran that it is prepared to take such action.”
ETFs Riskier to Markets Than High-Frequency Trading, Kauffman Study Says. Exchange-traded funds, not high- frequency trading, pose the greatest danger to stock-market stability and may trigger more disruptions like the May 6 selloff, according to the Kauffman Foundation in Kansas City. The proliferation of ETFs presents “unquantifiable but very real systemic risks of the kind manifested very briefly during the ‘flash crash’” earlier this year, Harold Bradley and Robert E. Litan said in a research report published today. Potentially worse declines are “a virtual certainty” without ETF reforms, Bradley and Litan said. The U.S. Securities and Exchange Commission blamed a mutual fund’s routine hedge against losses for starting a chain of events that turned an orderly decline into a crash that erased $862 billion in equity value in less than 20 minutes. Regulators also are investigating whether trading formulas, or algorithms, could “cascade,” triggering further action by computerized trading systems that would exacerbate market disruptions, Andrei Kirilenko, a senior economist at the Commodity Futures Trading Commission, said last week.
World Bank Says Asia May Need Capital Controls to Curb Bubbles. Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said. Any curbs should be “targeted”, temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said in an interview. This could include countries tying up funds for as long as a year to help limit hot-money, she said.
Euro Falls to One-Week Low Versus Dollar on European Fund-Raising Concern. The euro declined to a one-week low against the dollar as speculation European nations will struggle to raise funds reduced demand for the region’s assets. The common currency weakened versus 14 of its 16 major counterparts as Portugal prepared to sell as much as 1.25 billion euros ($1.74 billion) of debt tomorrow as concerns about so-called periphery European nations caused their bonds to tumble. “You’ve got these rumblings over in Europe,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “It’s mainly Portugal, Ireland and Greece. There’s a downside risk for the euro.”
U.S. Bond Rating Upgrades Trounce Europe by Record Amount: Credit Markets. U.S. credit quality is improving relative to Europe at the fastest pace ever, underscoring greater economic growth in America and downgrades of nations from Ireland to Greece. The ratio of upgrades to downgrades by Standard & Poor’s in the U.S. this year is 1.07, compared with 0.46 in Europe, the widest gap ever, according to data compiled by Bloomberg. S&P lifted the ratings of 455 U.S. issuers including Starwood Hotels & Resorts Worldwide Inc. and lowered 427. In Europe, there were 102 upgrades including France’s second-largest automaker Renault SA, versus 224 cuts.
Hedge Funds Slow to Change Marketers' Pay Structure - Survey. Hedge funds are revising their infrastructure, staffing and compensation policies to attract the so-called "sticky money" from pension funds, endowments and other institutional investors, but change to the pay structure of marketing executives at hedge funds has been slow, according to a recent survey. As a result, marketers may not be in sync with hedge funds' desire to market to such institutions, according to the study conducted by hedge fund executive placement agent Alpha Search Advisory Partners.
New Push to Ban Earmarks in Senate. Lawmakers aligned with the tea party are moving quickly to show their strength by trying to ban budget earmarking in the Senate, where support is still strong for the practice critics deride as pork-barrel spending. South Carolina Sen. Jim DeMint on Monday was collecting signatures on a letter calling for a vote by his fellow Senate Republicans to ban earmarks, in which spending is channeled to projects favored by individual lawmakers, outside the competitive federal funding system.
Fed Global Backlash Grows. China and Russia Join Germany in Scolding; Obama Defends Move as Pro-Growth. Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism. Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed's decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.
10 Signs the Consumer is Not Dead. Americans are certainly strapped, but there is very convincing evidence that consumers are rebounding faster than most economists give them credit for.
Institutional Investor:
Large Hedge Funds Weave Through Volatility. Many of the largest, high-profile hedge funds lagged the broader market in October. Several of them are even behind for the year. And their investors think this is just fine. As most new money flowing into hedge funds these days has been headed for the largest funds — a trend we have chronicled in the past — those investors are seeking the comfort of relatively stable organizations that, for the most part, are not swinging for the fences.
Politico:
Darrell Issa Plans Hundreds of Hearings. California Rep. Darrell Issa is already eyeing a massive expansion of oversight for next year, including hundreds of hearings; creating new subcommittees; and launching fresh investigations into the bank bailout, the stimulus and, potentially, health care reform.
Reuters:
Raymond James(RJF) Eyes Expansion as Valuations Improve. Raymond James Financial is considering acquisitions as the investment banking firm industry's valuations are leveling off after the crisis, its chief operating officer told Reuters on Monday.
Chongqing Morning Post:
China's Chongqing city is ready to introduce a property tax, citing the municipality's housing bureau. The local authority will temporarily intervene in home prices and increase supply of affordable housing.
China Securities Journal:
Possible interest rate increases are the biggest risk for China's property loans, citing Chen Huai, a researcher at the housing ministry. About 70% to 80% of mortgage loans were lent in the last three years when interest rates were at the lowest in more than two decades, Chen said. Interest rate levels may at least double the current level in the next 5 to 10 years if the government continues efforts to keep inflation between 3% to 5% annually, Chen said.
Securities Times:
Chinese government departments are drafting rules to allow authorities to intervene in home prices. Local governments may be given the power to limit selling prices of homes and profits developers take.
Beijing Times:
China should return to a normal monetary policy regardless of the U.S.'s second round of quantitative easing, or QE2, Yi Xianrong, a researcher with the Chinese Academy of Social Sciences wrote. China should withdraw from the "abnormal" monetary policy which began from 2008, Yi wrote. The country's economy will face huge risks if it doesn't change the policy because of quantitative easing in the U.S., Yi wrote. China should prohibit hot money inflows into the domestic property market, Yi wrote.
Evening Recommendations Citigroup:
Reiterated Buy on (BZH), target $6.
Reiterated Buy on (XL), target $25.
Reiterated Buy on (PCLN), target $540.
Wells Fargo:
Rated (TRN) Outperform.
Rated (GBX) Outperform.
Night Trading
Asian equity indices are -.75% to +.25% on average.
Asia Ex-Japan Investment Grade CDS Index 102.0 +8.0 basis points.
The NFIB Small Business Optimism Index for October is estimated to rise to 90.0 versus a reading of 89.0 in September.
10:00 am EST
Wholesale Inventories for September is estimated to rise +.7% versus a +.8% gain in August.
Upcoming Splits
(RVBD) 2-for-1
Other Potential Market Movers
The $24 Billion 10-Year Treasury Bonds Auction, IBD/TIPP Economic Optimism Index for November, JOLTs Job Openings report for September, weekly retail sales reports, weekly ABC Consumer Confidence reading, (EGN) analyst meeting, (HAS) investor day, (NFG) financial analysts meeting, (TRMB) analyst day, (AMD) financial analyst day, Goldman Sachs Techtonics Conference, Wells Fargo Tech/Media/Telecom Conference, JPMorgan Ultimate Services Investor Conference and the Piper Jaffray Tech/Media/Telecom Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.
North American Investment Grade CDS Index 87.25 bps +2.32%
European Financial Sector CDS Index 109.17 bps +7.34%
Western Europe Sovereign Debt CDS Index 171.0 bps +3.22%
Emerging Market CDS Index 194.05 bps +2.13%
2-Year Swap Spread 18.0 +3 bps
TED Spread 18.0 +1 bp
Economic Gauges:
3-Month T-Bill Yield .11% -1 bp
Yield Curve 215.0 -2 bps
China Import Iron Ore Spot $157.20/Metric Tonne +2.61%
Citi US Economic Surprise Index +32.60 +6.6 points
10-Year TIPS Spread 2.11% +1 bp
Overseas Futures:
Nikkei Futures: Indicating +17 open in Japan
DAX Futures: Indicating +21 open in Germany
Portfolio:
Slightly Lower: On losses in my Medical and Biotech long positions
Disclosed Trades: None
Market Exposure: 100% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades just slightly lower despite recent sharp equity gains, euro sovereign debt concerns and rising QE2 ramification worries. On the positive side, Coal, Oil Service, Gold, HMO, Construction and Education shares are especially strong, rising 1.0%+. Cyclicals and small-caps are outperforming again. The California Municipal CDS is falling -2.01% to 257.23 bps, which is a positive. The 10-year yield is rising +2 bps to 2.55%. The Citi US Economic Surprise Index is now at the best level since April 15th. On the negative side, Insurance, Airline and Utility shares are under pressure, falling more than 1.0%. (XLF)/(IYR) are trading a bit heavy today. The Citi Eurozone Economic Surprise Index is falling -11.3 points today to +26.30, which is its lowest levels since July 21st. The Spain sovereign cds is gaining +6.46% to 264.53 bps, the Portugal sovereign cds is rising +3.52% to 458.93 bps and the Ireland sovereign cds is rising +1.98% to 597.11 bps. The Western Europe Sovereign CDS Index is near its record high set May 7th at 174.12 bps, which is a large negative. Other key credit default swap indices are beginning to rise too much, as well. The divergence between the US/Eurozone Economic Surprise Indices, rising eurzone sovereign debt worries and overly bullish trader expectations regarding the euro currency could provide the catalysts for more euro weakness. The equity market continues to remain very resilient, despite potential headwinds, which remains a large positive. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic fear, buyout speculation, investment manager performance angst, short-covering and earnings optimism.
Irish Credit-Default Swaps Surge to Record on Bank Bailout Cost Concerns. Credit-default swaps on Ireland and its banks surged to record high levels on concern the cost of bailing out the nation’s financial system is unsustainable. Contracts on Ireland soared 28 basis points from a record closing level to 606, according to data provider CMA. Swaps on the senior debt of Allied Irish Banks Plc climbed 43.5 basis points to 899.5 and Bank of Ireland Plc increased 37.5 to 724.5. “The uncertainty regarding sovereign debt and deficits in the European periphery will remain a strain for risky assets,” Tim Brunne, a Munich-based strategist at UniCredit SpA, wrote in a note to investors. The extra yield, or spread, investors demand to hold Irish 10-year bonds instead of similar-maturity benchmark German debt increased 10 basis points to 531 basis points, near the record 534 basis points reached at the end of last week. Swaps on Allied Irish subordinated debt jumped 8 percentage points to 54 percent upfront and five percent a year, meaning it costs 5.4 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s debt for five years. Subordinated swaps on Bank of Ireland jumped 2 percentage points to 31 percent upfront and five percent a year. The Markit iTraxx SovX Western Europe Index of swaps on 15 nations rose 3.75 basis points from a record closing level to 174.75. Contracts on Portugal jumped 9 basis points to 454, Spain climbed 9.5 to 259.5 and Italy increased 4 to 195. Greece declined 3 basis points to 195. The cost of insuring corporate bonds also rose. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 7 basis points to 438, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 2 basis points to 98.75, JPMorgan prices show. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers was unchanged at 132.5.
Google(GOOG), Dell(GELL) Likely to Keep Acquisition Spree Alive. and Google Inc.Dell Inc. plan to push ahead with more acquisitions, helping maintain a takeover spree that’s boosted the value of U.S. technology mergers to more than $60 billion this year. Google is likely to buy more companies about the size of YouTube and DoubleClick, its two largest deals, to help offer more online services, the company’s head of mergers and acquisitions said in an interview last week. Dell plans more takeovers in its drive to double the size of its data-center business to $30 billion in sales, a company executive said. Internet and computer companies are increasingly relying on acquisitions to gain new technology and customers.
Euro Periphery-Nation Bond Yield Spreads Likely to Stabilize, Nomura Says. Bond yield premiums demanded by investors to hold Irish and Portuguese debt instead of benchmark bunds may stabilize, Nomura International Plc said. “This crisis, fueled by little true news, has entered a new phase and we expect some shorter-term stability,” a team of analysts led by Nick Firoozye in London wrote in a research report today. Portugal’s sale of bonds scheduled for Nov. 11 may go “smoothly” as a result, the analysts wrote. Greek Prime MinisterGeorge Papandreou’s move to rule out early elections may also “provide some comfort to spreads,” the analysts wrote in the note.
CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500. More U.S. executives than ever are increasing earnings forecasts compared with those lowering them. EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999. Shipping companies and computer makers boosted forecasts the most, pushing the Morgan Stanley Cyclical Index of businesses most tied to the economy up 27 percent from July 2 through Nov. 5.
SEC Weighs Slowing Algorithms in Times of Market Volatility, Schapiro Says. U.S. Securities and Exchange Commission ChairmanMary Schapiro said her agency is examining whether computer algorithms used to trade thousands of shares in milliseconds should include risk controls that instruct them to slow down during periods of market volatility. The agency is considering what to do about algorithms that “go crazy,” Schapiro said today at a Securities Industry and Financial Markets Association conference in New York. “Should they be programmed with throttles to slow them down?”
Israel's Netanyahu Asks Biden to Pressure Iran Harder Over Nuclear Program. Israeli Prime Minister Benjamin Netanyahu told U.S. Vice President Joe Biden that Iran must face greater pressure to stop it from developing nuclear arms, his spokesman said. He also expressed hope that disputes that have stalled Middle East peace talks will be resolved.
Wall Street Journal:
Regulators Watch Closely as Bonuses Soar. As brokerage firms' recruiting bonuses rise, so does regulators' concern that the incentives being attached to them could pose a threat to compliance with securities laws. The biggest brokerages are offering packages to their top-producing brokers that can exceed 300% of a year's production in fees and commissions, and much of that money is tied to their performance after they join the new company.
Obama Jumps Into G-20 Surplus Spat. U.S. President Barack Obama, returning fire in a heated exchange with Germany, added his voice to U.S. efforts to reduce massive German and Chinese trade surpluses and increase pressure on China to let the value of its currency rise. And in a highly anticipated speech to the Indian Parliament, the U.S. president for the first time publicly backed India's inclusion as a permanent member in the United Nations Security Council, albeit after the security council undergoes a broad restructuring that could takes years, if it happens at all.
Dallas Fed Chief: The Fed Is Monetizing The Nation's Debt For The Next 8 Months. Ben Bernanke has been able to get quantitative easing pushed through with only minimal opposition, but starting early next year the Fed is about to get much more hawkish, as three members are about to get votes, and three doves will lose their votes.
We Just Got The 14th Piece of Evidence That the Double Dip is Toast. Earlier we mentioned 13 signs that the double dip is toast. Among them: Strong ISM improvement, strong car sales, and the end of public sector job layoffs. The Fed just gave us a 14th sign: Loan lending standards continue to ease:
Cost of Green Power Makes Projects Tougher Sell. Michael Polsky’s wind farm company was doing so well in 2008 that banks were happy to lend millions for his effort to light up America with clean electricity. But two years later, Mr. Polsky has a product he is hard-pressed to sell. His company, Invenergy, had a contract to sell power to a utility in Virginia, but state regulators rejected the deal, citing the recession and the lower prices of natural gas and other fossil fuels. “The ratepayers of Virginia must be protected from costs for renewable energy that are unreasonably high,” the regulators said. Wind power would have increased the monthly bill of a typical residential customer by 0.2 percent. Even as many politicians, environmentalists and consumers want renewable energy and reduced dependence on fossil fuels, a growing number of projects are being canceled or delayed because governments are unwilling to add even small amounts to consumers’ electricity bills.
Washington Post:
Regulators Flawed in Foreclosure Oversight. As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations. When two banks - J.P. Morgan Chase and Wells Fargo - declined to cooperate, the state officials asked the banks' federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states' request, saying the firms should answer only to inquiries from federal officials.
San Francisco Chronicle:
California Borrows $40 Million a Day to Pay Unemployment. With one in every eight workers unemployed and empty state coffers, California is borrowing billions of dollars from the federal government to pay unemployment insurance. The Los Angeles Times reports that the state owes $8.6 billion already, and will have to come up with a $362-million payment to Washington by the end of next September. The continued borrowing means federal unemployment insurance taxes are going to increase, upping the annual payroll costs $21 a year per worker. California tops the list of 32 states that have borrowed a total of $41 billion to pay claims.
NASDAQ:
Hedge Funds Post Inflow of $3.8 Billion in September. TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an inflow of $3.8 billion (0.2% of assets) in September 2010, the third straight inflow as well as the sixth in eight months. Assets surged 2.5% to $1.62 trillion, the highest level since April. "September was a good month for hedge fund managers," said Sol Waksman, founder and President of BarclayHedge. "Nine in 10 managers reported a profit for the month, and our Hedge Fund Index increased 3.5%. This is the largest gain since May 2009, and it lifted the index above the October 2007 high-water mark." Hedge fund investors were risk averse in September. Equity Long Only funds redeemed $829 million (1.2% of assets), the heaviest outflow of all fund strategies, while Emerging Markets funds redeemed $269 million (0.1% of assets), the third outflow in four months. Meanwhile, commodity trading advisors (CTAs) hauled in $5.8 billion, the sixth straight inflow as well as the fourteenth in 16 months. In contrast, Funds of Hedge Funds redeemed $635 million (0.1% of assets). "It won't surprise us to see hedge fund managers investing aggressively through year-end, which could keep a strong bid under stock prices," said Vincent Deluard, Executive Vice President at TrimTabs. "Investors have poured $ 16.1 billion into hedge funds in the past three months, and managers need to put that fresh cash to work. Also, more than half of managers have failed to poke through their previous high-water marks. In order for these folks to collect performance fees this year, they need to lever up and produce a blockbuster quarter."
Irish Credit Unions May Need Major Restructuring. Ireland's credit union sector may need to be significantly restructured if arrears continue to rise and lending opportunities remain subdued, the official in charge of regulating the industry said on Monday. "Not all credit unions will make it through this difficult financial and economic environment in their current structure," James O'Brien, the registrar of credit unions, told the National Supervisors Forum.
FrontPoint Health Funds See Big Redemptions. Investors have asked FrontPoint to return about half of its healthcare portfolios' assets, or about $750 million, after the fund and its top manager became embroiled in an insider trading case, a source familiar with the matter said on Monday. The Greenwich, Connecticut-based hedge fund firm has also extended the redemption deadline to December 1 from November 15 to receive money back on December 31, FrontPoint's two chief executive officers told their investors late last week.
Radical Yemeni Cleric Calls for Killing Americans. A U.S.-born Islamic cleric linked to attacks by al-Qaida in Yemen on U.S. targets called for Muslims around the world to kill Americans in a new video posted on extremist websites Monday. Anwar al-Awlaki, 39, is one of the most prominent English-language radical clerics and his sermons advocating jihad, or holy war, against the United States have influenced militants involved in several attacks or attempted attacks on U.S. soil. Yemeni officials say he may have blessed the recent mail bomb plot, though he may not have taken an active part in it. Al-Awlaki has in past messages encouraged Muslims to murder American soldiers and justified the killings of American civilians by accusing the United States of intentionally killing a million Muslim civilians in Iraq, Afghanistan and elsewhere. But this message appeared stronger, arguing that no justification was needed. In his 23-minute message delivered in Arabic, al-Awlaki said because all Americans are the enemy, clerics don't need to issue any special fatwas or religious rulings allowing them to be killed. "Don't consult with anybody in killing the Americans," he said. "Fighting the devil doesn't require consultation or prayers seeking divine guidance. They are the party of the devils," he added. It is "either us or them."
IrishTimes.com:
German Finance Minister Upbeat About Ireland's Recovery Prospects. GERMAN FINANCE minister Wolfgang Schäuble has said that he is optimistic that Ireland will be able to pull out of its economic crisis. But he insisted that future EU bailouts would come with tough conditions, including a clause specifying the precise losses that bondholders would be expected to shoulder. “The EU was not founded to enrich financial investors,” he told this morning’s Der Spiegel magazine. Mr Schäuble rejected suggestions that Ireland’s difficulties were likely to unsettle the financial markets, saying investors would be far more worried if G20 nations failed to cut their deficits in half by 2013 as promised.
Eurostat won't Revise its estimate of Greece's 2009 deficit to more than 15.5% of GDP, from 13.8%, citing people at the Finance Ministry.
Canada Free Press:
Soros Bets on U.S. Financial Collapse. Another financial expert is expressing his deep disgust with the Federal Reserve’s decision to print more money and buy more U.S. debt, saying it is a sign that the U.S. capitalist system is moving closer to collapse. “This is the type of stuff we accused the communist and socialist governments of doing—interfering in free markets through currency manipulation,” declared Zubi Diamond, author of The Wizards of Wall Street. “What the Fed is doing is not good for free market capitalism and it is not good for America.” In an interview with Accuracy in Media, Diamond went on to say, “The Fed is following the economic models of Third World countries by printing more money and devaluing their currencies. If you keep doing what Third World economies do, eventually you will become a Third World economy.”
