Friday, July 09, 2010

Friday Watch


Evening Headlines

Bloomberg:
  • Swaps Show Bond Risk Easing for a Third Day as Stocks Rally. The cost of protecting U.S. corporate bonds from default fell for a third day as the Standard & Poor’s 500 Index rose on a drop in jobless claims and higher-than- forecast sales at some retailers. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 3.5 basis points to a mid-price of 112.8 basis points as of 5:31 p.m. in New York, the lowest since June 21, according to index administrator Markit Group Ltd. “The equity market has proven more of a tailwind for us,” said Tom Farina, who helps manage $188 billion of assets at Deutsche Bank AG Asset Management in New York. “Credit is really starting to gain some traction. It’s a classic credit rally.” Swaps on retailers fell, with J.C. Penney contracts dropping 11.5 basis points to 218.7 basis points, Nordstrom swaps falling 7.8 basis points to 130 basis points, and Macy’s declining 11.4 basis points to 223 basis points, according to CMA DataVision. TJX swaps fell 4.2 to 77.6 and Costco Wholesale Corp. dropped 1.8 to 53.9 basis points, according to CMA. Credit swaps on the biggest European banks’ bonds fell, with contracts on BNP Paribas, France’s largest bank, dropping 9.5 basis points to 113.9 basis points and Societe Generale, the country’s second-biggest bank by market value, falling 9 basis points to 122.1 basis points, CMA data show. Swaps on debt from UBS AG, Switzerland’s largest bank, declined 6.7 basis points to 134.6 basis points and contracts on UniCredit SpA, the biggest in Italy, fell 7.5 basis points to 147.2, according to CMA.
  • U.S. Appeals Court Rejects Six-Month Moratorium on Deep-Water Oil Drilling. A federal appeals panel denied the U.S. government’s request to reinstate a deep-water oil-drilling moratorium while it challenges a lower court order rejecting the ban. The Obama administration sought to delay an order by U.S. District Judge Martin Feldman that scrapped the six-month ban, imposed May 27 after the explosion and sinking of the Deepwater Horizon oil rig in April. The three-judge appellate panel in New Orleans denied the stay after a hearing today. The denial may lead to a quick return to drilling in the Gulf of Mexico, said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation and oil-and-gas law. “Drilling will begin, not necessarily immediately and not necessarily 110 percent,” Sabino said. “You’d see some of the braver souls go out there. They’d think, ‘We’ve got a green light now.’” The U.S. can ask the full 5th Circuit to review its request for a stay, Sabino said. “That has a snowball’s chance in heck of being granted,” he said. “Even getting a hearing is unlikely.”
  • North Korea Avoids Blame in UN Statement on Warship Sinking. The United Nations refrained from blaming North Korea for the March sinking of a South Korean warship that killed 46 sailors, according to a draft statement backed by the U.S. and China. “The UN seemed to weigh on keeping peace on the Korean peninsula by using very neutral language rather than taking sides,” said Kim Yong Hyun, professor of Dongguk University in Seoul for North Korean Studies. “The South Korean government may not be happy with the statement, even though it was expected, because the UN didn’t reflect its position.” The UN language is a blow to South Korean President Lee Myung Bak, who has called on China to acknowledge North Korea’s responsibility and on the UN to take “appropriate action.” By not specifically blaming North Korea, the UN may help restart six-nation talks on dismantling the communist regime’s nuclear program, Kim said. “The Security Council condemns the attack which led to the sinking of the Cheonan,” the draft statement says. The text “takes note” of North Korea’s denial of involvement in the March 26 incident. A multinational investigation reported on June 14 that a North Korean-made torpedo caused the sinking. The draft says that “in view of the findings” of the panel, the Security Council “expresses its deep concern.” North Korea’s ambassador to the UN said on June 16 that any Security Council statement “condemning us or questioning us” would produce a military response. “Follow-up measures will be carried out by our military forces” Ambassador Sin Son Ho told reporters.
  • BP Bonds Rebounding as Default Swap Curve Inversion Eases: Credit Markets. BP Plc is staging a comeback in credit markets as investors, who three weeks ago priced in more than 40 percent odds that the energy company would be forced into bankruptcy, speculate that mounting costs from the biggest oil spill in U.S. history will be contained. BP’s $1 billion of 4.75 percent notes due in 2019, which plunged almost 25 cents to as low as 80.5 cents on the dollar in the two months following the April explosion in the Gulf of Mexico, have gained 9.75 cents as they climbed in each of the past six trading days. Credit-default swaps protecting against a BP default for one year have declined for seven straight days, falling by almost half from their peak four weeks ago. Bondholders are gaining confidence that London-based BP will stem the flow of as much as 60,000 barrels of oil a day into the Gulf as soon as this month, giving the market a means to begin estimating the financial toll. Five-year credit-default swaps, which reached 594 basis points on June 29, now trade at 394, the lowest in a month, CMA DataVision prices show. Assuming a 40 percent recovery, that implies a 28.5 percent chance of default within five years, according to CMA.
  • Public Universities Face 'Dramatic' Funding Cuts, Moody's Says. Many public universities face “dramatic declines” in funding and possible ratings downgrades as states cut and delay annual appropriations, Moody’s Investors Service said. States are reducing funding to public universities by as much as 6 percent this fiscal year compared with last, Moody’s analysts led by Dennis Gephardt wrote in a report dated today. Institutions rated A2 and A3, five and six steps below the top grade, face the greatest risk of downgrade, New York-based Moody’s said. “Many U.S. public universities face dramatic declines in state funding on a scale that surpasses past experience,” the analysts wrote. Public colleges and universities also face a potential “funding cliff” beginning in fiscal 2012 when stimulus funds are no longer available, the analysts wrote. In 20 states, money from the American Recovery and Reinvestment Act made up more than 4 percent of budgeted support for public universities in fiscal 2010. Moody’s said in February it was reviewing all the public university bonds it rates from Illinois as a result of the state Legislature’s “extensive delays in budgeted appropriations,” according to the report. It also downgraded five of the institutions, including Illinois State University, to A3 from A2, according to a separate report.
  • Air Products(APD) Boosts Airgas(ARG) Offer to $63.50 a Share. Air Products & Chemicals Inc., the industrial-gases producer attempting a hostile takeover of Airgas Inc., raised its offer by $3.50 a share to $5.3 billion in an effort to win more shareholder support. Air Products will pay $63.50 cash for each Airgas share, rather than the $60 originally offered, the Allentown, Pennsylvania-based company said today in a statement. That’s a 5.8 percent increase and represents a 46 percent premium over the closing price on Feb. 4, the day before the bid was publicly announced.
  • U.S. Judge Says Federal Gay Marriage Ban is Unconstitutional. A U.S. judge declared that the federal Defense of Marriage Act, which defines the institution as being between a man and a woman, is unconstitutional. U.S. District Judge Joseph L. Tauro in Boston today decided that Congress exceeded its authority in legislating the issue and that the measure infringed states’ rights to regulate marriage. “In the wake of DOMA, it is only sexual orientation that differentiates a married couple entitled to federal marriage- based benefits from one not so entitled. And this court can conceive of no way in which such a difference might be relevant to the provision of the benefits at issue,” Tauro said in one of two rulings against the U.S. he issued today. The marriage-defining act, popularly known as DOMA, was signed into law by President Bill Clinton in 1996. As of 2003, it affected 1,138 federal programs in which marital status was a factor in eligibility for benefits, the judge said, citing a 2004 report by the federal government.
Wall Street Journal:
  • ECB Signals an End to Aid Program. European Central Bank President Jean-Claude Trichet said strains in European financial markets are starting to ease, suggesting the ECB will continue to pare a program to help the region's most-vulnerable countries get back on their financial feet.
  • U.S., Russia to Swap Agents. Washington Trades 10 Spies for 4 Prisoners of Moscow; Deal Settles Crisis. In the final chapter of a saga worthy of a spy novel, the U.S. and Russia agreed to one of the biggest prisoner swaps between the countries since the Cold War. The deal—to exchange 10 Russian spies who were arrested in the U.S. June 27 for four prisoners being held in Russia—came after high-level negotiations led by Central Intelligence Agency Director Leon Panetta and his counterpart in Moscow, according to people familiar with the matter.
  • Why This Isn't Like 1938 - At Least Not Yet by Don Luskin. Stock prices show we've dodged another depression, but toxic, antibusiness rhetoric and policy errors like the Dodd-Frank bill are hurting the still-fragile recovery.
  • Mexican Truck Dispute Previews Trade Battle. As President Barack Obama renews his focus on trade in a quest for job growth, a festering dispute with Mexico hints at the political battles ahead. Over the past several weeks Mr. Obama has vowed to push for passage of pending free-trade agreements with Korea, Panama and Colombia, and seek other trade opportunities. Yet shortly after taking office, Mr. Obama signed a bill with a provision that effectively bans Mexican trucks from operating inside the U.S. The ban violates the North American Free Trade Act, and prompted Mexico to impose punitive tariffs last year on $2.4 billion in American products—from Christmas trees and potatoes to wine. Mr. Obama could reverse the ban without the approval of Congress, but that would infuriate many Democrats and trucking and other unions that are critical supporters in a tough election year.
  • GE's(GE) Road In China Is Getting Bumpier. Well before General Electric Co. chief Jeffrey Immelt criticized China at a private dinner last week, the company was facing greater headwinds there. During a gathering in Rome, Mr. Immelt had said it is getting harder for foreign companies to do business in China, according to people who heard his comments. Mr. Immelt is under pressure to show growth in his industrial businesses to get the company's lagging stock price moving as he scales back its onetime profit engine, GE Capital. Its shares now trade for $14.83 apiece, down from $38.43 in April 2008. GE, which has 13,000 employees in China, has pinned much of its hopes for growth on Chinese markets. But GE faces increased competition in China as its government promotes homegrown companies and more Western competitors seek business there. Globally, Chinese wind-power companies are eroding GE's market share in wind turbines, and the Fairfield, Conn., conglomerate has faced setbacks in selling aircraft electronics there. Two years ago, Mr. Immelt said GE wanted to achieve $10 billion in sales in China by this year. Its China revenue totaled about $5.3 billion in 2009, up from $4.7 billion in 2008. Danish research firm BTM Consult Aps reported that GE held the second-biggest share of the global wind-turbine market, but its slice of the pie shrank to 12.4% from 18.5% a year earlier. GE estimates the smart grid market in China is a potentially $60 billion over the next 10 years. Its primary customer is State Grid Corp. of China, which covers electricity distribution for much of the country. GE's success hinges on creating a strong alliance with State Grid. But State Grid is also GE's biggest potential rival. State Grid wants to develop smart-grid know-how and machinery on its own. State Grid is developing technology standards and is lobbying the Chinese government to adopt them in order to cement its domestic market dominance.
Bloomberg Businessweek:
CNBC:
  • Google(GOOG) Confident of Getting China Web License. Google Chief Executive Eric Schmidt is confident the company will secure a license to operate a website in China, confounding speculation Beijing may reject them and shut down its flagship site in China. Schmidt, addressing executives and financiers at an annual gathering of the industry's movers and shakers in Sun Valley, said he now expected Beijing to renew its license to operate a website in the world's largest Internet market, but offered no timeframe.
MarketWatch:
  • Rio Tinto(RTP) CEO: China's 9% Growth Not Sustainable. China's economy is more likely to grow at an average rate of 6% annually than 9% annually, the chief executive of global diversified miner Rio Tinto PLC(RTP) said Thursday. "I think 9% is not a sustainable target" for Chinese economic growth, Tom Albanese said at the Melbourne Mining Club dinner here. He said that 6% annual growth is more manageable, particularly since the Chinese economy will be growing from a larger base. "It's a law of large numbers," he added.
Fox News:
  • Don't Blow Off Goldman's(GS) 2Q Just Yet. No financial firm has had its earnings estimates for the second quarter lowered more than Goldman Sachs (GS), and people at the firm say these estimates are likely to fall further in the coming days and weeks, FOX Business has learned.
ABC News:
NY Times:
  • Greece Approves Pension Overhaul Despite Protests. Greece took a big step toward overhauling its debt-plagued economy on Thursday by forcing through a pension bill that would sharply pare down the country’s welfare state by increasing the retirement age and reducing benefits. For Prime Minister George Papandreou, who commands a seven-member majority in Parliament, the bill represents the beginning of the end of the cradle-to-grave state compact that his father put in place as prime minister in the early 1980s.
Business Insider:
Zero Hedge:
CNNMoney:
  • Wall Street's Great Enablers: Pension Funds and Endowments. Are pension funds getting off too easy in their responsibility for the crisis? While banks have been beaten up during the financial reform regulation process (and well before, and deservedly so) there has been remarkably little attention paid to the travails of what one investment banker told us he calls "The Great Enablers" -- university endowments and pension funds that were all too happy to squeeze more and more risk into their portfolios for the promise of fat returns. Now, it seems, endowments and pensions may even be in danger of being canonized for their imagined virtue. CalPERS, which manages money for California state employees, has similarly fallen on hard times due to its fatal love for things like unrated CDOs, real estate and commodities. Many endowment managers are, if not completely unfazed, then certainly unchastened by the credit crisis -- the problem is the stock market, not their own investing style, they may blithely tell you. As early 90s diet guru Susan Powter would have said: Stop the insanity. It's worth recognizing that Wall Street would not have created its highly leveraged, risky products if there were not enormous demand for them from pension funds and endowments, which drive enormous amounts of money into the markets.
  • A Contrarian's View of Financial Reform: Why Bother? The current bill has us on the road toward crony capitalism. Access to capital will be a function of electoral politics, not your ability to repay. It's extremely important that capital be allocated for better or for worse depending on the borrower's ability to repay. Political pressure to broaden access to credit was a root cause of the bubble and Washington is still at it. Ultimately the whole financial system is based on people paying what they owe. Bailing out improvident borrowers at the expense of investors and taxpayers is an outrage. There need to be heavy consequences all around for bad financial decisions.
Forbes:
  • Why Bond Buyers Are Sleeping Better At Night. Moody's says corporate default rate slides to lowest level in 15 months. The worst threat to the hordes of Americans shifting their savings into bond funds is shrinking by the month. The rate at which corporate borrowers have bilked bondholding investors slipped for the seventh straight month in June, the rating agency Moody's announced on Thursday. The default rate dropped from 7.5% in May to 6.1%, the lowest level in 15 months.
Washington Post:
  • Boxer Leads Fiorina, But Approval Plummets. One day after polling showed that the California gubernatorial race is in a virtual tie, a new Field Poll indicates that the state's Senate race is just as closely contested. Sen. Barbara Boxer(D-Calif.) leads former Hewlett Packard CEO Carly Fiorina (R) 47 percent to 44 percent among likely voters in the survey, which had a margin of error of 3.2 points. Boxer's lead is up slightly from March, when she led Fiorina 45 percent to 44 percent in a general election match-up, but the latest numbers stand in stark contrast to a January Field Poll showing the three-term incumbent leading Fiorina 50 percent to 35 percent. Just nine percent of likely voters are undecided. Most worrisome for Boxer in the new poll is her job approval rating: 48 percent of likely voters polled said they disapprove of her performance, while 42 percent approve. That's the lowest rating Boxer has ever received in the 43 surveys since the Field Poll began testing her job approval, and it marks the first time more voters disapprove of Boxer's performance than approve. The poll also shows that 52 percent of likely voters hold an unfavorable view of Boxer, while 41 percent have a favorable opinion of her. Fiorina, by contrast, is viewed favorably by 34 percent of likely voters and unfavorably by 29 percent -- marking the first time that more voters viewed her favorably than unfavorably.
Real Clear Markets:
  • Racial, Gender Quotas in the Financial Bill? What one finds when reading congressional legislation is invariably surprising. Take the Dodd-Frank financial regulation bill, for instance, which was created by merging Senate and House bills. When the Senate returns from recess one of its first actions will be to vote on the bill, which passed the House on June 30. I was searching the bill for a provision about derivatives. What did I find but Section 342, which declares that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government. In a major power grab, the new law inserts race and gender quotas into America's financial industry. In addition to this bill's well-publicized plans to establish over a dozen new financial regulatory offices, Section 342 sets up at least 20 Offices of Minority and Women Inclusion. This has had no coverage by the news media and has large implications.
The New York Review of Books:
Politico:
  • White House: We're Not Anti-Business. The White House has launched a coordinated campaign to push back against the perception taking hold in corporate America and on Wall Street that President Barack Obama is promoting an anti-business agenda. Obama has been happy to be seen by voters as cracking down on Wall Street but those efforts have had an unintended result: feeding a sense that the president and his party are indifferent or even actively hostile toward big business, whether those businesses are Silicon Valley tech companies, Midwestern manufacturers or Main Street small businesses. And it is more than just politics: Obama’s aides believe confidence in the general direction of White House policy has an effect on the willingness of corporations to hire, invest and push the economy toward a more solid recovery.
  • Holder: Spill Probe Not Confirmed to BP(BP). Attorney General Eric Holder signaled here that the Justice Department may be conducting a sweeping criminal investigation into the Gulf Coast oil spill, saying that its suspected targets may cover more than just BP. "There are a variety of entities and a variety of people who are the subjects of that investigation," Holder told CBS' Bob Schieffer at the Aspen Ideas Festival. "For people to conclude that BP is the focus of this investigation might not be correct."
USA Today:
  • Fish Tacos Land on Restaurant Menus Across the USA. Not even the Gulf oil spill contamination has put a dent in one of the restaurant industry's hottest growth trends for 2010: fish tacos. At a time many consumers are looking to cut calories and costs, fish tacos are hitting the mainstream as they spread rapidly from the West Coast eastward.
  • Computerized Stock Trading Leaves Investors Vulnerable. The time it takes to read this sentence is all it takes for nearly 2 million stock trades to flash through the stock market. Most of those trades aren't coming from trigger-happy day traders and mutual fund managers with billions of dollars at their disposal. It's a flood of machine-gun speed fury coming from an army of computers programmed to obey complicated algorithms that are hyperactively buying and selling. What does that mean to you, the individual investor?
Reuters:
Financial Times:
  • Derivatives Reflect Fears of UK Property Slump. The west’s next real estate boom may be further away than ever. A fall in the price of complex derivatives linked to commercial property shows that investors believe that the UK market – predicted last year to recover strongly – is heading for a slide. The pricing of UK property derivatives – tradeable instruments based on an industry benchmark index – has weakened in the past three months, with a pronounced dip in pricing for contracts based on next year’s real estate returns. Derivatives trading suggests that UK commercial real estate is likely to see a fall in value in the next few years, with the prospects for rental growth diminishing. Falling prices reflect fears about a double-dip recession and the effect of another downturn on real estate. Sentiment has shifted sharply since last year, when traders were factoring in strong growth in returns for 2010 and 2011. The UK market in commercial property derivatives is one of the world’s most established. While derivatives trades are carried out based on other European and US markets, the volumes traded elsewhere are not sufficient to be seen as an indicator of sentiment. Bill Bartram, director at JC Rathbone, said the numbers showed that the market was becoming increasingly wary about another dip in property values. In the past month alone, expectations for total returns next year have moved from 4 per cent to 2 per cent, implying a fall in capital values of about 5 per cent. Trading for the 2010 contracts has also seen prices tail off, with total returns dropping from about 12.5 per cent in April to 9.5 per cent, which means there is not expected to be much further growth this year. There has also been a fall in the pricing for contracts based on market performance in 2012 and 2013. The fall in the price of derivatives reflects recent falls in the value of other assets that are backed by physical property, such as shares in property companies.
Telegraph:
  • Legal Noose Tightens on Europe's Monetary Union. The plot continues to thicken at Germany’s constitutional court, a body with power of life or death over Europe’s monetary union. Contrary to general belief, Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, and since May 7 for banks exposed to debt from Spain, Portugal, and Ireland as well. Should they succeed, of course, the eurozone risks disintegration within days, and perhaps hours. I am not sure that investors in New York, London, Tokyo, Beijing, or indeed Frankfurt quite understand this. There are now four cases at the court – or Verfassungsgericht – arguing that these disguised bank bail-outs breach multiple clauses of EU treaty law, and therefore breach Germany’s supreme and sovereign Basic Law.
  • IMF Tells Europe to Inject More Stimulus. The International Monetary Fund has called on the European Central Bank to prepare fresh emergency action to stabilise debt markets, throwing its weight behind calls for renewed monetary stimulus to offset budget cuts. "Markets are not yet convinced of the central bank's commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning," said the IMF's Global Financial Stability Report. The IMF called on Europe's authorities to make their €500bn (£420bn) rescue fund is "fully operational" and to explain how they intend to shore up banks that fail stress tests.
Yomiuri:
  • The Bank of Japan may raise its real economic growth forecast for this fiscal year to 2% or more from the current 1.8% at a policy meeting to be held on July 14 and 15.
21st Century Business Herald:
  • Chinese banks can withstand a 30%-50% decline in home prices, citing bank officials. The nation's banks have completed stress test on their exposure to mortgages. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. can withstand about a 35% decline in home prices. Bank of Communications Co. can withstand a 30% decline in prices and Agricultural Bank of China can take a 20% drop. China Minsheng Banking Corp. can withstand a decline of 40%. China Merchants Bank Co. can withstand a drop of 37%.
South China Morning Post:
  • China will suspend initial share sales in Shanghai and Shenzhen for a week to ensure Agricultural Bank of China has a successful trading debut. AgriBank shares are due to start trading in Shanghai and Hong Kong next week.
People's Daily Online:
  • China Plans a Unified Pricing to Buoy Rare Earth Prices. The central government is planning a unified pricing mechanism for rare earth minerals in five provinces and regions, a move considered to prevent the valuable resource from being undervalued, industry sources said. The plan, expected to be implemented as early as this month, covers Jiangxi, Fujian, Guangdong and Hunan provinces, as well as the Guangxi Zhuang autonomous region, which are rich in the resource. Rare earth minerals are made up of 17 elements including terbium, thulium and yttrium. They are widely used in areas from wind turbines and hybrid cars to mobile phones and missiles. China is considered to be the world's largest supplier of the resource. In the latest move, reportedly backed by a top government agency, a unitary price based on negotiation will be published once a month to protect the natural resources from being depleted and to avoid cut-throat competition among the five affected areas, sources said. "The pricing mechanism, if put into practice, will effectively buoy rare earths' undervalued prices and give Chinese producers more say on the global market," said Peng Bo, an analyst at Guosen Securities. China supplies more than 95 percent of the global production of rare earth oxides. The country has 59.3 percent of the world's basic reserves of rare earth resources. Developed countries like the United States and Japan are almost entirely dependent on China's exports of the resource.
China Daily:
  • China's home-appliance makers may raise export prices to mitigate the impact of a rising yuan and labor costs, citing companies and industry officials. Guangdong Galanz Enterprise Co., the world's largest microwave-oven maker, will miss its earlier full-year profit estimate because of the yuan's appreciation and rising labor costs, citing the company's export director Jackie Liu. Almost 60% of the company's output is exported and labor costs have risen 50%, he said.
Evening Recommendations
Citigroup:
  • Added (HGSI) and (CELG) to Top Picks Live list.
Night Trading
  • Asian equity indices are +.50% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 127.0 -4.0 basis points.
  • Asia Pacific Sovereign CDS Index 126.75 -8.0 basis points.
  • S&P 500 futures +.06%.
  • NASDAQ 100 futures -.10%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (PSMT)/.35
Economic Releases
10:00 am EST
  • Wholesale Inventories for May are estimated to rise +.4% versus a +.4% gain in April.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • None of note
BOTTOM LINE: Asian indices are higher, boosted by financial and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

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