Frontrunning: September 25

  • China carrier a show of force as Japan tension festers (Reuters)
  • Draghi Rally Lets Skeptics Dump Spain for Bunds (Bloomberg)
  • China’s Central Bank Injects Record Funds to Ease Cash Crunch (Bloomberg)
  • Obama warns Iran on nuclear bid, containment ‘no option’ (Reuters)
  • When Would Bernanke’s Successor Raise Rates? (WSJ) that’s easy – never
  • Italy’s Monti Downplays Sovereignty Risk (WSJ)
  • Portugal swaps pay cuts for tax rises (FT)
  • Madrid faces regional funding backlash (FT)
  • Berlin Seeks to Push Back New Euro-Crisis Aid Requests (WSJ)
  • Race Focuses on Foreign Policy (WSJ)
  • China Speeds Up Approvals of Foreigners’ Stock Investment (Bloomberg)
  • As worst euro fears fade, U.S. fiscal cliff looms (Reuters)
  • South Korea Delays Fiscal Balance to Boost Economy (WSJ)

Overnight Media Digest


* Foreign policy is taking on new urgency in the presidential campaign as President Barack Obama prepares to address the United Nations amid a resurgence of unrest in the Muslim world and his Republican challenger, Mitt Romney, intensifies his criticism of the White House’s approach to the region.

* Iranian President Mahmoud Ahmadinejad on Monday played down the prospects of an Israeli military strike on his country’s nuclear installations, but made clear that Tehran would hold the U.S. responsible if such an attack occurred.

* Syria’s crisis is deepening and threatening to spread to neighboring countries, the U.N.’s envoy to Syria told the Security Council on Monday, delivering his first report on reviving international diplomacy in the fractured country.

* American Airlines and its passengers are struggling with a rise in late and canceled flights spurred by pilot-initiated maintenance requests and a shortage of crew members amid a labor dispute.

* As Europe races to restore confidence in Spain’s finances and the euro, Germany has another reason for urgency in resolving the crisis: the health of its own banks.

* A growing number of companies are producing alternative measures of their top executives’ pay, seeking to persuade investors that compensation isn’t as high as the government’s yardstick implies.

* Two decades after a devastating banking crisis, Nordic banks are playing a new role: a safe haven for scared euro-zone depositors and investors.

* General Electric Co boss Jeff Immelt swore off significant acquisitions in 2012. But the year is nearly over, and the industrial giant may be working up an appetite again.

* Lennar Corp reported sharply higher fiscal-third-quarter earnings, helped by a tax benefit and stronger new-home deliveries and prices.

* The London interbank offered rate, or Libor, remains vulnerable to bank misconduct and should be replaced, Commodity Futures Trading Commission Chairman Gary Gensler said Monday.

* A former Intel Corp employee who said he was “deeply ashamed” of his insider trading avoided a prison sentence Monday for helping the government catch and prosecute Galleon Group hedge-fund founder Raj Rajaratnam.

* Companies that sell equipment and services to mining companies have geared up for a boom-just in time to see miners cut capital spending due to weak commodity prices.

* Lyor Cohen stepped down as head of Warner Music Group’s world-wide recorded-music operations, eight years after joining the company and just over a year after the installation of a new, budget-conscious boss.

* New Zealand is investigating allegations that its Government Communications Security Bureau acted unlawfully in connection with one of the largest criminal copyright cases.




Singapore investment fund Temasek has sounded out potential buyers for its 6 billion pound ($9.72 billion) stake in Standard Chartered.


Bumi, the coal mining group controlled by Indonesian investors, has begun an urgent investigation into allegations of financial and other irregularities.


George Osborne is facing awkward questions after a year-long search to replace the government’s unpopular private finance initiative has failed to deliver.


Investors are piling into specialised stock market funds that use derivatives to boost returns, highlighting how many money managers are searching for new strategies.


The siege on the euro zone’s coffee culture, emblematic of southern Europe, is contributing to a sharp drop in wholesale coffee prices.


Foxconn Technology Group suspended production at one of its largest factories in China on Monday following a riot by 2,000 workers.


British prime minister David Cameron has spoken to the French and German leaders about the proposed merger of EADS and BAE Systems.


British business minister Vince Cable unveiled a new British business bank on Monday, while lashing out at Conservative party “headbangers” for endorsing a hire and fire culture.


Apple said on Monday that it had sold more than 5 million iPhones in the opening weekend for its latest smartphone.


Global financial watchdogs have backtracked on proposals for greater regulation of the physical oil market due to opposition from oil majors and bodies.



* About 1,000 times a year, a plane or a vehicle moves onto an active runway by mistake, but U.S. regulators have been slow to address the problem.

* The images and video began to appear on Chinese social networking sites early Monday: buildings with shattered windows, overturned police cars, huge crowds of young people milling about in the dark and riot police in formation.

The online postings were from a disturbance late Sunday that shut down a manufacturing facility in Taiyuan in north China, where 79,000 workers were employed.

* Saying there are “troubling indications” of abuse in the way hospitals use electronic records to bill for Medicare and Medicaid reimbursement, the Obama administration warned on Monday that it would not tolerate what it called attempts to “game the system” and vowed to vigorously prosecute doctors and hospitals implicated in fraud.

* Greeks are increasingly angry over the prospect that public salaries and pensions will be sharply cut again in a last-ditch bid to secure a 31.5-billion-euro loan installment.

* Sheila Bair, who tormented Wall Street and its Washington allies as a banking regulator, is taking a fresh swipe at her foes in retelling the dark days of the financial crisis.

* More than a quarter of the work force in Spain or Greece is without jobs, but the city of Ingolstadt on the Danube north of Munich has the opposite problem: not enough workers.

* Christine Lagarde, the managing director of the International Monetary Fund, warned that it would probably cut its estimates of global growth yet again this year.

* Cosmetics company Estee Lauder plans to sell a skin care brand called Osiao that caters to the tastes of consumers in Asia.

* Despite a third day of vociferous criticism from the State Department, CNN executives on Monday strongly defended the decision to base some of their reporting about Libya on the private diary of Christopher Stevens, the ambassador who was slain in an attack on the United States consulate in Benghazi on Sept. 11.

* A former Intel Corp executive who leaked secret information about his employer to Raj Rajaratnam, the fallen hedge fund billionaire, avoided prison on Monday when a judge sentenced him to two years’ probation.

* Discover Financial Services has agreed to pay $200 million in refunds to more than 3.5 million cardholders who bought credit protection services over the phone, plus an additional $14 million in civil penalties to banking regulators.

The Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation jointly investigated Discover over deceptive telemarketing and sales practices, including misleading customers into thinking the services, like identity theft protection and credit score tracking, were free.

* Gary Gensler, chairman of the Commodity Futures Trading Commission, called for an overhaul of a crucial interest rate on Monday, telling the European Parliament that the integrity of consumer borrowing is at stake.

* TiVo Inc, the digital video recorder maker, said Monday that it would receive at least $250.4 million from Verizon Communications Inc in a patent lawsuit settlement.




* Canadian satellite operator Telesat Holdings Inc has been such a strong performer since BCE Inc sold the business in 2007, its current shareholders can’t agree on how to cash in.

* Two-tier wage deals like those inked recently by Ford Motor Co and General Motors Co are spreading across the U.S. border into Canada’s labour landscape again as companies struggle to compete with lower-cost global rivals.

Reports in the business section:

* The battle over tolls on a big natural gas pipelines has become a fight over the future of manufacturing products from energy in Alberta.


* Ottawa’s decision to share embassy space and resources with Britain, greeted with condemnation by opposition leaders on Monday, is in fact what some observers call a no-brainer: a logical way to expand Canada’s foreign presence without spending all the taxpayer dollars that go into bricks and mortar.


* With companies from India, Kuwait and China likely next in line to bulk up on Canadian oil and gas, foreign national oil companies (NOCs) are reaching deeper and deeper into Canada’s oilpatch, one of the last driven by the market.


Fly on the Wall 7:00 am Market Snapshot for 9/25



Approach Resources (AREX) upgraded to Overweight from Neutral at JPMorgan
Buffalo Wild Wings (BWLD) upgraded to Outperform from Sector Perform at RBC Capital
Safeway (SWY) upgraded to Outperform from Market Perform at BMO Capital
TiVo (TIVO) upgraded to Buy from Neutral at Lazard Capital
WNS Holdings (WNS) upgraded to Outperform from Market Perform at Wells Fargo


Abaxis (ABAX) downgraded to Market Perform from Outperform at Raymond James
Anixter (AXE) downgraded to Underperform from Neutral at Credit Suisse
Automatic Data Processing (ADP) downgraded to Neutral from Buy at UBS
CSG Systems (CSGS) downgraded to Neutral from Buy at Citigroup
Cognex (CGNX) downgraded to Underweight from Neutral at Piper Jaffray
GenOn Energy (GEN) downgraded to Neutral from Buy at Citigroup
Gevo (GEVO) downgraded to Hold from Buy at ThinkEquity
Marriott (MAR) downgraded to Market Perform from Outperform at Keefe Bruyette
Nokia (NOK) downgraded to Underperform from Market Perform at BMO Capital
Paychex (PAYX) downgraded to Neutral from Buy at UBS
Paychex (PAYX) downgraded to Sell from Neutral at Citigroup
Union Drilling (UDRL) downgraded to Market Perform from Outperform at BMO Capital


BNY Mellon (BK) initiated with a Buy at Citigroup
Cray (CRAY) initiated with a Hold at Wunderlich
Fusion-io (FIO) initiated with a Buy at Wunderlich
Genomic Health (GHDX) initiated with an Outperform at Credit Suisse
LeapFrog (LF) initiated with a Buy at SunTrust
Life Technologies (LIFE) initiated with an Outperform at William Blair
Lufkin (LUFK) initiated with a Neutral at JPMorgan
Myriad Genetics (MYGN) initiated with a Neutral at Credit Suisse
NVIDIA (NVDA) initiated with a Buy at Roth Capital
Northern Trust (NTRS) initiated with a Neutral at Citigroup
Pandora (P) initiated with a Reduce at Nomura
Sequenom (SQNM) initiated with an Underperform at Credit Suisse
State Street (STT) initiated with a Buy at Citigroup
Super Micro Computer (SMCI) initiated with a Buy at Wunderlich
Synergy Pharmaceuticals (SGYP) initiated with a Buy at Cantor


Tesla (TSLA) cuts 2012 revenue outlook, says DOE loan fully drawn down
SP ratings on Sony (SNE) lowered to BBB, off CreditWatch
Union Drilling (UDRL) to be acquired by Sidewinder Drilling for about $242M
Westlake Chemical (WLK) to expand ethylene capacity in 1Q13
Bridgepoint Education (BPI) eliminated 450 positions, reassigned other staff
Biofuel Energy (BIOF) idled Fairmont Minnesota ethanol facility indefinitely
Whitestone REIT (WSR) acquired Village Square at Dana Park for $50.5M


Companies that missed consensus earnings expectations include:
Red Hat (RHT)

Companies that matched consensus earnings expectations include:
Paychex (PAYX)


As Europe moves to restore confidence in Spain’s finances and the euro, Germany has another reason to quickly resolve the crisis: the health of its own banks. German lenders have the most exposure in Europe to Spain, at $139.9B, of which $45.9B alone is exposure to banks, according to the Bank for International Settlements, the Wall Street Journal reports
GE (GE) CEO Immelt said there would be no significant acquisitions in 2012, but the company may be working up an appetite again. A company executive said they want to more than double the size of its new mining business to $5B in revenue by 2016, the Wall Street Journal reports
Sony Corp. (SNE) will likely approve a plan this week to invest $642M in troubled Olympus Corp. (OCPNY), becoming its largest shareholder with about a 10% stake, sources say, Reuters reports
Google (GOOG) began sale of its Nexus 7 tablet in Japan, as well as local language movies and books, in what has quickly become one of its major global markets for digital downloads, Reuters reports
Google (GOOG) Chairman Schmidt said it would be up to Apple (AAPL) to approve the company’s map application for Apple’s operating system after the iPhone maker’s own app was criticized by reviewers, Bloomberg reports.
Royal Bank of Scotland (RBS) managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank fired, Bloomberg reports


Demand Media (DMD) files $100M mixed securities shelf, 14M shares for holders
Enterprise Products (EPD) files to sell 8M common units for limited partners
Healthcare Realty Trust (HR) files to sell 8M shares of common stock
Neptune Technologies (NEPT) files to sell common stock, no amount given
New Mountain Finance (NMFC) files to sell 4M shares of common stock
PennantPark (PNNT) files to sell 9M shares of common stock
Tesla Motors (TSLA) files to sell 4.35M share of common stock


Highfields Capital reports 5.8% passive stake in Liberty Interactive (LINTA)
SAC Capital reports 5.0% passive stake in Magellan Health (MGLN)



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Overnight Sentiment: Rumors Regurgitated, Refuted

The overnight session has been dead, leading to continued trading on the two regurgitated rumors appearing overnight, one coming from the FT that the EU is in “fresh” talks over a Spanish rescue plan – something which is not news, but is merely the occasional catalyst to get algos snapping up EURUSD and to keep it from sliding far below the 1.3000 barrier. This rumor has subsequently been swatted down later when Italy’s undersecretary of finance, Gianfranco Polillo, in an interview in Rome, repeated what has been known to most for over two months, namely that Italy and Spain won’t request bailouts unless there a new surge in bond yields (just as we explained first thing in August), and adding that “There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say — ‘I give up my national sovereignty.” A surprising moment of lucidity and truth for a European. Naturally the reemergence of the rumor is supposed to draw attention away from the real news, which is that broke Catalonia is ever closer to bluffing its independence in exchange for a bailout, or else. The other real news is that as Confidencial reported, the Spanish government has asked Santander, Banco Bilbao Vizcaya Argentaria and CaixaBank to take 30% stake in the Spanish bad bank, something which will hardly make shareholders in these companies happy for the simple reason that no bank in Spain is “not bad” if the current rate of deposit outflows continues. Finally, a second rumor appearing late yesterday is that Greek lenders are considering a new Greek bond haircut. This too has since been refuted when German Finance Ministry spokesman Martin Kotthaus told reporters in Berlin at a regular press conference that this report is without basis. In other words, as we said, rumors refuted, leaving us with essentially no real news overnight.

For the remaining (lack of) action we go to DB’s Jim Reid for the best market action summary.

Moving to the US and taking a closer look at the Philly Fed print, while the headline was ahead of estimates it remained in negative territory for the fifth consecutive month. As DB’s Joe LaVorgna notes, the biggest negative in the report was the deterioration in shipments (-21.2 vs. -11.3), which fell to the lowest level since the recession (-30.5 in April 2009). On a more positive note, overall expectations of economic conditions six months forward rose sharply (+41.2 vs. +12.5). The flash Markit PMI was unchanged at 51.5, while the Conference Board Leading Indicators fell in 0.1% for August. Initial jobless claims  or the September employment survey week declined -3k to 382k but remain near the top of this year’s range (352k to 392k). Joe’s preliminary read on September employment number is +110k with no change to the unemployment rate at 8.1%.

Data aside, it was a relatively dovish day in terms of Fedspeak. Fed’s Kocherlakota advocated an unemployment targeting approach to monetary policy, saying that he would like to see rates at zero until unemployment reached 5.5%, although on the condition that the Fed fulfils its price stability mandate. Also speaking yesterday, Fed’s Lockhart reiterated his support for further QE while the more hawkish St Louis Fed’s Bullard said that he does not favour unemployment targeting, and opposed QE3 saying that he would not want to see a re-inflation of US housing prices.

Over in Europe, PMIs surprised to the downside, increasing the debate around ECB policy rates. The Eurozone’s flash composite PMI was down 0.4 in September (45.9) and disappointed versus expectations of 46.6. Most surprising was the divergence between France and Germany. The latter’s manufacturing PMI improved month-on-month (47.3 vs 44.7) but France was down sharply (42.6 vs 46.0). As Mark Wall noted this reasserts Germany’s relative PMI strength after a brief period of weakness. The implied reading of the ‘non-core’ bloc was softer on the month too, but we have to wait until the  start of October to see the details for the likes of Italy and Spain.

In other European headlines, der Spiegel is reporting that EU leaders are considering drafting a declaration designed to fulfil the conditions set out by last week’s German constitutional court ruling. The declaration will clarify that each country’s maximum ESM liabilities cannot be exceeded without that country’s parliamentary approval, and provides assurance that governments will have access to information held by the ESM. Elsewhere the Italian economy minister reiterated there were no plans for Italy to request aid, although the government lowered their 2012 GDP growth forecast to -2.4% compared to a previous forecast of -1.2%. For the record, DB is expecting growth in Italy of -2.3% this year. Staying in Europe Chinese Premier Wen during his trip to Brussels said that the country will continue its investments in the EFSF and the Eurozone.

In terms of the day ahead, it will be relatively light in terms of data. Spain’s trade data and the UK’s budget data for August will be the main focus. German finance minister Schauble is due to speak this morning in Berlin. In the US, the Fed’s Lockhart will be speaking in Atlanta. Last but by no means least, the iPhone 5 goes on sale today. How long will we be able to hold out!!??

Overnight Sentiment: More Printing; More European Catch 22s

Those who expected a major response following the surprising, and “preemptive” easing by the Bank of Japan which has now joined the freely CTRL-Ping club of central banks, and went to bed looking for a major pop in risk this morning will be disappointed. The reason is that with every passing day that Spain does not request a bailout, all those who bought Spanish bonds on the assumption that Spain will request a bailout look dumber and dumber (a dynamic we explained nearly two months ago). As a result, the EURUSD has been dragging ever lower, and is now playing with 1.30 support. Providing no additional clarity was Spanish deputy PM Soraya Saenz de Santamaria who said Spain will decide if and when to trigger an ECB bailout once all details have been analyzed. Well the details have been more than analyzed, and Spain has been more than happy to receive the benefits of its bailout, it has yet to trigger the cause. Ironically in a Barclays study,over 78% of investors see Spain requesting a bailout by year end (even though as we explained over the weekend Spain really has to do this ahead of its major cash drawing bond redemption schedule in October when it may well run out of cash). And so, just like the US Fiscal Ceiling, the global markets are expecting some Catchy 22 deus ex machina, where traders can get their cake and politicians can eat it too. Alas, there never is such a thing as a free lunch. And what is making the much needed outcome even less probable is that Spanish bonds this morning are actually trading tighter once again making a bailout less than likely. The Spanish zombie has left its grave and is now romping through the neighborhood unsupervised.

As for the ever more frequent central bank easings, such as that from the BOJ last night, the biggest joke is that in 2-3 months when every central bank has eased “to infinity and beyond” and has pre-committed to destroy its currency ala Chairsatan, the world will be right back where it was before the Fed’s QE3 announcement! Ah, the joys of living in a circular, relativistic Keynesian world, where if everyone destroys their currency nobody destroyed their currency. Expect the market to realize this in 4-6 weeks, and to further realize that global debasement can only occur relative to other undilutable benchmarks. Such as crude. And gold.

For a run through of the other overnight events, we hand it over to DB’s Jim Reid:

Taking a closer look at the overnight session Asian equity markets are mostly higher as we go to print led by strong gains in the Nikkei (+1.6%) and the Hang Seng (+1.1%). Chinese equities are up for the first time this week but the Shanghai Composite (+0.1%) is still lagging the broader moves in Asia. The SP 500 Futures is up +0.3% as we type. Sentiment in China was perhaps helped by news that the government will push for 15 major capital market reforms during the current 5-year plan and a smaller-than-expected FDI contraction in August (-1.4% yoy v -5.8%).

On the row between Japan and China, Fitch noted that major Japanese auto and technology manufacturers may come under pressure if tensions escalate, naming Sharp and Nissan amongst companies with the highest revenue exposure. A UK Telegraph article reported that a senior advisor to the Chinese government has called for an attack on the Japanese bond market given its position as the biggest creditor of Japan ($230bn of bonds)

Turning to Europe, Spain’s deputy PM yesterday said that the government will study seeking a rescue to bring down its borrowing costs if the conditions imposed are acceptable. She added that funding at current levels is “like throwing money out of the window”. Spanish 10yr yields closed at 5.84% finishing 8bp lower on the day, helped by a firm 12-month and 18-month T-bill auction. Elsewhere in Europe, the German ZEW poll of economic sentiment rose to -18.2 from -25.5 in August, breaking a run of four monthly declines, probably reflecting the actions of the ECB in recent weeks. Greece’s negotiations with the Troika are expected to drag on until Sunday according to the finance minister. IIF’s Charles Dallara said Athens should get cheaper rates on its EU130bn aid deal and at least two more years from the EU and IMF to meet its targets. But better terms could only come after  the government delivers on his commitments to fiscal reform (Reuters).

Looking at the day ahead, the focus will be on US housing data with home sales, permits and starts due. DB expects the August data on housing starts and permits, as well as existing home sales to show continued evidence of firming activity today. The BoE will also release minutes from its last meeting.