Friday, July 26, 2013

Investors Are Worried That A German Court Hearing On Wednesday Could Damage Stability In The Eurozone

On Wednesday, the German Constitutional Court will hold a public hearing on the legality of the European Central Bank's "outright monetary transactions" (OMT) program.

The OMT is a program announced last summer that gives the ECB the ability to backstop government bonds, provided said country agrees to oversight and reforms.

Remarkably, the ECB has yet to actually engage in any outright monetary transactions.

However, as ECB President Mario Draghi put it in a press conference on Thursday following the central bank's latest decision on monetary policy, "OMT has brought stability, not only to the markets in Europe but also to the markets worldwide."

As such, people are talking about this week's court hearing.

Société Générale interest rate strategist Ciaran O'Hagan asserts that there is "much concern over what damage talk at the German constitutional court might do."

"In the 29-page Buba report leaked last April, there was some choice criticism of the ECB’s powers by the Bundesbank," writes O'Hagan in a note to clients. "A speech along the same lines by Mr Weidmann would hurt peripherals, and that is the key near-term threat."

Arguably, the biggest issue on the table is whether OMT impinges on the German constitution.

Deutsche Bank's Europe economists provide a pretty good overview of the subject in their latest note to clients:

The first requirement is that the budgetary prerogative and the budgetary competences of the Bundestag are not endangered. Against this background, the Court will certainly assess whether the unconventional measures of monetary policy are subject to sufficient control by the German parliament and the legislative and how this could be reconciled with the ECB’s independence. As there is a parliamentary prerogative on any ESM programme (simple majority) as a precondition for any OMT intervention, parliamentary control might be regarded as given – although it cannot be ruled out that initiating OMT in the end leaves the Bundesbank’s balance sheet and thus indirectly the German taxpayer with higher liabilities than formally decided under the ESM. However, as the OMT was explicitly limited to bonds with a maturity from 1 to 3 years, it should be possible for the Bundestag to assess the upper limit of potential ECB interventions (given member states’ current refinancing structures).The second requirement refers to the question whether the ESCB’s secondary market interventions will influence the identity of the German constitution. According to Art. 88 of the Basic Law the competences of the Bundesbank can be transferred to the ECB provided it is independent and adheres to the prior goal of price stability. In this context, the assessment whether OMT will put price stability at risk could become an issue. The Court faces the difficulty of having to rule (1) on the constitutionality of the ESCB’s unconventional monetary policy while fully respecting (2) the Bundesbank’s independence in order to comply with the constitution. One option to address this conflict: The Court could demand that the Bundestag has to take note of the Bundesbank’s opinion before OMT-related ESM decisions are taken that affect German liabilities.The Bundesverfassungsgericht has stated in previous judgments that it will not make any economic assessments of euro area support measures. So this view is going to limit its bite over the coming months. Instead, the court will analyse more the legal consistencies between the German Constitution, the ECB’s actions and European treaties. Talk that the court will set constraints on ECB market interventions is over the top; the court is unlikely to comment on such matters.

This week's events only entail a hearing. The actual court rulings will likely come later in the year.

"We are fearful of what Mr Weidmann will say now, but we do not expect the German court to rock many boats over the coming months," says O'Hagan. "Indeed, by Europeanising the ECB’s interventions, the court could end up strengthening the ECB’s powers."

And, once again, one of the remarkable aspects of this story is the fact that OMT has not even been activated yet.

"The more serious issues for investors are whether the ECB is at all serious about OMT and whether it will ever act on all its talk," says O'Hagan. "For now investors have blindly accepted the ECB’s talk at face value. But what if they think that the emperor doesn’t have enough clothes? That is a more real threat to [euro area] peripherals."

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Lululemon's Biggest Fanatics Wanted CEO Christine Day Out For Months (LULU)

Lululemon CEO Christine Day announced today she was leaving after five years on the job. 

Her resignation followed the worst quality-control problem in Lululemon history. The retailer recalled 17% of its black luon pants for being too sheer in March. 

Some of the yoga gear maker's biggest fans called for the CEO's firing after the retailer announced the recall.

Carolyn Beauchesne, author of the blog Lululemon Addict, claimed in a post that Day "ruined" her favorite brand. 

Beauchesne's blog is a gathering place for women who want to review and discuss Lululemon yoga gear. She once told us that she's spent a total of $15,000 shopping there. 

Responding to the see-through pants scandal, Beauchesne explained why many fans of the retailer don't like the CEO: 

"Day has ruined everything special about lululemon. The bullet proof quality, the fit, the femininity, the lululemoness of the product," Beauchesne wrote in March. "She is a one-trick pony who grew the company through expansion."

Day replaced Lululemon founder Chip Wilson in 2008. Before that, she was an executive at Starbucks. 

Many of Beauchesne's commenters appeared to support her vendetta against Day. 

"I had more faith in Chip Wilson to appoint someone with a like-minded vision for the company," one commenter wrote. "I'm surprised that he fell for her-she provided short-term eye candy for the investors, but look where it has taken her in the long run."

"I do not think Day should stay on, but not all of the blame falls on her," wrote another commenter. "The head of product/manufacturing and head of design must be replaced. Whoever allowed that shoddy fabric, construction and design should be shown the door, stat. They clearly don't understand the brand or the vision."

Another popular blogger, who goes by Lulumum, criticized Day's expansion strategy.

"I think it's time the board take a very serious look at what the cost of such quick expansion really is, because you are losing us here," Lulumum wrote. "And you are losing integrity while you are at it."

Today, Beauchesne tweeted the news that Day was stepping down. 

"About time!" one follower responded. Another summarized the move as "for the best."  


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GOLDMAN: These Are The 18 Most Undervalued Stocks In The Market (APC, AMGN, SLB, CRM, HAL)

shopping mallGetty Images

David Kostin, Goldman Sachs' chief U.S. equity strategist, provides us with a list of stocks with the most upside potential in his new Monthly Chartbook.

Kostin notes early May was solid for the S&P 500, but cited month-end drags in telecom services and utilities (-7 and -9 percent, respectively). 

Nevertheless, he projects the S&P will end up 7.3% by year end, at 1750.

Like last time, the list of undervalued stocks is dominated by the energy industry. You'll find some healthcare and tech picks in there too.

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A Subprime Lender Wants To IPO

Rob Wile | Jun. 10, 2013, 5:57 PM | 882 |

Springleaf Finance Corp. is talking to banks about doing an initial public offering, WSJ's Mike Spector reports.

The company makes subprime loans primarily for car and home repairs, Spector says. It employs about 3,600 people.

Its parent company is Fortress Investment Group, which bought it in a firesale from AIG in 2010.

Springleaf has recently performed well in debt markets, Spector writes:

One sign of Springleaf's comeback: In May, Springleaf for the first time in many years raised money in the high-yield debt market, a key driver of its business. The company sold $300 million of high-yield bonds, raising $50 million more than it initially sought. Springleaf makes money by borrowing money at lower rates than it charges customers and capturing the difference.

If subprimes are heating up...draw your own conclusions.

Click here to read the full story on WSJ.com >

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Barron's: Tesla Is A 'Lemon' Without A Cheaper Battery (TSLA)

Tesla's stock was down 2.5% to below $99.33 in the first minutes of trading today. This is well off its closing high of $110.33.

This comes after Bill Alpert at Barron's wrote that Tesla's Model S "owes its better-than-200-mile range to batteries costing tens of thousands of dollars."

Tesla needs to drastically cut battery costs by 2016 when it plans to launch a car that is more affordable. "If Tesla's next-generation car can't go the distance at half the price, its stock will head much lower," Alpert wrote.

The sub-head of the summed up Alpert's stance. "Tesla's electric car offers a quiet, powerful ride. But unless it comes up with a cheaper, stronger battery, the stock could turn out to be a lemon. From Barron's:

"Stubbornly costly batteries may even cause headaches when today's Tesla's luxury cars arrive on the used-car lot. Folks who buy $90,000 cars tend to replace them every few years, and the bid for a four-year-old Model S may prove disappointing if it's going to need an expensive new battery in a few more years. Musk has astutely met that concern with a financing option guaranteeing resale value, but that just shifts the risk to shareholders.

"As a result, Tesla's balance sheet will sprout a contingent liability for the "residual value" of those cars, and analysts worry that the amount will quickly rise to hundreds of millions of dollars -- on the order of half of the company's book value. The deferred impact of all those used batteries will become clearer in coming years, after Tesla also starts running low on the government-legislated zero-emission-vehicle credits that offset $68 million in expenses in the March 2013 quarter."

Alpert also says time will tell us how much "sustained demand" there is for the car. "No one yet knows what portion of Tesla's initial buyers were "early adopters," unrepresentative of ongoing demand," he wrote.

Tesla's CEO Elon Musk terminated the interview with Barron's after a few questions on battery cost reductions.

Here's a look at Tesla's five chart:

TeslaGoogle Finance

-day

Read the entire piece at Barron's >

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Booz Allen Stock Is Getting Slammed (BAH)

Rob Wile | Jun. 10, 2013, 9:39 AM | 3,659 | Booz Allen Hamilton shares are down -4.4% on the open.

This is the company NSA leaker Edward Snowden briefly worked for, according to a company release yesterday.

It gets about 98% of its revenues from government contracts, according to the New York Times.

The firm had contracts with the government totaling $3.85 billion in 2011.

According to Washington Technology, its 17 "major" customers are all different government agencies, including  The Defense Department, Air Force, Army, Navy, Marine Corps, Homeland Security Department, and IRS.

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