The Greek's Week Ahead - Bond Insurers' 11th Hour

The Greek's Week Ahead has been engineered to prepare you for the events that could impact your portfolio this week.

Grandpa Buffet came to the rescue last week with an offer to save bond insurers, or so it seemed. The response from the insurers themselves implied good old Warren was actually acting rather selfishly. By mid-week, the focus turned to Bernanke Downer and his mixed message depicting more tough times ahead, but without recession. Alan Abelson pegged Bernanke's motive and mindset perfectly in Barron's this week when he reminded us of Ben's obligation to the man who signed him on, good old GW. Bernanke and especially Hank Paulson acted mainly as presidential cheerleaders for most of last year while the underpinnings of the economy came loose. Finally, before the week was over, we were back to worrying about the bond insurers.

Despite the rough close to trading, broad indices mostly gained ground last week. The Dow Jones Industrials and the S&P 500 Index both climbed 1.4%, and the Nasdaq inched up 0.7%. While short interest trended lower, equity mutual funds continued to record outflows of capital. Money funds averaged weekly inflows of $42 billion over the four weeks ended February 13, while equity funds posted average outflows of $12.3 billion. Municipal funds saw net inflows of $919 million on average.

Foreign markets rose last week, with the European barometer, the DJ STOXX Index rising 0.6%. Norway led the region, as it increased 5.1%. In Asia, the DJ Asian Titans 50 increased 2.1% on the week, and Singapore led the region's risers as it moved 4.8% higher. India increased 3.0%, while Hong Kong rose 2.5%. However, Shanghai B shares fell 1.9% on the week. Oil prices recorded a noteworthy increase as well, as light sweet crude climbed to $95.5 a barrel.

Dramatic Week Awaits

The week ahead will be an abbreviated one due to the President’s Day holiday. However brief the week may be, it will not be short on drama. It’s very likely bond insurance providers and other interested parties will work through the long weekend as they seek to find resolution to their dire predicament.

New York Governor, Eliot Spitzer, and New York State Insurance Department Superintendent, Eric Dinallo, tightened the clamps on the bond insurance industry last week. Due to their concern that the credit rating agencies might soon downgrade Ambac Financial Group (NYSE: ABK) and MBIA, Inc. (NYSE: MBI), the two most important bond insurers, Spitzer issued an ultimatum. He’s given the insurers 3-5 days to take appropriate action in order to preserve their AAA credit ratings. At that point, if they have not done so, the state is prepared to force the division of the firms’ municipal bond operations from the remainder of the companies’ businesses, which include their troubled subprime mortgage related operations.

Loss of the AAA rating would disable the insurers’ ability to conduct ongoing operations. However, if the municipal insurance business is separated from the parent companies, municipal bond investments would not be at risk. As Dinallo states, the muni-insurance businesses could operate in “rehabilitation” while ironically still maintaining their triple-A status. They would continue to serve their obligations in runoff fashion. Eric Dinallo indicated in a CNBC interview that the insurers have many options, and he seemed to imply there remains a strong likelihood they could continue to operate as they do now with help from the private sector.

So, over the weekend the companies will very likely be working to secure new capital investment from current owners like Warburg Pincus (investor in Ambac), or from new equity interests. New investment could arrive from parties who either stand to benefit from securing their own risk or from gaining equity interests at bargain pricing. Institutional investors holding the municipal bonds or otherwise insured credits stand to benefit from aiding the insurers themselves. If the AAA rating is lost, as the underlying securities are likewise revalued, institutional investors face the potential of further asset write-downs themselves. In other words, The Greek would go out on a limb and say investment in ABK and MBI could prove wise a year from now. Investors must realize, however, that any incremental investment dilutes current shareholders’ stakes, and for the gamble to work out, these companies must remain operating as is.

The Week's Market-Moving Event Schedule

This week offers a relatively light load of economic data, but a busy earnings schedule. Light does not mean inconsequential, however, and some very important data will reach the market.

Monday

While the U.S. market will be closed in honor of President's Day, and Canada for Family Day, most of the world is open for trade. As you may recall, international market turmoil ruled the day the last time the American markets were closed, which was January's holiday honoring Martin Luther King. This led to an emergency rate cut by the American Fed Chief ahead of the U.S. open on that Tuesday.

We later discovered the catalyst of the chaos may have been Societe' Generale rogue trader, Jerome Kerviel. Wall Street will be more than a little edgy this Monday as well if no mitigating resolution has been found to cure what ails the bond insurers. Concerns are raised by the fact that many would-be saviors are already capital constrained due to the subprime debacle. Ironically, these same firms stand to benefit if AAA credit ratings can be preserved at the insurance firms. Still, there are other potential sources, including sovereign wealth funds and vulture investors.

There are still a handful of earnings reports on the docket Monday, including Constellation Energy Partners LLC (PCX: CEP), Flagstone Reinsurance Holdings (NYSE: FSR), Hellenic Exchanges (Athens: EXAE.AT), PharMerica (NYSE: PMC), Stewart Information Services (NYSE: STC), Trico Marine Services (Nasdaq: TRMA) and many other international firms.

Tuesday

On Tuesday, the State Street Investor Confidence Index should not surprise many with a low February reading, after a measure of 68.8 in January. After all, on the Friday just passed, the University of Michigan Consumer Sentiment Survey measured at its lowest level in 16 years.

In other news, the Housing Market Index will also be reported on Tuesday. God bless… Its last reading in January was a sad 19.0. Minneapolis Fed President Gary Stern will occupy a podium and may catch the newswire's attention. Finally, Presidential primaries will be held in Washington and Wisconsin, while the Democrats caucus in Hawaii.

Tuesday earnings schedule is headlined by Barclays Bank PLC (NYSE: BCS), Crocs, Inc. (Nasdaq: CROX), Hewlett-Packard (NYSE: HPQ), Marvel Entertainment (NYSE: MVL), Wal-Mart (NYSE: WMT) and Whole Foods Market (Nasdaq: WFMI).

Others reporting on Tuesday include Aaron Rents (NYSE: RNT), 21st Century Holding (Nasdaq: TCHC), ACI Worldwide (Nasdaq: ACIW), American Commercial Lines (Nasdaq: ACLI), AmSurg (Nasdaq: AMSG), Arthrocare (Nasdaq: ARTC), Axsys Technologies (Nasdaq: AXYS), Calumet Specialty Products (Nasdaq: CLMT), CEC Entertainment (NYSE: CEC), Champion Enterprises (NYSE: CHB), Chiquita Brands (NYSE: CQB), DealerTrak (Nasdaq: TRAK), Equity One (NYSE: EQY), Fossil (Nasdaq: FOSL), Genuine Parts (NYSE: GPC), HCC Insurance (NYSE: HCC), Holly (NYSE: HOC), Integrys Energy (NYSE: TEG), iRobot (Nasdaq: IRBT), Kaiser Aluminum (Nasdaq: KALU), Kindred Healthcare (NYSE: KND), Martha Stewart (NYSE: MSO), Medco Health (NYSE: MHS), Medtronic (NYSE: MDT), Montpelier Re (NYSE: MRH), Noah Education (NYSE: NED), OfficeMax (NYSE: OMX), Oil States Int'l (NYSE: OSI), PrePaid Legal (NYSE: PPD), The St. Joe Co. (NYSE: JOE), TradeStation Group (Nasdaq: TRAD) and many more.

Wednesday

On Wednesday, all eyes will be on the January reading of the Consumer Price Index. The Federal Reserve pays close attention to this report in order to keep tabs on inflation. Despite Fed expectations for beneficiary near-term impact to prices arising from economic softness, import prices posted an increase of 0.6% in January, excluding a 5.5% rise in petroleum costs. In other words, don’t get your hopes up. Bloomberg's consensus of economists is expecting a month-to-month rise of 0.3%, while looking for an increase of 0.2% when excluding food and energy prices. You will not want to miss the weekly ICSC-UBS Same-Store Sales Report, pushed back a day due to holiday. Last week's rate of growth was enthusing, as it showed a sales rise of 1.8%, year-over-year.

Petroleum Status is typically pushed back a day during weeks that include a Monday holiday, so this week's report could come on Thursday. Speaking of petroleum, it seems OPEC has been spoiled by rich crude prices. The group was rumored to be considering production cuts despite European GDP growth of 2.3% and surprisingly strong demand from Japan. Informally, shipping information indicates OPEC may already be cutting supply. However, on Saturday OPEC decided to keep production steady, while geopolitical trouble-makers Iran and Venezuela suggested a production cut for March. Regarding Iran, IAEA Director, Mohamed ElBaradei is expected to report on Iran's nuclear activity on Wednesday.

January Housing Starts will be reported on Wednesday morning, after missing the mark in December. Bloomberg's survey shows consensus looking for an annual pace of 1.01 million starts this time around. Finally, the Federal Open Market Committee January meeting minutes will be released, and considering the depressing testimony of Fed Chief Bernanke on Thursday, this report should prove mute. St. Louis Fed President William Poole may steal the show, as he speaks on the topic of "Inflation Dynamics." Hey, that sounds a heck of a lot similar to our article regarding inflation.

Wednesday's earnings include interesting reports from Aegean Marine Petroleum (NYSE: ANW), Garmin Ltd. (Nasdaq: GRMN), Paragon Shipping (Nasdaq: PRGN), Psychiatric Solutions (Nasdaq: PSYS), Suntech Power (NYSE: STP), Transocean (NYSE: RIG), Tween Brands (NYSE: TWB). Others on the slate include Agnico-Eagle Mines (NYSE: AEM), Allied Capital (NYSE: ALD), Analog Devices (NYSE: ADI), Brandywine Realty Trust (NYSE: BDN), Career Education (Nasdaq: CECO), Given Imaging (Nasdaq: GIVN), Inverness Medical Innovations (NYSE: IMA), Jack in the Box (NYSE: JBX), JAKKS Pacific (Nasdaq: JAKK), Koppers Holdings (NYSE: KOP), Lithia Motors (NYSE: LAD), NetEase.com (Nasdaq: NTES), Rogers Corp. (NYSE: ROG), Sina Corp. (Nasdaq: SINA), Terex Corp. (NYSE: TEX), TJX Companies (NYSE: TJX), Trinity Industries (NYSE: TRN), Watson Pharmaceuticals (NYSE: WPI) and many more.

Thursday

Thursday brings the Philadelphia Fed Survey, which shows the status of the region’s manufacturing sector. The New York area report on Friday posted a negative 5.75, indicating a contraction of the business environment for the first time since 2005. Just about every aspect of the report showed deterioration, including expectations for future employment. The only rise within the report was in prices paid, and that’s certainly not good. The Philly Fed Survey fell into the red in January, at a negative 20.9, and Bloomberg's consensus sees February's reading at -12.0.

Weekly Initial Jobless Claims remain an important blip on the regular radar as we attempt to forecast the onset of recession. The consensus is looking for 348K new benefit claim filings for the week ended February 16. Finally, Leading Economic Indicators for January are likely to follow December’s negative measure, in our view.

Hillary Clinton and Barack Obama are scheduled to debate in the important state of Texas on Thursday. The debate is critical to Obama, as we expect Clinton has strong support in Texas.

Thursday's earnings schedule includes a pan full of gold miners. Look for reports from Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), Hecla Mining (NYSE: HL), Kinross Gold (NYSE: KGC), Lihir Gold Ltd. (Nasdaq: LIHR), Newmont Mining (NYSE: NEM) and Pan American Silver (Nasdaq: PAAS).

Other notable reporters include MGM Mirage (NYSE: MGM), Ruth’s Chris Steakhouse (Nasdaq: RUTH), VCA Antech (Nasdaq: WOOF), Allianz SE (NYSE: AZ), Ansys (Nasdaq: ANSS), Cabelas (NYSE: CAB), Chesapeake Energy (NYSE: CHK), Eaton Vance (NYSE: EV), Express Scripts (Nasdaq: ESRX), Forest Oil (NYSE: FST), Friedman Billings Ramsey (NYSE: FBR), Gilat Satellite Networks (Nasdaq: GILT), Intuit (Nasdaq: INTU), JC Penney (NYSE: JCP), Morningstar (Nasdaq: MORN), Odyssey Re (NYSE: ORH), Olympic Steel (Nasdaq: ZEUS), Pool Corp. (Nasdaq: POOL), Quest Diagnostics (NYSE: DGX), Roper Industries (NYSE: ROP), Societe Generale (Paris: GLE.PA), The Midland Co. (Nasdaq: MLAN), Williams Cos. (NYSE: WMB), Zale Corp. (NYSE: ZLC) and many more.

Friday

Friday is devoid of economic reports. The earnings schedule includes Nicor (NYSE: GAS, PG&E (NYSE: PCG), St. Mary Land & Exploration (NYSE: SM), Aircastle (NYSE: AYR), Cobra Electronics (Nasdaq: COBR), Endo Pharmaceuticals (Nasdaq: ENDP), Huntsman (NYSE: HUN), Life Time Fitness (NYSE: LTM), Lincoln Electric (Nasdaq: LECO), Rogers Communications (NYSE: RCI), Standard Register (NYSE: SR) and others.

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