From Frankfurt to London to New York to Tokyo, bond traders say the Lehman Brothers Holdings Inc. bankruptcy is fading into history as the cost of credit retreats throughout the Group of Seven industrialized nations. The record pace of corporate bond sales, declining money market rates and a drop in mortgage costs all suggest the global economy is on the mend. In the government debt market, yields on 10-year notes exceed those of two-year securities by at least 1 percentage point in all the G-7 nations for the first time since before 1991, according to data compiled by Bloomberg. The so-called yield curve typically steepens when traders anticipate a recovery. Lending has resumed. The London interbank offered rate for three-month dollar loans fell to 1.01 percent on May 1, the lowest since June 2003. The TED spread measuring the difference between Libor and Treasury bill rates, which rose as high as 4.64 percentage points on Oct. 10, narrowed to 0.86 percentage point last week. The Libor-OIS premium that indicates banks’ reluctance to lend to each other fell to 0.79 percentage point last week, the lowest level since before Lehman’s collapse, from 3.64 percent on Oct. 10.
Berkshire Hathaway Inc.(BRK/A) Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co., said banks will use their “enormous political power” to prevent changes to the industry that would benefit society. “This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.” Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. “We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.” Munger said the financial companies spent $500 million on political contributions and lobbying efforts over the last decade. They have a “vested interest” in protecting the system as it exists because of the high levels of pay they were earning, he said. The five biggest U.S. securities firms, only two of which still exist as independent companies, paid their employees about $39 billion in bonuses in 2007. “They would like to get back as closely as possible to business as usual, and they have enormous political power,” he said.
- Berkshire Hathaway Inc.(BRK/A) Chairman Warren Buffett dismissed the importance of the government stress tests in helping him assess banks, and said Wells Fargo & Co. will prosper no matter what the results show. “I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said yesterday of the bank stocks that Omaha, Nebraska-based Berkshire owns. Regulators “may be using more of a checklist-type approach.” “All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said at Berkshire’s annual meeting.
- Berkshire Hathaway Inc.(BRK/A) Vice Chairman Charles Munger said he supports an outright ban of credit- default swaps to prevent speculators from profiting on the failure of companies. “If I were the governor of the world, I would eliminate it entirely -- 100 percent,” Munger said in a Bloomberg Television interview today. “That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.” The proliferation of credit-default swaps in the portfolios of debt investors and banks can eliminate incentives lenders have to keep companies out of bankruptcy, according to academics including Henry Hu, a law professor at the University of Texas in Austin, who testified before Congress in October on the so- called debt decoupling created by derivatives. Creditors that have hedged themselves “might well want its borrower to go into bankruptcy and have incentives to use its control rights to help grease the skids,” Hu told the House Committee on Agriculture, which oversees the Commodity Futures Trading Commission. “The whole mass of incentives created is quite counterproductive,” Munger said. Buyers of the swaps get a “vested interest in the destruction of some business.” House Agriculture Committee Chairman Collin Peterson in January circulated a draft bill that would have banned credit swaps trading unless investors owned the underlying bonds. The bill that passed the Minnesota Democrat’s committee the following month stopped short of an outright ban, though it would allow the CFTC to suspend trading in the market, if needed, to protect investors. The bill has not been taken up by the full House of Representatives. U.S. Treasury Secretary Timothy Geithner, who in his past post as president of the Federal Reserve Bank of New York pushed dealers to curb the potential for systemic risks from the market, told Congress in March that a ban such as Peterson had proposed “is not necessary and wouldn’t help fundamentally.”
The U.S. Securities and Exchange Commission should be given authority to regulate what hedge funds can buy and how much money they can borrow to maximize bets because registration falls short of what’s needed to police the $1.33 trillion industry, Chairman Mary Schapiro said. “It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”
- Crude oil fell from a five-week high in New York trading on speculation increased output by non-OPEC producers and weak demand may increase stockpiles. Daily oil output in Russia, the world’s second-largest producer, gained about 49,000 barrels in April, the nation’s Energy Ministry said May 2. “Some of these leading indicators have been reasonably encouraging, but that inventory over-hang is going to do a lot to stifle any rallies,” said Toby Hassall, research analyst at Commodity Warrants Australia Pty in Sydney. Crude-oil supplies in the U.S., the world’s largest user of the commodity, rose for an eighth week to 374.7 million on April 24, the Energy Department reported last week. The gain left inventories at the highest level since September 1990 and 15 percent above the five-year average for the period. Stockpiles rose even as April output from Alaska, the country’s second-largest producing state, fell 10.2 percent from a month earlier after a volcanic eruption. Production from Prudhoe Bay, the biggest U.S. oil field, fell 15 percent from March, a May 1 government report showed. “It is difficult to see a sustained rally in oil given the inventory status,” Hassall said. Daily exports from Iraq, the only OPEC nation not restricted by quota, increased by 5,000 barrels to 1.821 million last month, according to the state-run oil marketing company. Shipments may rise as much as 4 percent to 1.9 million this month, Falah Al-Amri, head of the agency, said yesterday.
- The recent spate of bombings in Iraq means U.S. officials may have to keep troops there longer than they planned, and Iraqis may have to live with a higher level of violence than they wish. American military officials say they are now reconsidering plans to withdraw troops from all cities in Iraq by the end of June in the wake of car and suicide bombings that killed 191 people in Baghdad between April 23 and April 29.
- Australian house prices fell for a fourth straight quarter in the three months through March as the nation’s first recession since 1991 and surging unemployment sapped demand for property. An index measuring the weighted average of prices for established houses in the eight capital cities dropped 2.2 percent from the fourth quarter, when it declined a revised 1.2, the Australian Bureau of Statistics said in Sydney today. House prices slumped 6.7 percent in the year through March, after dropping a revised 3.9 percent in the fourth quarter, today’s report showed. Economists forecast a 3.9 percent annual decrease.
Wall Street Journal:
- Wal-Mart Stores Inc.(WMT) is expanding a pilot prescription-drug program for companies, heating up the race among pharmacy retailers to transform the way drugs are priced and sold. The discount retailer is offering businesses low-priced drugs if they sign up to buy directly from Wal-Mart's network of in-store pharmacies, rather than contracting to buy drugs through third parties known as pharmacy-benefit managers.
- New reports showed the A/H1N1 swine flu had spread to 18 countries, as the World Health Organization moved closer to officially declaring the new strain a global pandemic. Incidents of the new flu continued to turn up, including in a herd of swine in Canada, U.S. officials said. But health officials cautioned that declaring a pandemic doesn't mean the disease, which has proven mild outside of Mexico, is deadly to most people or will sweep the entire globe.
- The problem with global warming, some environmentalists believe, is “global warming.” The term turns people off, fostering images of shaggy-haired liberals, economic sacrifice and complex scientific disputes, according to extensive polling and focus group sessions conducted by ecoAmerica, a nonprofit environmental marketing and messaging firm in Washington. Instead of grim warnings about global warming, the firm advises, talk about “our deteriorating atmosphere.” Drop discussions of carbon dioxide and bring up “moving away from the dirty fuels of the past.” Don’t confuse people with cap and trade; use terms like “cap and cash back” or “pollution reduction refund.” EcoAmerica has been conducting research for the last several years to find new ways to frame environmental issues and so build public support for climate change legislation and other initiatives. A summary of the group’s latest findings and recommendations was accidentally sent by e-mail to a number of news organizations by someone who sat in this week on a briefing intended for government officials and environmental leaders. Environmental issues consistently rate near the bottom of public worry, according to many public opinion polls. A Pew Research Center poll released in January found global warming last among 20 voter concerns; it trailed issues like addressing moral decline and decreasing the influence of lobbyists. “Another key finding: remember to speak in TALKING POINTS aspirational language about shared American ideals, like freedom, prosperity, independence and self-sufficiency while avoiding jargon and details about policy, science, economics or technology,” said the e-mail account of the group’s study.
- Fresh from pushing Chrysler into bankruptcy, President Obama and his economic team are hoping that the hard line they took last week gives them leverage to force huge changes in General Motors(GM), a far larger and more complex company.
- The big idea behind the Obama administration’s long-in-the-making policy for Afghanistan and Pakistan was that the two countries are inextricably linked. The key to stabilizing Afghanistan, the White House concluded five weeks ago, is a stable and cooperative Pakistan. That calculation has been utterly scrambled by the Taliban offensive in western Pakistan, which has forced the United States to concentrate on the singular task of preventing further gains in Pakistan by an Islamic militant insurgency that has claimed territory just 60 miles from Islamabad.
- The results of the bank stress tests to be released by the Obama administration this week are expected to include more detailed information about individual banks — assessing specific parts of their loan portfolios — than many analysts have been expecting. Using these results, the administration seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear.
- The iPod stemmed losses in the music industry. The Kindle gave beleaguered book publishers a reason for optimism. Now the recession-ravaged newspaper and magazine industries are hoping for their own knight in shining digital armor, in the form of portable reading devices with big screens.
- As Chrysler began its journey through bankruptcy in a New York courtroom yesterday, members of the administration's autos task force had already turned their focus toward a larger and more daunting problem: General Motors(GM).
- President Obama's health-care goals may be garnering attention, but his higher-education proposals are no less ambitious. If adopted, they could transform the financial aid landscape for millions of students while expanding federal authority to a degree that even Democrats concede is controversial. At stake is a plan to expand the Pell Grant program, making it an entitlement akin to Medicare and Social Security.
- April ended with 23,700 layoffs announced at the largest American companies, down from the 37,400 in March. It was the third monthly decline in layoff announcements since the peak of 163,700 in January.
- Apple(AAPL) appears to be preparing an all-out assault on the handheld gaming market, moving to snap up gaming industry insiders from Microsoft to go with its growing team of graphics-chip specialists. News that Apple has poached Richard Teversham from Microsoft's Xbox business this week is only the latest sign Apple has gotten serious about the gaming business.
- GM: The Government Is in Charge. The White House task force in charge of salvaging the carmaker is using a heavy hand. Is it hurting or helping? The Obama Administration has "no desire to run an auto company on a day-to-day basis," says White House spokesman Robert Gibbs. If so, somebody forgot to tell the team of Treasury Dept. staffers and management consultants now camped out at the Detroit Renaissance Center, a hotel and office complex anchored by General Motors' (GM) headquarters.
- The Charlotte News and Observer confirms a report last month from the (super-reliable on this topic, no?) National Enquirer of a federal investigation into the Edwards campaign: Federal investigators are sifting through the records of money that helped John Edwards' presidential campaign to determine if any was used to keep quiet his affair with Rielle Hunter. Edwards, a Democrat and former U.S. senator, acknowledged the investigation to The News & Observer.
- In an interview of momentous importance, WJR's Frank Beckmann interviews Tom Lauria, the Head of Restructuring at top five law firm White & Case, in which the lawyer, who represents Chrysler hold-out hedge funds Stairway Capital and Oppenheimer Funds, discusses on the record the amazing treatment by the White House of Perella Weinberg, which initially had been a transaction hold out but after threats by the White House (not my words) was forced to drop their objection and go with the administration. Says Lauria: "One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg." In the clip below, fast forward to the two minute mark, where the Obama administration's negotiating tactics become very, very clear. What is very odd is that Perella Weinberg could possibly have veered away from the administration's path in the first place: Zero Hedge readers know that P-W is the very firm advising the rapidly sinking FDIC "on transactions and strategies to stabilize the banking system, and also on the proper way to dispose failed institutions and how to handle delinquent securities assumed from banks, as well as the creation of the aggregator bank." This leads to the conclusion that this was really the work of one Dan Arbess, who runs the recently acquired by P-W, Xerion Capital, but nonetheless does not explain the lack of strategic integration at this most critical of advisors to Sheila Bair, and by implication the U.S. administration. How it is possible that one's core advisor would go against its client, even if offset by a Chinese Wall, is likely the big story here, and speaks volumes about the chaos behind the scenes currently occurring with regard to Wall Street's sentiment for the ruling administration.
- Italy's Fiat SpA could seek a merger of its auto group with General Motors Corp's Europe unit, then spin off the combined company and list it, Fiat said on Sunday. Fiat Chief Executive Sergio Marchionne, fresh from a partnership with ailing U.S. automaker Chrysler, will meet German government ministers on Monday to discuss a bid for German car maker Opel, part of GM Europe. Fiat's board met on Sunday to review the Chrysler deal and back Marchionne in weighing a potential merger of Fiat's auto group, including "the Chrysler interest," with GM Europe into a new company, Fiat said in a statement.
- The U.S. government expects to have flu vaccines ready for both the new strain of the H1N1 virus and the seasonal flu by autumn, Health and Human Services Secretary Kathleen Sebelius said on Sunday.
- US homeowners could save close to $18bn (€13.5bn, £12bn) on their mortgage repayments this year as record low interest rates allow millions of borrowers to switch to cheaper home loans. Those people that took advantage of cheaper borrowing costs in the first quarter saved about $160 a month on a $200,000 loan, Frank Nothaft, chief economist at Freddie Mac said. “In aggregate, this adds up to about $2.5bn in extra spending cash in the pockets of those homeowners to spend over the coming year.” With the refinancing trends expected to be boosted by the government’s plans to help more borrowers to qualify for mortgage renegotiations, this year’s savings for homeowners could reach $18bn. The sum would add firepower to the existing stimulus and underpin US personal consumption, which totaled $10,000bn in 2008. Wilbur Ross, the billionaire investor, said in an interview with the Financial Times that the positive effects of giving consumers additional disposable income were being felt.
- Citigroup(C) and Bank of America(BAC) are working on plans to raise more than $10bn each in fresh capital, even as they launch last-ditch attempts to convince the US government they do not need to bolster their balance sheets. People close to the situation said Citi, BofA and at least two other lenders will on Monday attempt to convince the Treasury and the Federal Reserve that the findings of “stress tests” into their financial health were too pessimistic. But with time running out – the government will present the final test results to 19 banks tomorrow with an announcement scheduled for Thursday – both Citi and BofA are looking at how they could raise extra capital. Preliminary findings have revealed that Citi, which has already been bailed out three times by the authorities, could need an extra $10bn or more if the economy worsens. BofA, which has had $45bn in government aid, was found to need well in excess of $10bn, people familiar with the matter said. Regional lenders Wells Fargo(WFC) and PNC Financial(PNC) were also among the banks that would need to raise more capital unless they could persuade the authorities their findings were wrong, said people close to the situation.
- The European Central Bank is set to cut its key interest rate to 1% this week, the lowest in its 10-year history. The ECB is also expected to embrace other measures to boost the money supply and head off the threat of deflation. Analysts will also be closely watching Thursday’s announcement from the Bank of England. Its monetary policy committee (MPC) will keep Bank rate on hold at the current record low of 0.5%, but markets will be scrutinising what it says about quantitative easing – deliberately boosting the money supply by purchasing bonds.
- The German economy will continue to contract next year, citing an internal paper by the commission of the European Union, which will be published May 4th. The German economy will shrink 5.6% this year and as much as .3% next year.
- Panasonic Corp. raised its monthly output capacity for plasma panels at two plants to 940,000 units as television sales recover in
- PC processor makers have sold off "most of not all" their excess inventory that piled up due to the recession creating "the potential for positive growth" in the next three to six months, according to an upcoming report from Mercury Research (Cave Creek, Az.).
- Made positive comments on (SPG), (VNO), (PLD), (KIM), (MORN), (WYNN), (
Asian indices are +1.50% to +3.75% on avg.
S&P 500 futures +.58%.
NASDAQ 100 futures +.61%.
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Stock Quote/Chart
WSJ Intl Markets Performance
Top 25 Stories
Top 20 Business Stories
Today in IBD
Earnings of Note
- None of note
10:00 am EST
- Pending Home Sales for March are estimated unch. versus a 2.1% increase in February.
- Construction Spending for March is estimated to fall 1.7% versus a .9% decline in February.
Other Potential Market Movers
- The Fed’s Hoenig speaking, Fed’s Lacker speaking, (ZMH) shareholders meeting, (RIMM) Capital Markets Day, (SEE) analyst meeting, (AFL) shareholders meeting, (SHLD) shareholders meeting and the (MOT) shareholders meeting could also impact trading today.
BOTTOM LINE: Asian indices are sharply higher, boosted by technology and financial shares in the region. I expect US stocks to open modestly higher and to build on gains into the afternoon, finishing higher. The Portfolio is 75% net long heading into the week.