Late-Night Headlines
Bloomberg:
- Declining bond-market volatility, a measure of risk, makes buying higher-yielding debt or longer- term Treasuries some of the most attractive trades in fixed income, according to JPMorgan Chase & Co. and Goldman Sachs Group Inc. Merrill Lynch & Co.’s MOVE Index, based on prices of over- the-counter options on Treasuries maturing in two to 30 years, has dropped 52 percent to 126.3 since hitting a record high in October after the collapse of Lehman Brothers Holdings Inc. drove investors to the relative safety of government debt. A record pace of corporate bond sales, declining money market rates and rising stock prices now all suggest the global economy is on the mend. Prospects of limited rate swings with the Federal Reserve forecast to keep its target lending rate near zero percent into next year make it more appealing for investors to exit the safety and relatively low returns of short-term government debt.
- Brazilian stocks are expensive after a rally in equities sent the Bovespa index to its steepest valuations in at least five years, Deutsche Bank AG and Banco Santander SA strategists said. “Brazilian equities appear overbought and relatively expensive,” Santander’s Marcelo Audi and Leonardo Milane wrote in a note to clients today. “We recommend that investors wait for a better entry point.” At Deutsche Bank, Guilherme Paiva said Latin American stocks may drop as much as 15 percent by the end of September because Brazil’s stocks are “rich” and Mexico’s companies may report “very weak” second-quarter earnings. Investors should adopt a “defensive” stance on Latin American stocks as “valuations are rich in Brazil, the Chinese economy should experience another period of gradual deceleration in the third-quarter because of slower loan growth, and a potentially very weak second-quarter earnings season in Mexico,” Paiva, the head of Latin America equity strategy, wrote in a note to clients today.
- Whole Foods Markets Inc.(WFMI), the largest natural-goods grocer in the U.S., reported second-quarter profit that fell less than analysts’ estimates, sending the shares higher in late trading. The shares jumped 10 percent to $22.03 at 4:16 p.m. New York time after the earnings were announced. Earlier, Whole Foods dropped $2.07, or 9.4 percent, to $20 in Nasdaq Stock Market composite trading. The stock has more than doubled this year.
- Former President Bill Clinton urged the Obama administration to make a “genuine effort” to encourage healthy banks to repay the Troubled Asset Relief Program so financial institutions can set executive compensation without fearing a public backlash. “Give them a chance to pay it back and maybe just give it back without the interest or anything else,” Clinton said in an interview with Bloomberg News. The government could say, “You’re back on your own; pay whatever you want” to executives, he said. On executive compensation, Clinton said that “as a general philosophical matter, the government should not set corporate salaries.” Still, he said the current situation, with firms such as American International Group Inc. largely owned by taxpayers, created a dilemma and that compensation at these businesses should be limited.
- Confidence among small-business managers in the US and Japan, the world’s two largest economies, rose in the same month for the first time since August as stimulus spending and credit-easing efforts took hold. “It’s important that the little guy and the mom-and-pop shops have a positive mental attitude,” said Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton Asia Ltd. in Hong Kong . The April increase in the US “They are the job generators and innovators who will lead us out of the recession,” he said.
- Crude oil may fall to $50 a barrel as prices have risen too far from their 20-day moving average, said Masahiko Sato, a senior analyst at OvalNext Corp. Sato expects oil to drop to $43.83 in New York “Given a lack of bullish fundamental factors, the market is definitely overheated,” Sato from OvalNext, a commodities investment advisor, said by phone from Tokyo
Wall Street Journal:
- The Obama administration's new drug czar says he wants to banish the idea that the U.S. is fighting "a war on drugs," a move that would underscore a shift favoring treatment over incarceration in trying to reduce illicit drug use. In his first interview since being confirmed to head the White House Office of National Drug Control Policy, Gil Kerlikowske said Wednesday the bellicose analogy was a barrier to dealing with the nation's drug issues. "Regardless of how you try to explain to people it's a 'war on drugs' or a 'war on a product,' people see a war as a war on them," he said. "We're not at war with people in this country." Mr. Kerlikowske's comments are a signal that the Obama administration is set to follow a more moderate -- and likely more controversial -- stance on the nation's drug problems. Prior administrations talked about pushing treatment and reducing demand while continuing to focus primarily on a tough criminal-justice approach. The Obama administration is likely to deal with drugs as a matter of public health rather than criminal justice alone, with treatment's role growing relative to incarceration, Mr. Kerlikowske said.
- After reducing their budgets sharply for months, many businesses across the U.S. have stopped slashing information-technology spending, a shift that could stem revenue declines at tech companies, including Hewlett-Packard Co.(HPQ) and Cisco Systems Inc.(CSCO). Interviews with more than a dozen chief information officers and corporate technology executives who oversee tech spending indicate that a range of U.S. businesses have finished cutting. The change won't show up on tech-company balance sheets for awhile. Cisco's revenue for its most recent quarter was down 17% from a year earlier, EMC's fell 9.2%, and Intel's dropped 26%. Nonetheless, each company's CEO said that other metrics gave them confidence the worst is over. "The early indication is that 2009 may be the low point," says Sarah Friar, a Goldman analyst.
- Staff at the Securities and Exchange Commission have decided to recommend filing civil fraud charges against Angelo Mozilo, the co-founder of Countrywide Financial Corp., according to people familiar with the investigation.
- A group of 18 financial institutions sued MBIA Inc., claiming the bond insurer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively "insolvent." The lawsuit, filed in New York state court on Wednesday afternoon, was brought by U.S. and foreign banks, including J.P. Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC, and UBS AG.
- The Obama administration is weighing plans to detain some terror suspects on U.S. soil -- indefinitely and without trial -- as part of a plan to retool military commission trials that were conducted for prisoners held in Guantanamo Bay, Cuba. The proposal being floated with members of Congress is another indication of President Barack Obama's struggles to establish his counter-terrorism policies, balancing security concerns against attempts to alter Bush-administration practices he has harshly criticized.
MarketWatch.com:
Chris Crowe can't believe he may lose nearly all the money he invested to send his son to college. He's watched the value of his $13,000 investment in General Motors(GM) bonds dwindle over time. He is now staring at the prospect of a June 1 bankruptcy filing that would further erode those holdings, set aside as a college fund for his 13-year-old son, Cameron. As odd as it sounds, bankruptcy still may work out better for a small bondholder like Crowe than the current deal put forth by the government and GM management to keep the debt-ridden auto giant afloat. That deal trades debt for stock that then gets split. "I got sick to my stomach because I'll get nothing the way they're doing it," said Crowe, a home inspector and electrician in Littleton, Colo. "I certainly don't want GM to go bankrupt, but for me to get 2 cents back for my $13,000, that's criminal," he said. "I stand a better chance of recovering a bigger percent of my money from bankruptcy court." Under President Barack Obama's April plan to rescue GM, bondholders like Crowe would get 225 shares of common stock for every $1,000 in debt they hold. These bondholders-turned-stockholders would own 10% of the company, before a 100-to-1 reverse stock split. Some bondholders say they could get a better deal in bankruptcy. As part of the task force's plan, the U.S. government would own 50% of the company in exchange for its $14.4 billion loan, and the United Auto Workers union would own 39%. The other 1% will remain with current equity holders, who usually get nothing in a bankruptcy. GM has around 100,000 individual bondholders, holding about 20% of the company's $27 billion in outstanding debt, according to 60 Plus, a senior advocacy group that is lobbying lawmakers for individuals who hold GM bonds. Dennis Buchholtz, 67, of Warren, Mich., has learned that lesson the hard way. His $98,000 purchase of GM bonds in 2005 was supposed to supplement social security after he retired as superintendent of a factory that made equipment for auto suppliers. "For heavens sake, this is a huge company and I never anticipated this would be lost," he said. Buchholtz also thought the bondholders would get better deal, because they usually do -- a big reason bonds are considered a more conservative investment than stock. "What bothers me most is that whatever I've read in the past about this, in most bankruptcies, bondholders get paid first," he said.
CNBC.com: The World’s 10 Highest Corporate Tax Rates
- The White House says they’re closing loopholes but Corporate America counters they're nothing but tax increases. Either way, will the Obama plan drag down the economy? The latest talk of taxes stems from President Obama’s sweeping new plan to overhaul the health care system. Although most of us can agree sweeping changes are greatly needed, we’re at odds over how to pay for it. The most likely scenario is tax increases. In fact, Congress is looking closely at capping tax benefits for employer-provided healthcare. In addition, there’s speculation that lawmakers might raise taxes on alcohol, soft drinks and foods high in fat and salt to encourage healthier eating and raise revenue. And that's not all. The White House wants to raise $24 billion over 10 years by tightening rules related to the estate tax. They also want to eliminate current provisions that allow multinationals to defer taxes on profits made overseas. And there’s the great debate over cap and trade – a plan that requires business to buy carbon dioxide emission permits. Seems like a lot of taxes on the table.
- As thousands of General Motors(GM) workers await word on more U.S. plant closures, reports that the company plans to import Chinese-made vehicles to the U.S. have created a political problem for the automaker and the White House.
IBD:
- Some say the fiesta may be over at fast-casual burrito chain Chipotle Mexican Grill (CMG). Others say it's taking a rest to shore up for the next blast.
nj.com:
- A coalition of labor unions, environmental groups and other liberal organizations is asking New Jersey Gov. Jon Corzine to fix the state's budget problems by taxing rich people more. Higher taxes on businesses and those making $300,000 or more annually could generate about $437 million in new revenue, said activists from the Better Choices for New Jersey coalition. Steeper registration fees for the owners of SUVs and other heavy gas-guzzling vehicles pushes would bring in another $80 million, coalition members said Tuesday during a Statehouse news conference.
Politico:
- President Barack Obama’s decision to withhold photographs of abused detainees marks the next phase in the education of the new president on the complicated, combustible issue of torture. Conservatives praised the move as a sign of Obama’s growth in office, while civil libertarians denounced it as a betrayal of the change he’d campaigned on. But it also marked a growing recognition inside the White House of how explosive the question of torture has become — swamping his predecessor’s legacy, entangling the speaker of the House and threatening to overwhelm Obama’s agenda.
Reuters:
- U.S. online travel agencies, hungry for business in an economic recession, may extend or make permanent the booking fee cuts and waivers they implemented this year on a promotional basis. The companies like Orbitz Worldwide and Expedia Inc suspended or reduced some of their booking fees recently to spur demand during the peak summer travel season.
- The Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis. Federal regulators proposed subjecting all over-the-counter derivatives dealers -- whose trades are not made through an exchange, making them hard to monitor -- to "a robust regime of prudential supervision and regulation," including conservative capital, reporting and margin requirements.
- General Motors Corp and Chrysler aim to drop as many as 3,000 U.S. dealers and are expected to begin sending notifications as early as Thursday, three people briefed on the still developing plans said. GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, is expected to send termination notices to up to 2,000 dealers -- a third of its roughly 6,000 U.S. dealers, the sources told Reuters. Chrysler, which filed for bankruptcy on April 30, will also tell up to 1,000 of its 3,189 U.S. dealers it is terminating their franchise agreements, according to the sources who asked not to be identified because the controversial closure plans have not been yet announced.
- POSCO, the world's No.4 steelmaker, on Thursday said it would cut prices of its domestic steel products by up to 20 percent in its biggest-ever price reduction, which came earlier than expected as it seeks to compete against cheaper imports. The South Korean company had said it would not slash steel prices until annual negotiations to decide import prices of iron ore were completed, which was likely to be in the second half. "We've decided to lower the prices of all our products earlier than we had planned, as international steel prices are falling and raw material prices are also expected to decline," POSCO said in a statement.
- Global coal miner Peabody Energy Corp (BTU) has agreed with Australia's White Energy Coal Ltd to build a coal upgrading facility in the United States, and may buy up to a 15 percent stake in the Australian firm. The two said in a statement they will build the facility at Peabody's Powder River Basin site, and plan over 1 million tons of upgraded coal production a year in the first phase. Later expansions could increase the plant's capacity to more than 20 million tons per year. Coal upgrading technology aims to turn poor quality coal with low heating value to one with much higher energy content. The upgraded coal has lower carbon and other emissions.
- DigitalGlobe Inc (DGI), a satellite image company primarily serving the U.S. government, priced its initial public offering at $19 per share on Wednesday, above the estimated range, according to a source familiar with the deal. DigitalGlobe, which is based in Colorado and supplies images to Google Maps and Microsoft's Virtual Earth, sold 14.7 million shares, according to the source, raising $279.3 million in a deal led by underwriters Morgan Stanley (MS) and JP Morgan (JPM). The price estimate range had been $16 to $18.
Financial Times:
- Peer Steinbrück, Germany’s finance minister, on Wednesday attacked proposals to conduct stress tests on individual European banks and labeled the financing checks of US institutions “worthless”. The outspoken minister’s comments came after the International Monetary Fund on Tuesday called for Europe to conduct stress tests of its banks based on the US model. In the most vocal expression of Berlin’s long-standing skepticism about the wisdom of individual stress tests, Mr Steinbrück called the testing of 19 US banks pointless because their results had been altered before publication. “We are currently seeing that the stress test in the US is worthless because the central bank exercised influence as well as the Treasury,” Mr Steinbrück told the German parliament.
- The rush of US homeowners to refinance mortgages at lower rates is creating a boom in the home lending business, prompting banks to hire thousands of new employees and put them to work on extra shifts to process mountains of paper. “Many of them work all day, go home and have dinner with their families, then go back to the office and put in a few more hours, because there’s work to be done,” said Greg Gwizdz, national sales manager of the Wells Fargo home mortgage unit. Lenders could originate up to $2,780bn of new mortgages this year, the Mortgage Bankers Association says. Statistics from mortgage financiers Fannie Mae and Freddie Mac suggest 80 per cent of that activity could involve refinancing. With interest rates for 30-year fixed rate mortgages at around 5 per cent, US homeowners could save close to $18bn on their mortgage repayments this year if they refinance, according to economists at Freddie Mac. Ken Lewis, Bank of America chief executive, said on Monday his company was adding 6,000 workers to beef up its mortgage capabilities. Wells also has added mortgage staff, although it won’t give out specific numbers.
National Bureau of Statistics:
- Industrial profits from companies in 22 provinces in China
Economic Daily News:
- AU Optronics Corp.(AUO) has received 40% more orders than it can meet at current production capacity because of rising television demand from China The flat-panel maker has resumed expansion at two plants to help meet the demand, Lee said.
Late Buy/Sell Recommendations
Citigroup:
- Buy 5-year credit default swaps on (CBS).
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Economic Releases
8:30 am EST
- The Producer Price Index for April is estimated to rise .2% versus a 1.2% decline in March.
- The PPI Ex Food & Energy for April is estimated to rise .1% versus unch. in March.
- Initial Jobless Claims for last week are estimated to rise to 610K versus 601K the prior week.
- Continuing Claims are estimated at 6400K versus 6351K prior.
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BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and technology stocks in the region. I expect US
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