Today's Headlines

Bloomberg:

- Greece’s economic woes will “spook” the derivatives market because of concern the nation’s banks may struggle to honor their credit-default swap trades, according to BNP Paribas SA. Asset quality at the country’s lenders will deteriorate as the economy slows, forcing them to mark down about 40 billion euros ($56 billion) of government bond holdings, analyst Olivia Frieser wrote in a note to clients today. Funding costs are also rising as the European Central Bank tightens its lending criteria, Frieser wrote. “What will spook the markets is CDS counterparty risk, our understanding is that Greek banks were active CDS players, and there is no way of finding out about these particular exposures,” the London-based analyst wrote. “As long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.” The country’s new 8 billion euros of five-year bonds sold on Jan. 26 have tumbled. The spread on the notes, due August 2015, has widened to 445 basis points over similar-maturity German government notes, according to Bank of Greece prices on Bloomberg. They were issued at a spread of 380 basis points. “The post-issue performance of the bond looks like a horror scenario to any government bond investor,” Tim Brunne, a strategist at UniCredit SpA in Munich wrote in a note to investors today. The French banks that have the largest Greek businesses are Credit Agricole SA, which owns Emporiki Bank of Greece SA, and Societe Generale SA, which has stakes in Geniki Bank SA and Hellas Finance, according to Frieser. Investor concerns about Greece are spreading to nations including Portugal and Spain, which must both tame budget deficits. Claims of foreign banks, led by German lenders, on Spain represent 3.8 times those against Greece, meaning “the Spanish sovereign is indeed more important” than Greece, Frieser wrote. German banks’ claims against Spain are $240 billion, with French banks at $196 billion, BNP said. Credit Agricole owns about 19 percent of Madrid-based Bankinter SA, according to Frieser.

- Corporate bond sales in Europe slumped by almost half this week amid investor concern that ballooning budget deficits for Greece and other nations in the region will stifle economic growth. Alstom SA, the world’s second-largest train maker, and Fortis Bank Nederland NV led 7 billion euros ($10 billion) of issuance this week, down from 13 billion euros in the previous period, according to data compiled by Bloomberg. Investment- grade companies sold 81 billion euros of debt this month, a 43 percent drop from a year earlier. “The markets are so volatile due to sovereign-related concerns that there’s hardly any issuance from the corporate market,” said Puneet Sharma, the London-based head of European credit strategy at Barclays Capital.

- Commodities headed for the biggest monthly drop in 13 months on concern that demand may wane as governments seek to control economic growth. The Standard & Poor’s GSCI Index of 24 raw materials is down 6.2 percent this month, the most since December 2008, led by slides of 16 percent for zinc and 14 percent for lead. Copper has lost 6.6 percent this month, also the most in 13 months, and crude oil is down 6.8 percent, the first decline since July. Investors poured a record $92 billion into commodities last year, Barclays Capital estimates. “The optimism that led into 2010 has dried up very quickly,” said Jonathan Barratt, managing director at Commodity Broking Services Pty in Sydney. “Economies have been running off stimulus packages, not off genuine demand.” “China’s got very high copper stockpiles right now,” Charles Kernot, a mining analyst at Evolution Securities Ltd., said today by phone. “One would have to question how much more buying one can expect from them.” Commodities also have declined as the dollar strengthened, curbing investment demand for raw materials as an alternative asset. The U.S. Dollar Index, a six-currency gauge of the greenback’s strength, has added 1.4 percent this month after gaining 3 percent in December. “Speculators are still liquidating gold, with no physical buying in sight,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report.

- Legislation to rein in the $605 trillion over-the-counter derivatives market contains exemptions that would leave most of the market unregulated, Commodity Futures Trading Commission Chairman Gary Gensler said. Proposals in Congress do little to curb customized contracts while exempting about 60% of standardized transactions that had been delivered today to the American Bar Association’s annual meeting of commodities lawyers in Palm Beach, Florida.

- President Barack Obama’s efforts to bolster the U.S. housing market, the trigger of the worst recession since the 1930s, may be undone by record unemployment and repossessions by lenders. Foreclosures probably will reach 3 million this year, surpassing the record of 2.82 million in 2009, according to Irvine, California-based RealtyTrac Inc. That would more than offset an estimated 448,000-unit rise in home sales, based on the average forecast of the National Association of Realtors, the Mortgage Bankers Association and Fannie Mae. The housing industry remains a challenge for Obama as he enters his second year of office and government assistance programs near expiration.

- When President Barack Obama challenged lawmakers this week to “let me know” if they had a better idea how to overhaul U.S. health care, several Republicans shot up their hands. Obama asked his opponents during his Jan. 27 State of the Union address to come up with an “approach that will bring down premiums, bring down the deficit, cover the uninsured” and bolster Medicare. Republicans, almost universally opposed to Obama’s plan, say they have less-costly ways of reaching many of those goals and have been advocating them for months. “That’s exactly what the Republican health-care proposal does, much more so than the proposal that he and Democrat leaders are trying to shove down the throats of the American people,” House Republican Leader John Boehner of Ohio told reporters yesterday. The Republican ideas, more limited in scope than the roughly $900 billion medical-system revamp the Democrats seek, may have a bigger role in defining party differences this election year than in crafting a compromise on the health bill. That’s because the gap between the two approaches is so wide. A plan Boehner pushed in November would expand coverage to just 3 million uninsured Americans, compared with more than 30 million in bills passed in the Democratic-controlled House and Senate, according to the nonpartisan Congressional Budget Office. It would cost $61 billion over 10 years. It doesn’t require Americans to obtain insurance. And it spans 219 pages -- compared with the House bill, which runs to about 2,000. Even with their legislation at an impasse, Democratic leaders would likely adopt only a handful of Republican proposals if they wanted to pick up support for a final bill, said John Fortier, a scholar at the American Enterprise Institute in Washington. One possibility, he said, would be imposing limits on medical malpractice awards. Republicans say they want an incremental approach, emphasizing preventive care, affordability and greater access to insurance. “Rather than creating a government-centered bureaucracy, what you want to do is drive down those costs,” said Senator Tom Coburn of Oklahoma. Legislation introduced in May by Coburn and Senator Richard Burr of North Carolina and Representatives Paul Ryan of Wisconsin and Devin Nunes of California, all Republicans, features tax credits to help people obtain insurance. The plan would end the current tax benefit for employer- sponsored plans and shift responsibility for coverage to individuals, who would get a tax credit of $2,300 to buy insurance. Families would get $5,700. It would encourage states to create exchanges where people would shop for coverage and let states band together to ease administrative costs and diversify pooling. It would limit medical-liability lawsuits by setting up state panels to review cases and make judgments. While there’s no requirement that individuals buy coverage or that companies provide it, states would set up “auto- enrollment” options at workplaces, medical centers and other sites. Boehner’s alternative, which would let business groups pool resources to purchase coverage and allow insurance to be bought across state lines, was rejected, 258-176, on Nov. 7 before the House approved the Democratic legislation.

- Taxing equity trades may reduce U.S. stock market volume by 90 percent, Interactive Brokers Group Inc. Chief Executive Officer Thomas Peterffy said. A transaction tax was first discussed in February and revived in December, when Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio said it is the “most painless way” to fund the government’s deficit and curb speculation. French President Nicolas Sarkozy said Jan. 27 that a European debate on the subject is unavoidable. “The mother of all creators of havoc on Wall Street is this looming transaction tax,” said Peterffy, who is also president of the brokerage and automated market-making company, in an interview yesterday. Interactive Brokers is based in Greenwich, Connecticut. “Trading volumes would plunge by about 90 percent, markets would become illiquid and tens of thousands of people would lose their jobs.” Sending a fee to the government for every transaction would hurt asset managers, brokerages and so-called high-frequency traders, a group that accounts for 61 percent of volume, according to New York-based research firm Tabb Group LLC. Interactive Brokers handles about one-seventh of U.S. options that change hands.

- Japan’s housing starts fell to the lowest level since the nation celebrated its postwar recovery by hosting the Olympics in 1964, as builders were hobbled by dwindling household incomes and sustained deflation. Construction companies broke ground on 788,410 homes last year, 27.9 percent fewer than in 2008, the Land Ministry said today in Tokyo. That was the lowest since 751,429 recorded in 1964.

- China’s central bank said rising inflation will complicate management of the world’s third- largest economy in 2010 after record lending sparked a jump in property prices and added to overcapacity in some industries. The government will ensure “balanced” lending and continue fiscal stimulus as policy makers seek to cement a recovery that started last year, the People’s Bank of China said in a report on its Web site today. “Inflation may spiral if monetary policy isn’t proactive,” said Liu Li-Gang, an economist with Australia & New Zealand Banking Group Ltd. in Hong Kong. “It’s a major risk facing the economy this year,” Liu said, adding consumer prices may rise 6.7 percent this year if left unchecked. The central bank cautioned today that the trade environment is “deteriorating” because of a weak global recovery and intensifying protectionism. “Inflation is gaining pace and the sooner the central bank raises interest rates, the easier it will be for them to manage inflation expectations,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. Xing expects consumer prices to rise 1.8 percent this month from a year earlier, peaking at 4.5 percent mid-year.

- Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said. The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

- Russian stocks risk a “temporary correction” as commodity prices fall on concern China will increase interest rates, Goldman Sachs Group Inc.(GS)d. “We see this as no more than a temporary correction, yet we would recommend tactically to diversify with a more defensive exposure,” strategists led by Moscow-based Sergei Arsenyev wrote in a research report. Russia is unlikely to outperform in the “very short term,” he wrote.

- U.S. legislation to impose gasoline sanctions on Iran over its disputed nuclear program won’t succeed in halting fuel supplies, an Oil Ministry official said. “If for any reason any refinery or trader would stop working with us, we can refer to other refineries and traders and receive the amount of gasoline needed,” said Hojatollah Ghanimifard, vice president for investment affairs at the National Iranian Oil Co.

Wall Street Journal:

- Delinquencies in general continued to rise in December among home loans made between 2004 and 2007, said Standard & Poor's Ratings Services, and especially for prime-rated jumbo and subprime loans.

- Google Inc.(GOOG) Chief Executive Eric Schmidt Friday defended his company's recent decision to stop obeying government censorship rules on its Chinese search site. We like what China is doing in terms of growth...we just don't like censorship," Mr. Schmidt said, speaking at the World Economic Forum annual summit. "We hope that will change and we can apply some pressure to make things better for the Chinese people," he said.

- Al Qaeda leader Osama bin Laden has called for the world to boycott American goods and the dollar, blaming the U.S. and other industrialized countries for global warming, according to a new audiotape released Friday. In the tape, broadcast in part on Al Jazeera television, Mr. bin Laden warned of the dangers of climate change and said the way to stop it is to bring "the wheels of the American economy" to a halt. He blamed Western industrialized nations for hunger, desertification and floods across the globe, and called for "drastic solutions" to global warming instead of "solutions that partially reduce the effect of climate change."

- AutoNation Inc. Chairman and Chief Executive Officer Mike Jackson, America’s No. 1 car salesman, has a few things to say about the government’s approach to “green cars.” Many Americans believe they can cut their reliance on foreign oil and still have cheap gasoline. “These are mutually exclusive concepts,” Jackson said in a speech Thursday to a gathering of federal regulators, electric vehicle advocates and others at the Washington Auto Show. The government wants auto makers to sell car and truck fleets that average 35 miles per gallon when gasoline is under $3 a gallon, which is like telling a shop owner who sells donuts and broccoli “you have to sell 50% broccoli — and we’re reducing the price of donuts,” he said. The government’s effort to promote 85% ethanol as an alternative to gasoline? “It’s a joke,” he said. Electric cars? “The cost is completely out of whack.” Jackson’s goal in being impolitic is to persuade the Obama administration and Congress that America needs to gradually phase in higher gas taxes to spur demand for the green vehicles Washington wants. To make higher pump prices palatable, the government could give consumers their money back at the end of the year, he said. It’s a proposal he makes often, and to little avail. Jackson’s worry is that without higher gas prices AutoNation will get stuck trying to move fleets of cars with expensive fuel-saving technology that customers don’t want. “It’s going to be a train wreck,” he said.

- Lenny Dykstra’s California mansion, a palatial estate once owned by hockey legend Wayne Gretzky, is on the market for $14.9 million. Dykstra, a former baseball player-turned-financial whiz, is now in bankruptcy, and the trustee overseeing his Chapter 7 case is selling off his personal belongings and real estate for the benefit of his creditors.

CNBC:

- The U.S. economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending.

- A senior U.S. Federal Reserve official warned Friday that the uncertain path of interest rates poses risks for banks inattentive to the match of durations among their assets and liabilities.

NY Times:

- Where Clinton Turned Right, Obama Plowed Ahead. When President Bill Clinton faced a Republican uprising and a nation that turned deeply skeptical about his agenda, he used the 1996 State of the Union address to declare that “the era of big government is over.” That move to the middle — arguably more rhetoric than reality — stopped Newt Gingrich’s Republican Revolution in its tracks. So why did President Barack Obama go a different route on Wednesday night, giving little ground and declaring that the problem was not his agenda but a deficit of trust in government and of pragmatism?

NY Post:

- Call them the friends of Lloyd Blankfein. Months before the government negotiated a cushy deal in which the hobbled American International Group(AIG) paid several banks top dollar for esoteric securities that had collapsed in value, a top AIG official got himself a sweet deal on a mortgage from Blankfein's firm, Goldman Sachs(GS). Rodney O. Martin, chief operating officer of AIG's life insurance unit, and his wife, Deborah, got a 30-year, $4 million loan from Goldman's bank to buy an apartment at 15 Central Park West, which Blankfein calls home. Under the terms of the mortgage, the Martins were charged a 4.8 percent interest rate, and were required to make interest-only payments for the first 10 years. The interest rate was about two percentage points less than the average rate at the time. The loan came just before several banks, including Goldman, received billions from AIG to settle derivatives contracts under a plan sanctioned by the Federal Reserve Bank of New York. The revelations of the payments, including Goldman's $13 billion payday, were kept quiet until the end of 2008, when they triggered a public outcry because billions in taxpayer funds had already been shelled out to prevent AIG from collapsing. The news about the Martins' mortgage deal, which was first reported by Gawker.com, is likely to raise fresh questions about AIG's payments to Goldman, and whether the mortgage is somehow connected to those payments.

The Business Insider:

- The China housing bubble isn't just for major cities.The southern tropical island of Hainan, previously known for beauty pagents and prostitution, was set on fire by speculation that the government was developing an international tourist resort, according to China Daily.

- Such is the perilous state of Toyota's reputation right now that even its most loyal Japanese fans are beginning to question the company's quality:

Detroit Free Press:

- The Christmas Day bombing attempt aboard Northwest Flight 253 touched off a series of blunders that deprived emergency ground crews of critical information and exposed travelers in the McNamara Terminal to danger if another bomb or accomplice had been on board, according to aviation experts and records obtained by the Free Press. The flight from Amsterdam, Netherlands, with nearly 300 people aboard, taxied right to Gate A24 instead of going to an isolated area where baggage and passengers could be screened for explosives -- a move several terrorism security experts called highly inappropriate. Despite crew and passengers having subdued a suspect who tried to ignite explosives in his underwear, Northwest pilots radioed air traffic control only about a disturbance -- a man with firecrackers, records show. Airport police and fire report obtained by the Free Press also show:

The Detroit News:

- The United Auto Workers said Thursday it would not drop a grievance against Ford Motor Co. about restoring merit pay increases and retirement fund contributions for salaried workers, despite having profit-sharing restored for union workers. "They're two separate issues," said UAW Vice President Bob King, head of the union's national Ford division. "We gave up a long laundry list of benefits. None of that is being restored." Ford stood by its decision. "We agree that they're not linked," said Ford spokesman Mark Truby. "But we don't believe that we violated the contract."

LATimes:

- Talk about a party-pooper: California's wine industry saw its shipments fall in 2009 -- for the first time in 16 years.

Rassmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-two percent (42%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -17 (see trends).

Politico:

- Nearly 100 allegations of senatorial misconduct were made in 2009, and 13 preliminary investigations over potential breaches of Senate ethics rules were launched, according to a report issued Friday by the Senate Select Committee on Ethics. The committee says after it launched the preliminary inquiries, it dismissed eight of the ethics complaints, and issued one letter of admonition, suggesting that the secretive panel is now investigating four separate incidents involving members of the Senate or their staff. The committee, which is evenly divided between three Republicans and three Democrats and chaired by Sen. Barbara Boxer (D-Calif.), released Friday’s annual report to comply with a requirement under a 2007 transparency law.

CNN:

- Saudi’s Al-Jasser Says Dollar Peg Has Worked Well. (video)

zerohedge:

- Pensions Look to Leverage Up? The problem with this strategy is what happens when all the pension parrots start doing it? Who is overseeing systemic risk of public pension funds investing in hedge funds, private equity, and now leveraging their fixed income portfolios? I hope someone at the Fed is also "thinking through all ramifications" of this strategy because before you know it, leverage in bonds is about to grow exponentially, posing a new set of macro risks for the global financial system.

Reuters:

- Sovereign credit risk has grown most sharply for Greece, Portugal and France since September because of investor sales of various government debt, according to a report by Credit Derivatives Research on Friday.

Il Sole 24 Ore:

- Governments in the Euro region are ready to bail out Greece, as the country struggles to tackle the European Union’s biggest budget deficit, citing “European sources.” The bailout plan may be implemented by June. There may be risks for the euro without external help to Greece.

Business Recorder:

- Beep, beep! Beep, beep! The insurance premium on Pakistan’s sovereign bond has suddenly started blinking on the screens of international and local bond watchers. According to CMA - a London-based credit information provider - Pakistan was fourth on the list of high default probabilities, a level unachieved in many months. Fancily called the Credit Default Swap (CDS), the premium shot up by more than 70 basis points in a matter of two days, from 763.26 bps on Tuesday to 835.20 bps on Thursdays early trade. The move, which comes after seven months of virtually stagnant behavior, reflects changing investor perceptions about Pakistan’s economy. Is it corruption, political bickering or sub-optimal efforts to curb terrorism? One can be too sure as it is hard to assign weight to each argument. But whatever the reason maybe, foreign investors are showing signs of being short on Pakistan - which means that something is cooking.