Evening Headlines
Bloomberg:
- Euro Swap Spreads Narrow Fourth Day as Bank Funding Stress Concern Eases. Two-year euro swap spreads narrowed for a fourth day as signs funding pressures are easing at Europe’s financial institutions diminished the need for hedges against a deterioration in credit quality. The spread, which indicates the extra risk of trading with banks for two years instead of buying government securities, touched the lowest level in more than five weeks as the European Central Bank awarded temporary loans to ease the expiration of 12-month emergency funds. European banks yesterday asked for 131.9 billion ($164.7 billion) in three-month loans, less than economists expected. The euro rallied to the highest in a month against the dollar. “There’s a growing perception that the ECB may be moving toward shorter maturities and the state of the European banking system may not be as dire as we thought,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The euro is becoming a bit detached from the risk jitters.” Two-year euro swap spreads were 1.7 basis points lower at 74.93 at 3:35 p.m. in New York after falling as low as 72.17 basis points, the lowest level since May 21.
- U.S. Corporate Credit Risk Benchmark Holds Near Three-Week High. An indicator of corporate credit risk in the U.S. held near a three-week high as data on manufacturing, jobless claims, and home sales fanned concern the economic recovery is faltering. Indexes that gauge the risk of corporate bonds in the U.S. and Europe were little changed as stocks fell after the number of contracts to purchase previously owned houses plunged in May by more than twice as much as forecast. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.1 basis point to a mid-price of 122.8 basis points, the highest since June 11, after climbing as much as 3.7 basis points earlier, according to Markit Group Ltd. Swaps on Masco climbed 24.5 basis points to 284.5, the highest level in almost a year, according to CMA DataVision prices. Toll Brothers increased 17.4 basis points to 223.4 and M.D.C. gained 10.3 basis points to 191.3 at 4:30 p.m. in New York, CMA data show. Ryland Group Inc. climbed 22.3 basis points to 269.3, CMA said. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 1.6 basis point to 131.1, Markit prices show. The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings increased 8 basis points to 584.7, according to Markit.
- Buffett's Berkshire(BRK/A) May Be Spared Collateral Posting Under Financial Bill. Warren Buffett’s Berkshire Hathaway Inc. , which lobbied Congress to exclude its derivatives contracts from new collateral requirements, may get its way as the financial regulatory overhaul nears approval. The new rules won’t alter previously written derivative contracts, Democratic Senators Chris Dodd of Connecticut and Arkansas’s Blanche Lincoln told Democratic Representatives Barney Frank of Massachusetts and Minnesota’s Collin Peterson in a letter. “It is a positive thing for Berkshire Hathaway,” said Michael Yoshikami, chief investment strategist at YCMNet Advisors. “It’s in writing from a lawmaker. It may not be over, but it’s virtually a promise.” Dodd’s letter was reported earlier today by Dow Jones Newswires. Berkshire estimated in April that it may need to post $6 billion to $10 billion in collateral if the new rules were applied to existing derivatives. Yesterday, Jay Gelb, an analyst with Barclays Plc said Omaha, Nebraska-based Berkshire may need $6 billion to $8 billion in collateral.
- Gillard Reaches Deal With Miners on Australian Tax. Australian Prime Minister Julia Gillard reached an agreement with mining companies on a new resources tax, ending a dispute that cost her predecessor Kevin Rudd his job and paving the way for an election this year. The mineral resources tax will be 30 percent, applying to iron ore and coal, while the levy on oil and gas projects will be 40 percent, the government said. The government said the tax will only apply to the profits of iron ore, coal, onshore petroleum and gas, representing three-quarters of the value of exports, unlike the Rudd proposal that also included most minerals extracted in Australia. The levy’s threshold, effectively the point where the tax kicks in, will now be based on the 10-year government bond rate, currently around 5 percent, plus 7 percent. Previously it was to apply to any profits above the 10-year government bond rate.
- Pimco's Crescenzi Sees 'Worst Kind' of Treasury Gains as Optimism Waning. The shrinking difference between short- and long-term Treasury yields has been “the worst kind” because it is driven by a pessimistic economic outlook, according to Pacific Investment Management Co., which runs the world’s largest bond fund. “The flattening of the yield curve has been the worst kind,” Anthony Crescenzi, a money manager at Newport Beach, California-based Pimco, wrote to clients yesterday. It occurred during “a decline in market interest rates on both ends of the yield curve. Investors have become less optimistic about the outlook for both the U.S. and global economy.” The spread, known as the yield curve, narrowed to 2.27 percentage points yesterday, the least since October. Nations will no longer be able to borrow to spur economic growth, Crescenzi wrote. “The last balance sheet has been tapped, forcing fiscal austerity upon all levels of government worldwide and affecting economic activity,” his report said. “Investors are increasingly of the belief that the inflation rate could continue to move lower.”
- BP's(BP) Gulf Spill to Drive Down Rig Rates, Create Oversupply. BP Plc’s oil spill in the Gulf of Mexico will drive down rental prices for deep-sea drilling vessels by about 20 percent, analysts say, creating an oversupply of rigs as demand slows. The Deepwater Horizon drilling rig that blew up and sank in April prompted President Barack Obama to ban deep-water drilling for six months. That halted 33 rigs in the Gulf of Mexico and led Statoil ASA, Anadarko Petroleum Corp. and Cobalt International Energy Inc. to declare force majeure, or suspend terms, on their rig hire contracts. Falling prices could pressure companies into making more deals. Rental rates for deep-water rigs may drop about a fifth to $350,000 a day in the next six months, according to the average estimate from Citigroup Inc., ODS-Petrodata Inc. and Sanford Bernstein & Co. “Some rigs are having force majeure declared on them, some could well be moved out, some could well sit,” said Gavin Strachan, an Aberdeen-based consultant at ODS-Petrodata, an energy analytics agency. “There’s potential oversupply.” At the same time, a total of 64 rigs are under construction worldwide, the biggest expansion since the early 1980s, according to Bernstein. The global deep-water rig utilization rate may drop by as much as 10 percentage points to 70 percent, driving down hiring rates, according to Standard Chartered Plc estimates. A U.S. court ruled Obama’s six-month moratorium on drilling in waters deeper than 500 feet (152 meters) was illegal. U.S. Interior Secretary Kenneth Salazar has appealed the ruling. Australia, Trinidad and Tobago, Tanzania and Norway are moving ahead with licensing plans to allow new deep-water exploration. The U.S., which will import about 14 percent of the world’s oil this year, may need to shorten the deep-water drilling ban to maintain supplies and preserve jobs in the industry. Oil output from the region may fall by as much as 300,000 barrels a day in the next five years, the International Energy Agency has forecast.
- U.S. House Approves Restrictions on Deals Between Drugmakers. The U.S. House approved a measure restricting the ability of drugmakers to enter agreements that the Federal Trade Commission has said keep generic medicines off the market.
- Macau Casino Revenue in June Declines on World Cup. Macau’s casino revenue declined 20 percent in June from the previous month as the World Cup kept some gamblers away from card games and slot machines in the world’s biggest betting hub.
- Hong Kong Stocks Fall, Erase Gain, on U.S., China Economies; Foxconn Drops. Hong Kong stocks fell, dragging the benchmark index to its first weekly drop in six, after Goldman Sachs Group Inc. cut its China economic growth forecast and worse-than-estimated U.S. economic reports fueled concern the global recovery may falter. The Hang Seng Index dropped 1.3 percent to 19,869.57 as of 12 p.m. local time, widening its losses in this holiday- shortened week to 4 percent.
- Why Is The Gulf Cleanup So Slow? There are obvious actions to speed things up, but the government oddly resists taking them. As the oil spill continues and the cleanup lags, we must begin to ask difficult and uncomfortable questions. There does not seem to be much that anyone can do to stop the spill except dig a relief well, not due until August. But the cleanup is a different story. The press and Internet are full of straightforward suggestions for easy ways of improving the cleanup, but the federal government is resisting these remedies.
- Florida Sees New Threat to Its Beaches. Deepwater Drilling Project in Cuban Waters Set to Launch Next Year Could Kick Off a Spate of Exploration in the Region. Florida has long fought to prevent oil drilling anywhere near its white sandy beaches. But as the state continues to deal with oil from the Gulf of Mexico spill washing up on its shores, it faces a new threat: deepwater drilling in nearby Cuban waters. Maria Ritter, a spokeswoman for Spanish oil company Repsol YPF SA, said it plans to drill off Cuba, about 60 miles south of Key West, Fla., early next year. If successful, this would likely kick off a spate of exploration.The U.S. Geological Survey has said there could be a substantial amount of untapped oil off the Cuban coast, whetting the appetite of several global oil companies that have signed exploration leases. U.S. companies won't participate because of a longstanding trade embargo against Cuba.
- The 'Opposite Twins' Clash Over the Future of Europe. Europe's "opposite twins," as Mr. Sarkozy sometimes calls his country and Germany, are on different sides of crucial issues in Europe's debate over its economic future, from how best to encourage growth to how to tackle rising public debts.
- The Obama Tax Trap. How some Republicans are preparing to walk right into it.
- Total Chief: Don't Bar Deep Water Oil. Drilling in deepwater oil fields remains essential in spite of the moratorium in the U.S. Gulf of Mexico following the BP PLC oil spill, said Total SA Chief Executive Christophe de Margerie. Global demand for transportation fuels leaves no choice but to drill in such deepwater fields, he said. Exploration continues in other deep-sea fields around the world, such as the North Sea, off the west coast of Africa and offshore Brazil. "This remains a job that not only is normal but is necessary," he said in an interview with The Wall Street Journal at his Paris office.
- Hedge Fund Stars Start Grooming Successors.
- Andy Grove: How America Can Create Jobs. The former Intel chief says "job-centric" leadership and incentives are needed to expand U.S. domestic employment again.
- Stocks, Like Most of Us, Like Job Growth. Correlation between stocks and jobs at strongest since 1960s. Here's a possible way to reconcile Americans with the stock market: Over the past 10 years, U.S. stocks have increasingly closely tracked the Labor Department's report on weekly jobless claims, rising when claims fall and falling when claims rise. Over at Wells Capital Management, chief investment strategist Jim Paulsen cranked up the firm's database, and the resulting chart does show a striking inverse correlation between jobless claims and stocks.
- It Strives to Offer Mortgage Services From A to Z. Altisource Portfolio Solutions (ASPS) chief William Shepro isn't one to let grass grow under his feet.
- Long-Term IS Budget Outlook: Anyone Still Laughing at Greece? (graph) The updated Long-Term Budget Outlook from the Congressional Budget Office (CBO) is out. What a surprise, the previously optimistic forecasts by the US administration do not appear to come to fruition.
- Google(GOOG) Buys Huge Flight Search Engine ITA For $700 Million.
- CEBM Warns China Exports and Imports to Decelerate in Q3 and Onward. (full report)"As the government has unofficially adopted normalization strategy away from the stimulus we are likely to see property, infrastructure, and manufacturing investments lose steam in the second half. The deceleration of FAI may put downward pressure on China’s imports."
- Some Insights on David Viniar's Grilling by Brooksley Born on the Firm's Double Profit From AIG(AIG).
- Google's(GOOG) Three Pillars of Expansion. At a Google press event this week, the company unveiled ambitious plans for expansion. People often think of Google (GOOG) as a search company. While certainly the biggest search company in the world, it's what Google does with its search technology that makes it the cash-belching behemoth it is.
- House passes unemployment benefits extension. After a failed attempt earlier this week, the House voted to extend the deadline to file for federal jobless benefits Thursday. But the bill will be stuck in limbo as Congress takes a weeklong summer break. The bill would extend the deadline to file for extended unemployment benefits through November, and would retroactively pay out claims to those who saw their benefits expire in May. The legislation, which garnered a 270-153 vote, now moves on to the Senate. That chamber, however, closed up shop Wednesday evening for the summer recess after failing to pass its own version of the bill, which would raise the deficit by $33.3 billion. House Democrats have struggled to get support from Republicans, who oppose the extension because it adds to the nation's $1.4 trillion deficit.
- Fictitious Financial Reform by Brian S. Wesbury and Bob Stein. The upcoming overhaul won't address key problems that caused the crisis.
- Is the Financial Crisis Inquiry Commission Wimping Out on JPMorgan(JPM)? by Charles Gasparino. You would think if you were investigating the root causes of the financial crisis and were ordered to prepare the definitive account of the collapse of Lehman (and the rest of Wall Street), investigating the circumstances behind JP Morgan's collateral call would be high on your list, right? Well not if you're Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, the Congress-mandated body led by the former treasurer of California. The commission has no plans to seek testimony from senior officials at JP Morgan, including its CEO Jamie Dimon, about the now infamous collateral call that sent Lehman into oblivion, and nearly the rest of Wall Street as the markets crumbled during those dark days in the Fall of 2008. People at just about every other firm I know of say JP Morgan was being heavy handed; it didn't need to turn the screws when it did, and only did so because Lehman wasn't just a creditor who owed the bank money, but also a competitor, which vied for business with JP Morgan in the markets. (JP Morgan made a similar collateral call at that time on Merrill, also leading to that firm's forced sale to Bank of America.) It's one of the many downsides of the dissolution of the Glass-Steagall law, which once separated investment banking from commercial banking. Once the financial supermarkets were created, firms like Citigroup and JP Morgan could squeeze competitors like Bear Stearns and Lehman by refusing to lend them money.
- Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).
- We're Looking More Like France. President Barack Obama’s Democrats have set out to alter fundamentally the nature of the U.S. political system. The changes they’ve wrought will not be easily undone. Obama has sought to remake America into a social democracy — like Germany or France — with a larger public sector, expanded entitlements, stronger labor unions and a changed political structure. He’s doing quite well so far. Entitlement expansion. Obamacare has passed and is lurking in our federal and states’ budget futures. When the program is fully operational in 2014, federal spending for health care is expected to rise sharply. Many businesses could drop their coverage and force workers into the public “exchanges” created by the legislation. Millions more could be eligible for federal subsidies. This adds up to millions more advocates for even more generous benefits and higher federal spending. Democratic politicians should be only too happy to oblige. There’s another way we resemble nations of the European Union: high unemployment. Obama’s allies are selling the nonsense that 10 percent unemployment is the best we can do in this economy. It’s the best he can do if he follows European statist policies. Free-market principles, dominant since the Reagan years, kept U.S. unemployment at about half that in Europe for three decades.
- Obama speech fans immigration fight. Republicans greeted President Barack Obama’s call to arms on immigration reform Thursday with a demand of their own: that Obama visit the troubled U.S.-Mexico border and see for himself why it must be secured. It was a strong reaction to the president’s first policy speech on an issue that so far has defied a legislative solution. The conflict showed how unified the GOP has become in opposing any plan it views as amnesty — and how tough it will be for Obama to revive a key administration goal after months of neglect. The speech seemed as much about keeping immigration reform alive — and assuaging immigrant rights groups — as an imminent, presidential push for reform.
- Goldman(GS) Execs Grilled for Taking AIG(AIG) Bailout Money. A Goldman Sachs executive told an inquiry panel Thursday that the firm had no regrets about collecting billions of dollars in taxpayer money for correctly predicting the demise of the U.S. housing market. David Viniar, Goldman's chief financial officer, said Uncle Sam had an obligation to honor American International Group's full debts. The firm was entitled to be paid $12.9 billion out of the $182 billion bailout that went to crippled insurance giant AIG — the largest federal rescue. "The government stepped into AIG's shoes" and therefore had to honor its contract with Goldman, Viniar told the congressionally appointed panel investigating the financial meltdown. The government "paid 100 cents on the dollar for something that was going for 48 cents at the time," said Bill Thomas, the panel's vice chairman and a former California Republican who was chairman of the House Ways and Means Committee. The panel probed Goldman's actions during a second day of hearings examining the firm's relationship with AIG, and how their derivatives trading helped push the country into financial crisis. A previously disclosed 2007 e-mail has Viniar indicating that the firm made more than $50 million in one day on bets that the housing market would founder.
- Ex-Justice Department Lawyer Says Whites' Rights Ignored. Witnesses described an ugly scene: Two members of the New Black Panther Party threatening white voters the day Barack Obama was elected president, flinging insults like "white devil" and "you're about to be ruled by the black man, cracker." The fallout from the case has become even uglier. Most charges against the men were dropped for lack of evidence, the U.S. Justice Department says. Now a former Justice Department lawyer is accusing his ex-superiors of ignoring white voters' rights and creating a systematic "one-way" approach in which only minorities are protected.The claims by J. Christian Adams are the latest installment of a long-running dispute over Justice Department enforcement of the nation's civil rights laws.
- NYC office construction my drop to one-fifth of '09. Construction of new offices in New York City is on pace to fall to one-fifth of last year's level, as developers focus on renovating instead of erecting new towers, a trade report said on Thursday.
- What does the new EU regulation mean for bankers' pay: a Q&A. As European regulators draw up new regulations on bonuses, here's a guide to what they may mean.
- Small Australian Miners Unhappy With New Tax Regime. The federal government's new resources tax regime was hammered out with the big three miners at the expense of others, a lobby for smaller mining companies argues. Association of Mining and Exploration Companies chief Simon Bennison said his group was left out of the negotiations. Small miners would be disadvantaged by the new arrangements announced on Friday, Mr Bennison said. "The government feels the only way it can negotiate through these sorts of situations is with three companies," he told ABC Radio, referring to BHP Billiton, Rio Tinto and Xstrata. "That's an absolute nonsense. "That's not the way to do business. It typifies the way this government responds to small businesses in this country."
- U.N. Discussions on Ship Sinking Stalled: Sources. U.N. Security Council discussions on North Korea's sinking of a South Korean warship are stalled as China still balks at naming the communist neighbor the culprit and refuses even to call the case an attack, sources said Thursday. U.N. diplomats have been negotiating language in a document the Council plans to adopt on the March 26 sinking of the warship Cheonan, which left 46 sailors dead, after South Korea referred the case to the U.N. early last month for a rebuke of Pyongyang.
- The increase in minimum wages in Chinese provinces and cities must be followed by other measures to boost personal incomes as a share of gross domestic product to sustain growth in consumption. Personal incomes as a proportion of GDP have declined during most of the past 30 years and an increase in the minimum wage alone is unlikely to narrow the disparity, the editorial said.
- Foxconn Technology Group will move a "major part" of its production to Hebei province in northern China from the southern city of Shenzhen by the end of this year, citing company spokesman Tong Wenxin.
Citigroup:
- Reiterated Buy on (STZ), target $21.
- Reiterated Buy on (GOOG), target $630.
- Asian equity indices are -1.0% to +.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 141.0 -1.50 basis points.
- Asia Pacific Sovereign CDS Index 140.75 +2.5 basis points.
- S&P 500 futures +.20%.
- NASDAQ 100 futures +.27%.
Earnings of Note
Company/Estimate
- None of note
8:30 am EST
- The Unemployment Rate for June is estimated to rise to 9.8% versus 9.7% in May.
- The Change in Private Payrolls for June is estimated to rise to 110K versus 41K in May.
- The Change in Non-farm Payrolls for June is estimated to fall to -130K versus 431K in May.
- Average Hourly Earnings for June are estimated to rise +.1% versus a +.3% gain in May.
- Factory Orders for May are estimated to fall -.5% versus a +1.2% gain in April.
- None of note
- None of note
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