Evening Headlines
Bloomberg:
- Economic Recovery Languishes as Americans Wait for Signal of Better Times. In Boulder, Colorado, Michael Englund, chief economist at Action Economics, hears the grumbling on the sidelines at his children’s sports matches. “The whole country’s talking about monetary policy, and it’s pretty hostile,” says Englund. “They’re asking me, ‘Are we still going to have a dollar in five years?’ ”
- U.S. Mortgage Proposal May Lead to 'Rental Entrapment,' MBA's Stevens Says. Minorities and the working class may find it harder to buy homes under a U.S. plan that would require larger down payments to qualify for lower-cost mortgages, according to lenders, consumer groups and lawmakers. Bankers and consumer advocates, often at odds on policy issues, united today to make the case for revising the government proposal and released data that they said shows the rule would deny loans to millions of borrowers while doing little to reduce defaults.
- Kan Pledge Sets Off Succession Maneuvering. Naoto Kan’s pledge to step down as prime minister set off a contest to select Japan’s next leader, adding to the risk of delays in reconstruction and revenue bills needed to restore growth and assuage credit concerns. “This is a new stage of real chaos in Japanese politics, and I don’t see any scenario where things will suddenly get better,” said Koichi Nakano, a political science professor at Sophia University in Tokyo. “Japan is paying a very high price for the instability at the top.”
- Berkshire(BRK/A) Failed to Apply Sokol Standard at RV Unit, Ex-Manager Mart Says. Warren Buffett’s Berkshire Hathaway Inc., which investigated former executive David Sokol and said he violated insider-trading rules, failed to enforce its code of ethics when told of abuses at its recreational-vehicle unit, according to an ex-manager who is suing the company.
- Groupon Files to Raise $750 Million in IPO. Groupon Inc., the top online-coupon provider, filed to raise $750 million in an initial public offering, riding a wave of Web-company share sales and giving investors a chance to bet on the surging daily-deal market. The IPO will be handled by Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and Credit Suisse Group AG (CSGN), according to the filing. Chicago-based Groupon, founded in 2008, will trade under the ticker GRPN.
- Boehner Proposes Libya Resolution Demanding Details on U.S.'s Objectives. House Speaker John Boehner moved to head off a resolution seeking an end to U.S. military involvement in Libya by proposing an alternative demanding that President Barack Obama more fully spell out the mission’s purpose. “The president really does need to step up and help the American people understand why these missions are vital to the national security interests of our country,” Boehner, an Ohio Republican, told reporters today at a news conference in Washington. House Republicans met in private later in the day to discuss several resolutions voicing disapproval of U.S. support for the bombing campaign in Libya by the North Atlantic Treaty Organization to protect rebels and pressure dictator Muammar Qaddafi to step aside.
- China's Boom Threatened by Enron-Style Tricks: William Pesek. Credit downgrades can elicit fascinating reactions. Take a January move by Standard & Poor’s to cut Japan’s rating to the same level as China’s. I expected the backlash to come from Tokyo. Instead, it was the Chinese who were aghast. Every Chinese official I’ve met since is bewildered that 10 percent growth and $3 trillion of currency reserves don’t buy a better grade than the AA- China shares with an overly indebted, aging nation that names a new prime minister every year. Many in China even think their economy deserves a higher score than the U.S., with its AAA rating. These views are as tantalizing as they are wrong. Credit risks are rising before our eyes as China battles a worsening inflation threat, the result of which will be slower growth. The process poses bigger risks to China’s creditworthiness and the world economy than investors may realize. The secret to China’s success? A huge, unreported accumulation of debt. Scattered around China are 20 cities that want international airports, glistening skyscrapers, five-star hotels, six-lane highways, world-class universities and cultural centers, Prada stores, Mercedes-Benz showrooms and ample housing. It is the largest urbanization in modern history. This building boom is taking place quietly, largely beyond the control of Beijing and financed with easy credit and local debt issuance. The surge of loans by banks to local authorities may spark a wave of bank failures that hobbles economic growth. The jump in local debt, which is tough to measure, increases the risk of default around the nation and leaves Beijing with a touchy question: Must it bail out local governments that went too far? Cities and provinces can’t borrow directly from banks, so they set up more than 8,000 investment companies to skirt regulations. Fitch Ratings predicts that, because of lending to these vehicles and to real estate developers, bad loans might reach 30 percent of the total at China’s banks. Expect a huge effort to push liabilities off balance sheets, Enron-style, as bankers scramble to mask the extent of their lending to local governments. It’s these kinds of financial shenanigans that have hedge fund managers like Jim Chanos of New York’s Kynikos Associates LP betting against China.
- Sino-Forest Plunges as Short Seller Block Targets Stock Owned by Paulson. Sino-Forest Corp. (TRE), whose biggest shareholder is hedge fund Paulson & Co., plunged the most since October 2008 in Toronto trading after short seller Carson C. Block said it overstated timberland holdings and production in China’s Yunnan province. Sino-Forest, which is based in Hong Kong and Mississauga, Ontario, dropped as much as 25 percent and was C$3.75 lower at C$14.46 when trading was suspended on the Toronto Stock Exchange yesterday.
- The euro may weaken to $1.30 this year, as increasing demand for options to sell the currency signal that recent gains have been driven by an "irrational" market, according to Mizuho Corporate Bank Ltd. "While the bond market has kept setting off all sorts of warning bells, the foreign-exchange market has been relatively bullish on the euro for the past six months, solely because of higher interest-rate expectations in the euro zone," said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank. "The currency market is irrational, and the risk-reversals suggest that the euro should be corrected."
- Fiat to Pay U.S. $500 Million for Chrysler Stake. Fiat SpA (F) will pay $500 million for the U.S. government’s remaining 6 percent stake in Chrysler Group LLC, ending the Treasury’s involvement in the automaker. The U.S. Treasury said it will receive an additional $60 million as part of a deal for Fiat to acquire the government’s rights to buy a union trust fund’s stake in Chrysler. The Canadian government will get $15 million from that part of the transaction, the Treasury said yesterday in a statement. With the new option to buy all of the Chrysler shares held by the United Auto Workers’ retiree health-care trust, Chief Executive Officer Sergio Marchionne may not need to hold an initial public offering.
- If India and Pakistan Come to Nuclear Blows, Blame U.S.: Mishra. Are India and Pakistan likely to stumble into nuclear war? This appalling possibility has long been kept alive by conflicts between the two historical enemies, but it may have been pushed closer to fulfillment by a catastrophic failure of U.S. foreign policy in South Asia. In recent weeks, a cover story in the Economist on the world’s "most dangerous border" described Pakistan’s rush to militarize its nuclear capacity, and former U.S. Secretary of State Henry Kissinger warned of a pre-World War I, Balkans-like scenario in South Asia that leads to a global conflict. Other developments, which have largely escaped the radar of Western commentators, give deeper cause for foreboding. A day after U.S. Navy seals killed Osama Bin Laden, the Indian army and air chiefs declared that the Indian military was capable of mounting similar operations in Pakistan. Pakistan’s spy chief, Lieutenant General Ahmad Shuja Pasha, responded with the claim that the Pakistani military had already rehearsed retaliatory strikes on India. This isn’t just playground posturing.
- Syrian Violence Tests U.S. Security forces loyal to Syrian leader Bashar al-Assad pressed a sustained assault against protesters Thursday in one of the bloodiest episodes in the so-called Arab Spring, exposing the quandary that President Barack Obama faces in trying to deal with a man he once thought he could convert into an ally. The killing of at least 70 people around the central town of Homs in the past five days, according to activists, brought to an estimated 1,100 the total toll in Mr. Assad's months-long crackdown and sparked tougher condemnation from the Obama administration.
- SEC Probes China Auditors. The Securities and Exchange Commission is investigating some accounting firms over their audits of Chinese companies whose shares trade in the U.S., and the inquiry is expected to lead to enforcement cases, people familiar with the situation said. The SEC has
publicly indicated it was examining accounting and disclosure issues regarding Chinese companies that engaged in "reverse mergers," which allow companies to list on U.S. exchanges without as much regulatory scrutiny as an initial public offering. People familiar with the matter say the investigation also includes auditors, which hadn't previously been known. - Gmail Hack Targeted White House. People who work at the White House were among those targeted by the China-based hackers who broke into Google Inc.'s Gmail accounts, according to one U.S. official. The hackers likely were hoping the officials were conducting administration business on their private emails, according to lawmakers and security experts.
- Probe Deepens of Alleged Inside Trades at FDA. A federal inquiry into insider trading at the Food and Drug Administration, which has focused on an agency chemist who was charged in March, is expanding to look at other government employees, according to people familiar with the matter.
- Former NPR Boss Schiller Hired by NBC. NBC News said Thursday that it had hired Vivian Schiller, who quit as chief executive of NPR in March, to a new role overseeing the news unit's digital strategy.
CNBC:
- PBS Hackers Claim to Breach Sony Pictures. Just days after threatening to undertake an operation that it called "the beginning of the end for Sony," a hacker group claims to have compromised the personal information of over 1 million users of SonyPictures.com.
- Forget The Debt Ceiling, The White House Has A Whole New Problem On Capitol Hill. Moody's brought the debt ceiling back into focus today with its warning on the US credit rating, and Tim Geithner met with House freshmen on the issue. But we hear from a DC source that wasn't what all the buzz is about in Congress. Instead it's Libya. Congressman Mike Turner introduced a one page bill that basically just says: The Congress does not approve of Obama's actions. It's not binding or anything, but it does already have 62 co-sponsors. Where it gets interesting, according to The Hill, is that liberal Progressive Representative Dennis Kucinich actually introduced a measure that would mandate an immediate withdrawal from Libya, and it was going to come to a vote, until the GOP leadership realized it might actually pass, at which point their weight was thrown behind the more symbolic measure from Turner. For what it's worth, the Defense Department even came out with a warning about dire consequences if Libya funding were cut.
- Why The Eurozone is Doomed to Extinction. Unless their economies rapidly start to mend, continuing in the euro will be economic suicide for the PIIGS once the backdoor subsidies stop. In this week's column, Robert Samuelson notes just how dire things are "Already, unemployment is 14.1% in Greece, 14.7% in Ireland, 11.1% in Portugal and 20.7% in Spain. What are the limits of austerity? Steep spending cuts and tax increases do curb budget deficits; but they also create deep recessions, lowering tax revenues and offsetting some of the deficit improvement." Add on top of this the drawbacks of an expensive currency and a tight monetary policy for a troubled economy, and they'd have to be crazy to stay. Maybe they are crazy--now. But clinging to a failed monetary peg causes problems that can drag on for years. Look at Argentina in the 1990s, or the entire developed world during the Great Depression: the longer a country clung to the gold standard, the longer and deeper the economic suffering. I think the chances of the euro zone surviving intact are now less than 50%. They're not 0%. But they do seem to be shrinking every day.
- 5 Things You Need to Realize About China's Gigantic Bailout of Local Governments.
- Discount Window Borrowings Spike to Highest in 2011. (graph) As for the culprit, we have one guess. If proven correct, this would mean that the emergency liquidity provisioning system of the ECB is starting to get a little "problematic" to put it mildly.
- Treasury Continues to Dip Into Retirement Accounts, Prepares to "Take Out" $66 Billion Chunk to Make Room for New Bond Issuance.
- Moody's Leaked Again: Told Nancy Pelosi Will "Probably Not" Downgrade US Weeks Ago; Did Her Multi-Millionaire Investor Husband Know Too?
Reuters:
- US Senate Bill Would Force CFTC to Act on Position Limits. An outspoken U.S. senator who criticized the country's futures regulator for failing to crackdown on energy speculation said on Thursday he will introduce legislation next week that will force the agency to act. Senator Bernie Sanders said the legislation would force the head of the U.S. Commodity Futures Trading Commission to use emergency authority to impose limits on the positions investors can take in crude oil, gasoline and heating oil. The move could occur without support from the majority of the agency's commissioners. The bill also would raise margin requirements in the markets and force big Wall Street houses to live within prescribed limits. "We cannot allow Wall Street speculators to continue to rip off the American people at the gas pump any longer," said Sanders, an Independent from Vermont. The Sanders legislation, which was still being drafted, would increase margin requirements for speculative trading in crude oil and heating oil to 25 percent. In addition, it would end all bona-fide hedging exemptions for bank holding companies including any of their affiliates and subsidiaries, such as Goldman Sachs (GS.N), Morgan Stanley (MS.N), JP Morgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N), and Credit Suisse (CSGN.VX).
- China Under Suspicion in U.S. for Lockheed(LMT) Hacking. Suspicion that some individual or entity in China was behind a recent cyber attack on Lockheed Martin is growing among experts and agencies looking into the incident. "It's unclear at this point precisely who conducted the attacks, but given past history with these sorts of things, there's a strong tendency to look east. The Far East, in fact, and a country that not so long ago hosted the Olympics," said one U.S. official who asked for anonymity, but was reluctant to point the finger at China by name.
- Deferred payment programs offered by some Hong Kong real estate developers to home buyers are a sign that the city's property market has peaked and prices may start dropping soon, citing Chong Tai-leung, executive director of the Institute of Global Economics and Finance, at Chinese University of Hong Kong. Developers are seeking to sell as many apartments as possible while the prices are at their highest, citing Chong.
- The Chinese central bank is expected to rely less on interest rate increases to control monetary policy this year, citing Fan Gang, head of the National Economic Research Institute of the China Reform Foundation.
- Residential land sales in 128 Chinese cities dropped 14% in the first five months of 2011 from a year earlier, citing investment advisor CEMB Group. Residential sales fell 84% in Beijing in the first five months from a year earlier and declined 44% in Shanghai.
- China's central bank may raise interest rates "asymmetrically," according to a commentary published in the China Securities Journal. The monetary authority may also raise banks' reserve requirement ratios this month depending on changes of liquidity in the banking system.
- None of note
- Asian equity indices are -.50% to +.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 109.25 -.25 basis point.
- Asia Pacific Sovereign CDS Index 113.50 +.25 basis point.
- S&P 500 futures -.17%.
- NASDAQ 100 futures -.15%.
Earnings of Note
Company/Estimate
- None of note
8:30 am EST
- The Change in Non-Farm Payrolls for May is estimated at +165K versus +244K in April.
- The Unemployment Rate for May is estimated to fall to 8.9% versus 9.0% in April.
- Average Hourly Earnings for May are estimated to rise +.2% versus a +.1% gain in April.
- ISM Non-Manufacturing for May is estimated to rise to 54.0 versus a reading of 52.8 in April.
- None of note
- The Fed's Tarullo speaking, Fed's Warsh speaking, Fed's Rosengren speaking and the ASCO Meeting could also impact trading today.
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