Monday, September 12, 2011

Today's Headlines

  • Italian Yields Surge as Papandreou Struggles With Greece Default Concern. Italian bond yields surged at an auction today and Greek Prime Minister George Papandreou failed to reassure investors that his country can avert default as the euro region’s debt crisis worsened. Italy sold 12-month bills today to yield 4.153 percent, up from 2.959 percent a month ago as demand fell. The yield on Greece’s two-year note surpassed 60 percent for the first time after the government said it would raise property taxes to meet the 2011 deficit goal in its European Union-led rescue. Papandreou is struggling to convince investors that Europe’s most-indebted country can avoid a default that threatens to roil the euro region. That’s undermining European leaders’ efforts to stop contagion from spreading to Spain and Italy as splits emerge in the German government about how best to handle Greece. “We have got to the stage when markets have lost an enormous amount of faith with the euro project as a whole,” said Marc Ostwald, strategist at Monument Securities Ltd. in London. Papandreou’s pledges to meet the deficit target was undermined by data released today showing the central government’s budget gap widened 22 percent in the first eight months as austerity measures deepened a three-year recession. The government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission.
  • Merkel, Roesler Clash as Prospect of Greek Default Splits German Coalition. German Chancellor Angela Merkel’s government lurched into open conflict over tackling the debt crisis, as Merkel called for Greece to get more time and her coalition allies suggested it may need to default and leave the euro area. The deepening divisions underscore Merkel’s challenge of keeping her three-party coalition united behind bailout aid for Greece as she seeks to prevent a breakup of the euro while prodding Europe toward more joint economic and fiscal policies. A state election in Berlin on Sept. 18, the last of seven this year that have seen the coalition parties punished amid bailout fatigue, further adds to the political pressure. “To stabilize the euro in the short term there can’t be any taboos,” Philipp Roesler, the vice chancellor and economy minister who heads Merkel’s Free Democratic coalition partner, said in an op-ed published in Die Welt newspaper today and e- mailed by his party. “That ultimately includes Greece’s orderly insolvency, if the necessary instruments are available.”
  • Insurance Against Sovereign, Bank Defaults Rises to Record Highs in Europe. The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 17 basis points to 353 at 5:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 14 basis points to 314 and the subordinated index jumped 15 to 550, according to JPMorgan Chase & Co. Swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all-time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week. “The situation in Greece is just the initial problem,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Our economists expect a hard default is likely by year-end. We are focused on the consequences of that for European banks.” Credit-default swaps on Portugal, Greece, Italy and France surged to records, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Portugal jumped 79 basis points to 1,213, Italy rose 40 basis points to 503 and France was up 11 at 189. Swaps on Societe Generale were 53 basis points higher at 443, Credit Agricole increased 41 to 331 and BNP Paribas rose 31 basis points to 306, according to CMA. “It would not be a surprise if Moody’s downgraded Italy and a couple of French banks” this week, Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a note to investors. Swaps on U.K. banks rose to records as plans to strengthen consumer lenders may cost as much as 7 billion pounds ($11 billion) to implement, a government-appointed commission said. Contracts on Barclays Plc’s senior debt climbed 30 basis points to 290, while swaps on Royal Bank of Scotland Group Plc notes increased 26 basis points to 394, CMA prices show. The cost of insuring corporate debt rose to the highest levels in 2 1/2 years, according to JPMorgan. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 6.5 basis points at 198.5 after rising as high as 204. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings climbed 22.5 basis points to 797.5 after earlier touching 811.5, the highest since May 2009.
  • French Banks Tumble on Possible Moody's Cut on Greek Woes. BNP Paribas SA, Societe Generale SA and Credit Agricole SA plunged in Paris on a possible ratings cut by Moody’s Investors Service, extending their more than 40 percent slide in the last three months. Societe Generale fell as much as 13 percent to its intraday lowest level in 19 years. Credit Agricole tumbled almost 14 percent to its lowest on record. BNP Paribas dropped as much as 15 percent to a 2 ½-year low. Credit-default swaps tied to the senior debt of the three banks, reflecting the cost of insuring against default, rose to records, according to CMA. France’s three largest banks by market value may have their credit ratings cut as early as this week because of their Greek holdings, two people with knowledge of the matter said. The country’s lenders top the list of Greek creditors with $56.7 billion in overall exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements. “SocGen’s market value has lost about 20 billion euros over two months, you can’t explain that only with sovereign risks and a potential downgrade from Moody’s,” said Lutz Roehmeyer, who helps manage about $14 billion at Landesbank Berlin Investment GmbH and owns shares in Societe Generale, BNP Paribas and Credit Agricole. “The market is playing broader themes. The fear is liquidity, banking crisis and of course recession.”
  • Europe Stress Seen in French Bank Commercial Paper Rates: Credit Markets. Societe Generale SA, BNP Paribas SA and Credit Agricole SA (ACA) are being quoted higher rates than their competitors in the commercial paper market as the crisis in the euro zone spreads beyond Greece, Portugal and Italy. Investors charged the French companies an average 6.7 basis points more to borrow three-month commercial paper on Sept. 8 than the rate the lenders said they could pay in the London interbank offered rate market, according to two buyers who asked not to be identified because the talks are private. As recently as July, the banks received CP rates that were lower than Libor. Premiums on short-term loans are rising as odds of a default by Greece grows, with German Chancellor Angela Merkel preparing plans to aid her nation’s financial companies.
  • Chinese Property Prices to Decline in Next 12 Months, Lo Says. China’s property prices may fall in the next 12 to 18 months as banks curb loans to real estate companies, which may slow development, Hong Kong billionaire developer Vincent Lo said. The government is pushing banks to hold back lending to property firms as it attempts to cool the housing market, said Lo, chairman of Shui On Land Ltd. (272) The developer received a Chinese bank’s approval for a loan, which was withdrawn as the lender had a policy change, he said in an interview with Bloomberg Television.
  • Crude Oil Rises in New York Trading as Euro Rebounds From a Six-Month Low. Crude oil rose for the first time in three days in New York as the euro rebounded from a six-month low, increasing the appeal of commodities as an alternative investment to the U.S. dollar. Crude advanced after the European currency pared losses after touching the lowest level since Feb. 15 as investors bet that Europe’s debt crisis will limit economic growth. Oil for October delivery gained 96 cents, or 1.1 percent, to $88.20 a barrel at 12:21 p.m. on the New York Mercantile Exchange. Futures ranged from $85 to $88.95. Prices have fallen 3.5 percent this year.
  • Gold Retreats as Some Investors Sell to Cover Losses in Equity Markets. Gold declined in New York as some investors sold the metal to cover losses in equities that dropped on concerns that the European debt crisis is worsening. “The margin clerks will be sharpening their knives today and will take dead aim even upon gold if that is where they think they can find liquidity,” Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said in his daily report. Some investors “will argue that gold will prove valuable and will hold its value even as stock prices plunge, and in the long run they may well be right.” Gold for December delivery fell $35.20, or 1.9 percent, to $1,824.30 an ounce by 12:13 p.m. on the Comex in New York. Immediate-delivery gold was 1.9 percent lower at $1,821.22 in London.
  • Business Economists Cut U.S. Growth Forecast. The U.S. economy will grow less than previously estimated through 2012, reflecting a slump in confidence, limited consumer spending and a struggling housing market, a survey showed. Gross domestic product in the world’s largest economy will expand 1.7 percent this year, less than the May forecast of 2.8 percent, according to results of a survey by the National Association for Business Economics issued today in Washington. Growth in 2012 will average 2.3 percent after a previous projection of 3.2 percent. Some 54 percent of respondents lowered their growth forecasts because they said the legislation stemming from the debt-ceiling debate will fail to reduce the long-term budget deficit. Unemployment projected to stay above 8.5 percent until late next year and Europe’s debt crisis were also among panelists’ top concerns.
  • Broadcom(BRCM) to Buy NetLogic(NETL) for $3.7 Billion in Record Takeover for Company. Broadcom Corp. (BRCM), the maker of communications chips, agreed to buy NetLogic Microsystems Inc. (NETL) for about $3.7 billion in cash to gain processors used in data networks. NetLogic shareholders will get $50 a share, the companies said today in a statement. That’s 57 percent more than Santa Clara, California-based NetLogic’s closing price on Sept. 9.
  • Bank of America(BAC) to Slash 30,000 Jobs Under New Plan. Bank of America Corp. (BAC), the biggest U.S. lender by assets, will eliminate 30,000 jobs in the next few years as part of Chief Executive Officer Brian T. Moynihan’s plan to bolster profit and the company’s stock. The reductions, equal to about 10 percent of the staff, are part of an overhaul that aims to remove about $5 billion in annual costs by the end of 2013.
  • Obama Team Stood by Solyndra as Troubles Mounted. Solyndra LLC’s workers making solar-power panels in a California factory subsidized by U.S. taxpayers showed “the promise of clean energy isn’t just an article of faith,” President Barack Obama said on a visit to the company in May 2010. Two months before Obama’s visit, accounting firm PricewaterhouseCoopers LLP warned that Solyndra, the recipient of $535 million in federal loan guarantees, had financial troubles deep enough to “raise substantial doubt about its ability to continue as a going concern.” The Obama administration stood by Solyndra through the auditor’s warning, the abandonment of a planned initial public offering and a last-ditch refinancing where taxpayers took a back seat to new investors. That unwavering commitment has come under increasing scrutiny since the company’s travails culminated in its filing for bankruptcy protection on Sept. 6 and a raid on its headquarters by the Federal Bureau of Investigation two days later. “People including our government put blinders on and did not want to believe in the obvious,” Jonathan Dorsheimer, an analyst in Boston for Canaccord Genuity Inc. of Vancouver, said in an interview with Bloomberg Government. “The fact that the government chose Solyndra as their white horse is mind- boggling.”
  • 'Only a Matter of Time' Before Greek Default: Bove. Greece is unable to repay its debts, according to Richard Bove, banking analyst at Rochdale Securities, and given that the euro zone banking system has yet to mark sovereign debt holdings to market, many banks will be forced to raise new capital. “Even though it is clear that Greece is unable to repay its debts and its banks are probably insolvent, no European or American bank has, to my knowledge, marked the sovereign debt to market,” Bove said in a research note on Sunday.
  • Hedge Funds See September Cash Infusion. With global equity markets facing turmoil and fixed income yields trading at 60-year lows, investors continue to pour capital into hedge funds, according to new data.
  • Market Swings Are Becoming New Standard.
Business Insider:
Zero Hedge:
The Detroit News:
Ad Age:
  • Ad Spending Grows Again in the Second Quarter - but Growth Slows Again, Too. The growth in U.S. ad spending continued to slow in the second quarter of 2011, increasing 2.8% from the second quarter of 2010, according to a new report from Kantar Media. U.S. ad spending had increased 4.4% in the first quarter, the smallest rate of growth since ad outlays began rising again. "Advertising grew at a slower rate in the second quarter, contributing to speculation about the durability of an advertising recovery that is into its second year," Jon Swallen, senior VP-research at Kantar Media North America, in said a statement accompanying the new numbers.
  • Maersk Line Says Container Sector to Stay Depressed. Conditions in the overall ship container industry will remain depressed in the coming months due to a glut of ships on order, the chief executive of Maersk Line, the world's biggest container shipping company, said on Monday. Prospects for a recovery in the global container shipping industry could be derailed if global economic turmoil spreads and consumer demand in Europe and the United States slides. "Overall the industry is suffering and will probably do so for some months," Maersk Line CEO Eivind Kolding told Reuters on Monday.
USA Today:
  • I am going to be honest with the American people by Rick Perry. The first step to fixing a problem is honestly admitting there is a problem. America's goal must be to fix Social Security by making it more financially sound and sustainable for the long term. But Americans deserve a frank and honest discussion of the dire financial challenges facing the nearly 80-year-old program.
Financial Times:
  • Currency Basis Swaps as a Funding Tool. (graph) Currency basis swaps are all the rage again. SocGen has even referred to the basis swap market as a key means for managing “access to short-term USD liquidity” in its “hard facts” release. Of course, with everyone swapping cheap euros (obtained probably from the ECB) for US dollars in the currency swap market, rates are starting to reflect the one-sided demand. The latest three-month EURUSD currency swap rate was being quoted at about 123 basis points according to Icap (via Reuters) — worryingly within Lehman territory:

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