Fannie Mae Will Deny New Loans to Homeowners Who Walk Away. Fannie Mae, the mortgage guarantor 80 percent owned by the U.S. government, will temporarily deny new loans to borrowers who deliberately default and walk away from their homes. Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement.
Homebuilder Default Swaps Rise as New Sales Fall 33% to Record Low in May. The cost to protect against losses on homebuilder bonds jumped after purchases of U.S. new homes fell in May to the lowest level on record. Credit-default swaps on D.R. Horton Inc. climbed to the highest in 11 months, and contracts on KB Home and Lennar Corp. also rose, according to CMA DataVision prices. Swaps on D.R. Horton increased 14.6 basis points to 264.9 basis points, according to CMA DataVision prices. A close at that level would be the highest since July 22, end-of-day prices show. Contracts tied to KB Home, the Los Angeles-based homebuilder that sells to first-time buyers, surged 35.3 basis points to 502.7. Swaps on Lennar rose 17.4 basis points to 435.4. Pulte Group Inc. contracts climbed 12.1 to 264.8.
Rudd Resigns as Australia Leader, Gillard Takes Post. Julia Gillard will become Australia’s prime minister after Kevin Rudd was dumped by his Labor party following a slump in opinion polls and a clash with the resources industry over a plan to tax its profits. Rudd, who served the shortest term as leader since 1971, stood down amid signs he would be replaced by Welsh-born Gillard, 48, at a party room meeting in Canberra today. Gillard took the leadership and needs to be sworn in by Governor-General Quentin Bryce as the country’s first female prime minister.
BHP(BHP, Rio(RTP) Shares Rise as Gillard Ousts Rudd as Australian Leader. BHP Billiton Ltd. and Rio Tinto Group led gains in Australian mining companies as Julia Gillard undertook to negotiate with them on a proposed profit tax after ousting Kevin Rudd as prime minister. “The market is expecting a change,” Tim Leung, who helps manage about $1.5 billion at IG Investment Ltd. in Hong Kong. “People expect the incoming prime minister to oppose the super profit tax on resources.”
A Missed Opportunity on Financial Reform by Arthur Levitt. How could Fannie Mae and Freddie Mac have escaped Congress's attention? As a lifelong Democrat and public servant to four presidents, I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors. It's not. The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors. Ironically, the authors of this bill are the same Democrats who normally would have opposed many of its features if they were in the minority. Now in the majority, these politicians are investor advocates in their press releases alone. One of many bad ideas that made it into the bill: Public companies will now have a wider loophole to avoid doing internal audits investors can trust. This requirement was the most important pro-investor reform of the last decade, and it worked. Of the 522 U.S. financial restatements in 2009, 374 were at small firms not subject to auditor reviews. But the reform bill about to be passed expands the number of small companies exempt from Sarbanes-Oxley audit requirements. When fraud is happening at a public company, small or large, investors care. Now, thanks to Democratic leadership, investors are less likely to know. There are many missed opportunities in this bill, but these are the biggest:
Merkel Rejects Obama's Call to Spend. German chancellor rebuffs pressure to boost domestic demand, not exports; warns Europe's crisis is far from over. Chancellor Angela Merkel roundly rebuffed U.S. President Barack Obama's call for Germans to aid the global recovery by spending more and relying less on exports, even as she warned that Europe's own financial crisis is far from over. In an interview with The Wall Street Journal in her Berlin chancellery, an unapologetic Ms. Merkel said the nations that share the beleaguered euro have merely bought some time to fix the flaws in their monetary union. She called on the Group of 20 industrial and developing nations meeting in Toronto this weekend to send a signal that tougher financial-market regulation is on its way to dispel the impression that momentum is fading amid resistance by big banks. She took aim at an idea voiced by France, the U.S. and others that Germany could help global producers by spurring its persistently weak consumer demand. The latest call came in a letter last Friday from Mr. Obama to the G-20, in which he asked big exporters—Germany, China and Japan—to rebalance global demand by boosting consumer spending rather than exports. Ms. Merkel countered that Germany's growth and employment are rising—and therefore the world's fourth-largest economy has no reason to rethink its dependence on its powerhouse industrial sector and large trade surplus. "German export successes reflect the high competitiveness and innovation strength of our companies," she said. "Artificially reducing Germany's competitiveness would be of no use to anyone." Continuing to run big deficits could backfire here, she said, because of Germans' angst about their aging society and rising public debt. Fear that the German welfare state will run out of money in the future leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, "then the citizen is more willing to spend money," she said, "because he knows that he can count on the pension, health and elderly-care systems."
Republicans Raise Minority Profile. South Carolina Republicans shattered racial traditions this week by voting to nominate an Indian-American woman for the state's governorship and an African-American for the U.S. Congress—punctuating a year in which the GOP has fielded more non-white candidates nationally than any since the 19th century.
Confidence Waning in Obama, U.S. Outlook. Americans are more pessimistic about the state of the country and less confident in President Barack Obama's leadership than at any point since Mr. Obama entered the White House, according to a new Wall Street Journal/NBC News poll. The survey also shows grave and growing concerns about the Gulf oil spill, with overwhelming majorities of adults favoring stronger regulation of the oil industry and believing that the spill will affect the nation's economy and environment. Sixty-two percent of adults in the survey feel the country is on the wrong track, the highest level since before the 2008 election. Just one-third think the economy will get better over the next year, a 7-point drop from a month ago and the low point of Mr. Obama's tenure. Amid anxiety over the nation's course, support for Mr. Obama and other incumbents is eroding. For the first time, more people disapprove of Mr. Obama's job performance than approve. And 57% of voters would prefer to elect a new person to Congress than re-elect their local representatives, the highest share in 18 years. The results show "a really ugly mood and an unhappy electorate," said Democratic pollster Peter Hart, who conducts the Journal/NBC poll with GOP pollster Bill McInturff. "The voters, I think, are just looking for change, and that means bad news for incumbents and in particular for the Democrats. "Mr. McInturff said voters' feelings, typically set by June in any election year, are being hardened by frustration over the economy and the oil spill. Support for Mr. Obama and his party is declining among centrist, independent voters. But, more ominous for the president, some in his base also are souring, with 17% of Democrats disapproving of Mr. Obama's job performance, the highest level of his presidency. Fewer than half give him positive marks when asked if he is "honest and straightforward.'' And 49% rate him positively when asked if he has "strong leadership qualities,'' down from 70% when Mr. Obama took office and a drop of 8 points since January. Just 40% rate him positively on his "ability to handle a crisis," an 11-point drop since January. Half disapprove of Mr. Obama's handling of the oil spill, including one in four Democrats. "As a Democrat and as a woman, I am disappointed in him," said poll respondent Melissa Riner, a 42-year-old law clerk from Mesa, Ariz. Referring to the oil spill, Ms. Riner added, "I don't think he's handling it. He doesn't seem to be doing anything. He just talks." In the survey, 45% said they wanted to see a Republican-controlled Congress after November, compared to 43% who wanted Democratic control. But even more telling is the excitement gap between the core voters of each party. Just 44% of Obama voters—those who voted for Mr. Obama in 2008 or told pollsters they intended to—now express high interest in the midterm elections. That's a 38-point drop from this stage in the 2008 campaign. By contrast, 71% of voters who supported Republican John McCain in 2008 expressed high interest in this year's elections, slightly higher than their interest level at this stage in that campaign. The gap helps explain why the Democratic National Committee is spending $50 million on a campaign to try to lure Obama voters back to the polls this year.
AIG(AIG) Changes Pay Plan for Its Stars. American International Group Inc. has changed its compensation structure for its most highly paid employees, potentially making their income more secure while the insurance giant tries to repay its bailout. Government-controlled AIG recently implemented a plan to reduce the impact of its volatile share price on the pay of top employees, by basing most of their noncash compensation instead on the price of its debt, which is seen as a more-stable investment. The plan was devised by AIG's management and board and approved by the company's government overseers.
Mexico, US to Negotiate Gulf Cross-Border Oil Treaty. Mexico and the U.S. plan to negotiate an agreement to set rules for the exploitation of cross-border oil fields in the Gulf of Mexico in which each side would have the right to some of the resources, the Mexican Foreign Ministry said Wednesday. "The governments of Mexico and the U.S. today jointly announce their desire to negotiate a treaty to regulate the exploitation of hydrocarbon deposits that cross our common international maritime border," the statement said. No common oil field has been discovered to date where resources cross the maritime border, the statement said, but both sides want to be prepared should that happen. Some Mexican politicians have expressed concern that oil rigs on the U.S. side of the Gulf could suck up crude from the Mexican side in what they call the "drinking straw effect." Prior to the BP oil spill, production on the U.S. side of the Gulf was intensifying in deep waters and Mexico was barely beginning exploration. Some of the U.S.-side production is near Mexican waters. The ministry also said that a moratorium on drilling in the western part of the Gulf of Mexico has been extended from January 2011 to January 2014.
New Fronts Open Up in Smartphone Turf War. iPhone Advances Inside Companies BlackBerry Had. Consumers around the globe will wait on long lines Thursday to get their hands on the newest iPhone, but far from the sidewalk frenzy, Apple Inc.'s smartphone is making inroads with business customers. Companies like Bausch & Lomb Inc. are buying iPhones for their employees, in some cases replacing BlackBerry devices. Earlier this year, the eye-care products company made iPhone the standard issue device for its sales force. Now, about 1,200 salespeople have one.
BP(BP) Relied on Faulty U.S. Data. BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one. The government models, which have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models wrong.
Woman Accused Gore of Sex Misconduct in 2006. A Portland massage therapist accused former Vice President Al Gore of "unwanted sexual contact" at a hotel during an October 2006 visit, but no charges were filed due to lack of evidence, law officials said Wednesday.
CNBC:
Senators Prepare a Citigroup-Sized Hole in Volcker Rule. Senate negotiators are expected to offer changes today to the financial reform bill that would soften the Volcker rule. On Capitol Hill there is widespread speculation that the Senate negotiators will propose language that would allow banks to invest a small amount of their capital in their internal hedge funds or proprietary trading desks. Depending on which percentage the Capitol Hill negotiators agree to, lawmakers may unintentionally be allowing the banks that needed the biggest bailouts during the financial crisis to escape the Volcker Rule. On the other hand, banks that fared better may be forced to spin off parts of their prop trading and hedge fund businesses.
IBD:
Voice Box Maker Gets The Word Out To Those Who Cannot Speak. The Pittsburgh company DynaVox (DVOX) develops software and hardware that voice words for people who suffer from various neuromuscular diseases, have traumatic brain injuries or can't speak for other reasons.
Business Insider:
Barney Frank Tells Hedge Funds To Pay for Next Stimulus and Fund Homeless Job Creation. Looks like Barney Frank is trying to play tough guy after Republicans teased him and infuriated him over fixing Fannie and Freddie. Reuters via Zerohedge is reporting that Barney Frank is telling hedge funds that they're next in line for funding the cost of a bailout, should we have another one. Zerohedge: Just out from Reuters: Barney Frank has introduced the Frank Bank Levy Proposal, which would tax banks with more than $50 billion in assets, and hedge funds with more than $10 billion, and use the money to fund $4 billion for neighborhood assistance and foreclosure help for the jobless with good credit. In other words, big banks and hedge funds will be funding Obama's next stimulus for his core constituency.
Google(GOOG) Wins YouTube Copyright Case Against Viacom. Google just announced that it has won its $1 billion YouTube copyright case with Viacom. Viacom plans on appealing the decision. Here's Google's blog post about it:
Zero Hedge:
Portuguese Bank Borrowings From ECB More Than Double in May, Hit All Time Record. Earlier, we pointed out the abysmal results of the most recent 5 Year Portuguese auction, which came in at a whopping 4.657%, nearly 1% higher than the last such auction from just a month ago, which then closed at 3.7%. Alas, the deteriorating funding environment in Portugal is not a fluke - according to the Bank of Portugal, bank borrowings from the ECB surged in the past month, and doubled from €17.7 billion to €35.8 billion in May.
How High Frequency Trading Quote Stuffing Caused the Market Crash of May 6, And Threatens to Destroy the Entire Market at Any Moment. Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop.
Why Illinois' Bond Rating Is Worse Than it Seems. Based on raw numbers, other states have more serious financial problems than Illinois. Nevada and Michigan, for example, both have unemployment rates close to 15 percent. California has a $19 billion budget deficit. But does any state have a government less serious about solving its financial problems? “We view the failure to enact significant new recurring fiscal measures as a troublesome indicator with respect to Illinois’ governance and management profile,” Moody’s Investors Service wrote when it downgraded Illinois’ bond rating this month. The bond rating dip came after the state refused to do anything about the $13 billion budget deficit. In other words, if Illinois were a corporation, they’d want to see a new CEO and board of directors before buying its stock. All over the U.S., as property values and tax revenues crash, and federal stimulus money disappears, states are beginning to realize they can’t continue supporting their residents in the manner to which they’ve become accustomed. Trenton and Lansing may not be in denial, but Springfield is. Illinois’ expected budget shortfall of $13 billion is 36.1 percent of its budget – the third-highest percentage in the nation, after New Jersey and Nevada, which has seen severe declines in property values. So far, the legislature’s solution has been to hand off the problem to Gov. Quinn, by giving him emergency budget-cutting powers. But instead of cutting the budget, Quinn wants to borrow $3.7 billion to pay the state’s pension obligations. That’s going to put us deeper into the hole, when the interest comes due. The state did raise the retirement age and reduce pension obligations to new employees, but we won’t see the benefits of that for 25 or 30 years. But the governor and the legislature are afraid to do more, because 2010 is an election year. If they don’t do anything, it’ll be the last election year a lot of them have to worry about. This is a bad time to be running any state – but it’s an even worse time to have leaders who refuse to run a state.
Crain's Chicago Business:
Wall Street Reform Bill to Probe White House Role in ShoreBank Bailout. House and Senate negotiators on the Wall Street reform bill agreed Wednesday to investigate whether the White House exerted political pressure to bail out Chicago’s ShoreBank Corp. The White House has denied any involvement in helping the struggling South Side bank, which is widely known for its community-oriented lending policies and close ties to the Obama administration. But Republicans pressed for an investigation after several of Wall Street’s biggest banks — including Goldman Sachs, J. P. Morgan Chase & Co. and Bank of America Corp. — intervened to raise about $150 million in private capital that ShoreBank needs to qualify for another $75 million in help from the federal government’s Troubled Asset Relief Program.
Rasmussen Reports:
42% Oppose Kagan's Confirmation, 35% Favor. Forty-two percent (42%) of U.S. voters now believe Supreme Court nominee Elena Kagan should not be confirmed following the Senate hearings scheduled to begin next week. That's up nine points from the week President Obama announced her nomination and the highest level of opposition to date in Rasmussen Reports tracking of the Kagan nomination. The latest Rasmussen Reports national telephone survey of Likely Voters shows that 35% think Kagan should be confirmed by the U.S. Senate to the Supreme Court. Another 23% are undecided at this point.
USA Today:
Home Buyer Tax Credit Fraud Includes 1,295 Prison Inmates. Despite efforts by the IRS to combat scams, thousands of individuals — including nearly 1,300 prison inmates — have defrauded the government of millions of dollars in home buyer credits, Treasury's inspector general reported Wednesday.
Gulf Seafood Takes Bite Out of Restaurants. As the ruptured BP well spews oil into the Gulf of Mexico, seafood restaurants nationwide are rewriting menus to cope with volatile prices and spot shortages for shrimp, oyster and crab. Some menu items, such as Gulf oysters, may disappear entirely. Other restaurants may import seafood to fill in the holes. Prices for harder-to-find foods may increase, and portions may shrink.
Tamba Bay Online:
GM Seeks Subprime Borrowers. General Motors Co. is looking to boost auto sales by lining up banks and other financial institutions to make loans and lease deals for buyers with poor credit. "We are developing relationships with other financial sources on a selective basis for specialized financing needs, such as leasing and subprime financing," GM spokeswoman Renee Rashid-Merem said Wednesday. The automaker's sales are up about 15 percent through the first five months of the year, but they trail the increase for the overall U.S. industry by more than 2 percent. Crosstown rival Ford Motor Co. has seen its sales rise 30 percent compared with the first five months of last year. Mark Reuss, GM's North American president, said in an interview last month that GM would like to tap into the subprime credit market to help lift sales.
Reuters:
Venezuela to Nationalize US Firm's Oil Rigs. Venezuela will nationalize 11 oil rigs belonging to U.S. company Helmerich and Payne (HP), the latest takeover as socialist President Hugo Chavez struggles with lower oil output and a recession.
Nike(NKE) Profit Matches View, Sees Pressure Ahead. Nike Inc (NKE) on Wednesday said fourth-quarter profit jumped 53 percent to match Wall Street's view, but cautioned that the strong dollar and higher costs for oil, labor and shipping would weigh on profits and sales in the coming year. Shares in Nike slipped 2.4 percent after the largest global player in the athletic shoe and clothing market said fourth-quarter revenue missed analysts goal.
US Lawmakers Renew Drive for China Currency Bill. U.S. lawmakers on Wednesday dismissed China's recent step toward a more flexible currency policy as too little too late and said they would pursue legislation to press Beijing for more significant reform. "Nothing ever changes unless you force China to act," Senator Charles Schumer said at a hearing where lawmakers also urged top Obama officials not to let up pressure on Beijing. The New York Democrat said he other senators who believed China's currency policy gives it an unfair trade advantage were determined to get a Senate vote soon on their bill that would consider the undervalued yuan a subsidized currency. "We are not placated by these public pronouncements. We want action ... The Chinese will keep treating us like they have us on a yo-yo unless we make a serious push for our legislation," Schumer said. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said he also believed China was moving too slowly and planned to dust off a bill he crafted several years ago to give the White House new tools to deal with the issue. The congressional backlash raises the temperature for this weekend's meeting in Toronto between President Barack Obama, Chinese President Hu Jintao and other leaders of the Group of 20 leading developed and developing nations. A common feature of most of the bills is a provision that would require the Commerce Department to treat "undervalued" currencies as a subsidy under U.S. trade law.That would allow U.S. manufacturers to request, on a case-by-case basis, a "countervailing duty" on Chinese goods that benefit from the exchange rate. Many lawmakers insist the Commerce Department already has the authority to take that step, and department officials have been weighing whether to investigate if China's exchange rate can in fact be treated as a subsidy.
Bed Bath & Beyond(BBBY) Q1 Beats Street; Sees Lackluster Q2. Home furnishings retailer Bed Bath & Beyond Inc (BBBY) posted a strong quarterly profit as consumers continued to splurge on their homes, but thecompany forecast weak second-quarter earnings, sending its shares down 7 percent.
Citigroup's(C) Pandit Eyes Basel. Citigroup Inc (C) Chief Executive Vikram Pandit said the biggest U.S. banks are too focused on regulatory reform domestically, and not paying enough attention to pending changes in global capital rules. The Basel rules on banks' capital requirements can impact the institutions and uncertainty about the rules can slow recovery, Pandit said at a panel discussion on Wednesday. "It's time to shift our focus to these Basel-type accords, which can actually have a big dampening effect, particularly in places like Europe," he said. The Basel rules are expected to require banks around the world to hold more capital to protect against future financial crises.
Japan's Export Growth Slows. Japan's annual export growth slowed for a third consecutive month in May in a sign that its overall economic growth could start to slow as the pace of recovery in overseas demand moderates. Exports also fell 1.2 percent from the previous month on a seasonally adjusted basis as signs of weakness in the U.S. economic recovery and steps to curb bank lending and investment in China hampered demand for Japanese goods.
Telegraph:
Soros Tells Germany to Step Up to Its Responsibilities, or Leave EMU. "German policy is becoming a danger that could destroy the European Project. A collapse of the euro cannot be excluded," he told the German weekly Die Zeit. "Unless Germany changes policy, its withdrawal from the currency union would be helpful for the rest of Europe. At the moment Germany is pushing its neighbours into deflation: this threatens a long phase of stagnation, leading to nationalism, social unrest, and zenophobia. It endangers democracy," he said. Mr Soros saw the political effects of wage cuts first-hand during the Great Depression, and narrowly survived the Holocaust as a Jewish boy in Nazi-controlled Budapest. He has since dedicated much of his wealth to philanthropic works promoting freedom and pluralism across the globe, mostly through Open Society institutes. His comments reflect growing alarm in influential circles on both sides of the Atlantic over the 1930s-style policies of wage cuts and debt-deflation being imposed up the Club Med bloc, Ireland, and parts of Eastern Europe by the EU authorities, at the behest of Berlin.
21cbh.com:
China may limit businesses that process or assemble imported materials into products for export, citing trade officials. The businesses, which currently aren't required to pay taxes on imported materials as they are being processed for export, would need to begin doing so as a result of the new rules. The rules would be applied to some products including the six for which the government removed export tax rebates this week.
China Daily:
Local Government Debt Could Trigger Financial Crisis. The nation's chief auditor warned on Wednesday that local government debt will pose risks to the Chinese economy amid concerns that the debt could trigger a European-style financial crisis. The ratio of debt to disposable revenues at some local governments has exceeded 100 percent, with the highest standing at 365 percent. "The scale is large, and the burden is quite heavy," Liu Jiayi, director of the National Audit Office, said while making an annual audit report to the top legislature. Liu came to the conclusion after an audit of the nation's budgets. Debt repayment pressure for some local governments is quite heavy, with the total public debt of 18 audited provinces, 16 cities and 36 counties amounting to 2.79 trillion yuan ($410 billion), he said. Among those debts, 1.75 trillion yuan was accumulated before 2009, while 1.04 trillion yuan is new, accounting for about 37 percent of the total, he said. The local government debt could total between 6 and 11 trillion yuan for the nation as a whole, according to various estimates by researchers. "New government debt must be strictly controlled to prevent financial risk evolving into fiscal risk," he said.
China Securities:
China's state revenue may be insufficient to pay the 2.9 trillion yuan of debt owed by local provincial and city governments. Severn provinces, 10 cities and 14 districts owed debt that exceeded their repayment abilities by more than 100%, citing the country's Auditor General Liu Jiayi.
Shanghai Morning Post:
Three of China Vanke Co.'s Shanghai developments began selling at prices 20% less than the company estimated before the government's tightened real estate policies, citing a person at the Vanke's Shanghai branch.
Evening Recommendations Citigroup:
Reiterated Buy on (BBBY), target $54.
Reiterated Buy on (NKE), target $86.
Night Trading
Asian equity indices are -.25% to +.50% on average.
Asia Ex-Japan Investment Grade CDS Index 130.0 -1.0 basis point.
Asia Pacific Sovereign CDS Index 127.75 +5.0 basis points.
Durable Goods Orders for May are estimated to fall -1.4% versus a +2.9% gain in April.
Durables Ex Transports for May are estimated to rise +1.0% versus a -1.0% decline in April.
Initial Jobless Claims for last week are estimated to fall to 463K versus 472K the prior week.
Continuing Claims are estimated to fall to 4550K versus 4571K prior.
Upcoming Splits
None of note
Other Potential Market Movers
The $30 Billion 7-Year Treasury Notes Auction, weekly natural gas inventory report, Wells Faro Healthcare Conference, Deutsche Bank Industrials Conference and the (ADSK) Analyst Meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.
North American Investment Grade CDS Index 116.56 bps +6.22%
European Financial Sector CDS Index 151.84 bps +12.04%
Western Europe Sovereign Debt CDS Index 124.83 bps -4.71%
Emerging Market CDS Index 254.07 bps +.77%
2-Year Swap Spread 35.0 unch.
TED Spread 42.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .12% +1 bp
Yield Curve 243.0 -6 bps
China Import Iron Ore Spot $143.20/Metric Tonne -.42%
Citi US Economic Surprise Index -20.60 -5.7 points
10-Year TIPS Spread 1.97% -4 bps
Overseas Futures:
Nikkei Futures: Indicating -43 open in Japan
DAX Futures: Indicating +12 open in Germany
Portfolio:
Slightly Lower: On losses in my Technology, Retail and Medical long positions
Disclosed Trades: Covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short
Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is just mildly bearish as the S&P 500 trades slightly lower despite many negatives. On the positive side, Coal, Steel and Homebuilding stocks are especially strong, rising .75%+. The reversal higher in the homebuilders, despite very bad data, is noteworthy. The bounce in the euro, mainly as a result of poor US economic data, is also helping prop up stocks today. On the negative side, Medical, I-Banking, Bank, Software, Energy and Utility shares are especially weak, falling .75%+. It remains a huge negative that Greece sovereign debt angst continues to rise despite Europe's recent actions. The Greece sovereign cds is rising another +8.23% to 947.53 bps, which is very near its record high of 1,031 on May 7th. Moreover, the Portugal sovereign cds is rising +6.23% to 319.51 bps and the Russia sovereign cds is surging +4.7% to 186.83 bps. The Emerging Markets Sovereign CDS Index is rising 9.7% to 239.33 bps. Finally, the European Investment Grade CDS Index is rising +7.07% to 120.50 bps. The 10-year yield is falling too much again, dropping another 6 bps to session lows. I am very surprised at today's equity resilience given the news. The deterioration in Greece, once again, is a huge negative that is currently being mostly ignored by investors as the euro currency bounces on poor US economic data. The market is unlikely to ignore Europe much longer, but the bears seem low on firepower right here and more short-covering could occur in the short-term. I expect US stocks to trade modestly lower into the close from current levels on technical selling, rising US housing worries, increasing sovereign debt angst, tax hike worries, increasing financial sector pessimism and more shorting.
Sales of U.S. New Houses Plunge to Record Low as Credit Ends. Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support. Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down. The median price decreased 9.6 percent from the same month last year, to $200,900, the lowest since December 2003, today’s report showed. Purchases dropped in all four U.S. regions last month, led by a record 53 percent decrease in the West. The supply of homes at the current sales rate jumped to 8.5 months’ worth from 5.8 months in April. The S&P Supercomposite Homebuilder Index, which includes Toll Brothers Inc. and Lennar Corp., has dropped 28 percent through yesterday since reaching a 19-month high on May 3. Builders are also concerned that the Gulf oil spill and European debt crisis are hurting buyer confidence. Toll, the largest U.S. luxury homebuilder, said deposits have been running 20 percent behind the year-earlier period the past three weeks.
Greek, Spanish Yield Spreads Widen on Economic Growth Concern. The extra yield investors demand to hold the bonds of so-called peripheral European nations instead of German bonds increased as signs the economic recovery may be slowing added to the appeal of the safest fixed-income assets. The yield on the benchmark 10-year bund fell to its lowest in a week after a report today showed growth in Europe’s services and manufacturing industries slowed in June. It extended declines after U.S. data showed purchases of new homes slid to a record low. Spanish and Greek bonds fell, widening the yield spread over German notes. The cost of insuring against losses on Greek debt soared to the highest in more than a month. Greek government bonds fell, pushing the yield to more than 10 percent for the first time since May 10, the day the European Central Bank began buying debt securities to support a European Union rescue plan for nations struggling to raise funds. The extra yield investors demand to hold Greek 10-year bonds instead of benchmark German bunds widened to 775 basis points from 711 basis points yesterday. Credit-default swaps tied to Greek sovereign debt surged as much as 91.5 basis points to 941, above the all-time high closing level of 940 on May 6, according to CMA DataVision. Portugal auctioned 943 million euros of bonds due 2015, more than originally planned at an auction today. The securities were sold at an average yield of 4.657 percent, compared with 3.701 percent at an offering in May.
Fed Keeps Rate Pledge, Says Markets 'Less Supportive'. Federal Reserve officials retained a pledge to keep the benchmark interest rate at a record low for an “extended period” and signaled that European indebtedness may harm American growth. “The economic recovery is proceeding” and “the labor market is improving gradually,” the Fed’s Open Market Committee said in a statement in Washington. Still, “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
Lumber Falls to Eight-Month Low on Collapse in U.S. Home Sales. Lumber futures plunged to the lowest price in eight months after a report showed that new-home sales in the U.S. fell at a record pace in May, dimming prospects for building materials. Purchases collapsed an unprecedented 33 percent from April to an annual pace of 300,000 units, the fewest since at least 1963, the U.S. Commerce Department said today. Economists surveyed by Bloomberg News forecast a 410,000 annual pace. Lumber futures have declined as much as 46 percent since April 21, when prices were the highest in almost four years. “Home sales are down 33 percent, so you have an overall economy issue,” said Dewey Strickler, the president of Ag Watch Market Advisors in Nashville, Tennessee. “For grains or any other commodities to rise, you have to have strong consumer demand, and we don’t really have that right now.” Lumber futures for September delivery fell $7.80, or 4.1 percent, to $184.20 per 1,000 board feet at 12:12 p.m. on the Chicago Mercantile Exchange, after reaching $183, the lowest price for a most-active contract since Oct. 9.
IEA Says World Oil Demand Growth to Slow Through 2015. The International Energy Agency, an adviser to oil-consuming nations, said growth in world fuel demand will decline over the next five years as the pace of Chinese consumption slows. The IEA estimates that annual demand growth will shrink every year to average 1 percent in 2015, or 940,000 barrels a day, from 1.9 percent, or 1.62 million barrels a day, in 2010, it said in its Medium-Term Oil and Gas Markets 2010 report today. While Chinese oil demand is expected to reach 11.63 million barrels a day by 2015, from 9.16 million barrels a day this year, the pace of annual growth is slowing, according to the IEA data. Consumption will increase 4.1 percent in 2015, compared with 7.6 percent this year, the data show. The rate of decline in developed economies is accelerating. North American demand will drop 0.6 percent in 2015 compared with a rise of 0.8 percent this year, according to the IEA. Total demand from OECD countries will drop 0.9 percent compared with 0.1 percent in 2010, the agency estimates. The agency estimates that non-OPEC oil supply will average 52.5 million barrels a day in 2015 compared with 51.5 million barrels a day in 2009, six-year growth of 1.9 percent. In last year’s report it estimated that supply would decline 0.4 percent in the six years through 2014.
Commodity Shipping Extends Longest Drop in 14 Months on Surplus. Commodity shipping costs measured by the Baltic Dry Index extended their longest losing streak in 14 months because of an expanding surplus of vessels and declining Chinese imports of iron ore and coal. Growth in China, the world’s biggest consumer of both commodities, will slow to 10.5 percent this quarter and 9.6 percent in the following three months, compared with 11.9 percent in the first quarter, according to the median forecast of 21 economists surveyed by Bloomberg. The nation’s coal and iron-ore imports fell in April and May, customs data show. Shipping lines were counting on expanding demand to bolster business for new vessels joining the fleet. The global fleet of capesizes, which haul 170,000 metric-ton cargoes of iron ore and coal, was at 1,031 at the start of June, up from 950 in January, according to Arctic Securities ASA. That may reach 1,150 by the fourth quarter, Arctic estimates. “There’s been a constant increasing pace of deliveries and China’s iron-ore imports have cooled down,” said Martin Sommerseth Jaer, an analyst at Arctic in Oslo who has followed shipping for six years. “The market is being hit from two sides. You have the supply side which is killing you and you have a break in demand.” The index fell 32 points, or 1.3 percent, to 2,515 points today, according to the Baltic Exchange in London. That’s the 19th consecutive drop, the longest losing streak since April 2009. Daily rates for capesizes declined 4.3 percent to $24,064 a day, the lowest since Sept. 28. Capesize costs may drop to $20,000 by next week, Jaer said. That would be the lowest since April 2009. There were 34 capesizes at anchorage outside major ore and coal berths in China, according to a June 18 report from Truro, England-based Global Ports, which tracks the shipping lines. A month earlier, there were 43 capesizes waiting. The nation’s coal imports slumped 11 percent in April and almost 19 percent in May, customs data show. Imports of iron ore, used to make steel, fell more than 6 percent in both months, the first back-to-back monthly declines since the middle of 2008.
Soros Says Europe's Banks Haven't Been 'Cleansed' Yet. Billionaire investor George Soros said continental European banks haven’t been “properly cleansed” after the credit crisis because they haven’t marked the value of their holdings to market prices. “The current crisis is more a banking crisis than a fiscal one,” Soros, 79, said in remarks prepared for a speech in Berlin today. “Bad assets haven’t been marked to market, but are being held to maturity. When markets started to doubt the creditworthiness of sovereign debt it was really the solvency of the banking system that was brought into question because the banks were loaded with the bonds of the weaker countries and these are now selling below par.”“We cannot judge how serious the situation is until the results are published,” Soros said today. “Indeed we shall not be able to judge even then because the report will deal only with the 25 largest banks and the biggest problems are in the smaller banks, notably the Cajas in Spain and the Landesbanken in Germany.” Recapitalization of the smaller banks including Spain’s savings banks and Germany’s state banks should be “compulsory” because they are “way over-leveraged,” Soros said.
Business Insider:
Goldman(GS): A Drilling Ban Would Destroy Half of Gulf Oil Production by 2015. As horrible as the disaster is, and as noble as the concept of weaning America off of oil consumption may be, it's hard to see how America will be able to drastically change its ways any time soon. Any oil not produced in the gulf will be shipped in from abroad. In addition, one has to imagine that the offshore industry in nearby states would be devastated by 2015 as well.
Barclays(BCS) Slaughters Goldman(GS), Cuts Q2 2010 EPS by 65% to $1.95 from $5.35 Previously, $4.29 Street Consensus. From Barclays: "Financial market conditions have deteriorated notably since 1Q10, evidenced by sharply wider credit spreads, cash-derivative basis, declines in structured finance indices, sharply higher volatility and a "flight-to-safety" trade in less risky assets. We believe this market dislocation, while certainly smaller than the dislocations seen in 2008 and early 2009, has impacted broker-dealer revenue generation in terms of client activity levels, trading revenue and investment banking results.
Dow Jones:
China should be wary about raising the levels of Australian dollars in its currency reserves due to the possibility of lower materials demand as the nation's economy becomes more efficient, a think tank official said. The likelihood of lower demand for iron ore and other resources means the Australian dollar "doesn't really look reliable" as a reserve currency," Zheng Xinli, vice chairman of the China Center for International Economic Exchanges said.
alternet:
A Last-Minute Wall Street Sell-Out By New Dems?A coalition of conservative New Democrats, whose leader is being investigated by a Congressional ethics committee over Wall Street fundraising, has officially come out in favor of gutting financial reform. The issue they’ve targeted: derivatives, the most closely watched effort of the bank overhaul. Good luck in November, guys. New Democrats like to say they are “pro-business,” but what they usually mean is, “willing to funnel federal gifts to bigwig executives.” Their chair is Rep. Joseph Crowley, D-N.Y., currently under investigation by the House Office of Congressional Ethics over a fundraiser he held just days before the final House vote on the Wall Street reform package back in December 2009. Crowley is a favorite of Wall Street CEOs, who has pulled in more than $2.6 million from the finance industry over the course of his Congressional career, over 250 percent more than any other industry. Crowley isn’t the only New Dem close to Wall Street.
Rasmussen Reports:
28% Say U.S. Heading in Right Direction. Twenty-eight percent (28%) of Likely Voters now say the country is heading in the right direction, according to a new Rasmussen Reports national telephone survey taken the week ending June 20. The latest finding is down slightly from last week and is down seven points from the recent high following Congress' passage of the national health care bill in late March, when 35% felt that way.
Tighter Standards Slow Housing Market. Even for successful buyers with sterling credit, seeking a mortgage these days can feel like a simultaneous root canal and colonoscopy. Tighter loan restrictions were expected after the mortgage fiasco. A quarterly Federal Reserve survey of loan officers at large banks confirms they have tightened standards significantly over the past three years, although now some lenders are beginning to loosen up. But as the housing market continues to struggle, with sales of existing homes dropping unexpectedly last month, sales some mortgage brokers say the pendulum of scrutiny has swung too far, causing transactions to take far longer than necessary, putting buyers through too much hassle and blocking qualified applicants from purchasing. The real estate business seems to have switched its motto from “location, location, location” to “documentation, documentation, documentation.” Potential buyers must chronicle every dollar of income and all assets via pay stubs, W-2s, tax returns, bank statements, credit reports and sometimes even letters from employers or family members. Mortgage brokers blame new federal lending rules for injecting unneeded delays in the loan process, and they accuse some underwriters of focusing on their own job security rather than fairly analyzing a consumer’s default risk.
Reuters:
Special Report: Saving Goldman Sachs(GS). * Goldman executives working overtime to protect franchise * Some clients wary of doing business with tarnished firm * Controversy costs Goldman a spot on Booz Allen IPO * Calpers says won't use Goldman as real estate adviser * Charm offensive includes sushi lunches and face time.
Financial Times:
Funds of Hedge Funds. The names, as ever, sound terrific: Momentum AllWeather, Mellon Sanctuary, Principal Absolute Alpha. Yet the aggregate performance of funds of hedge funds (FOFs) has been anything but. While regular hedge funds are down about 2 per cent so far this year, according to Lipper, FOFs – which channel investors’ money to a portfolio of managers – are down more than 6.
Rp.pl:
Poland's sovereign credit ratings may come under "enormous pressure" if the country doesn't take steps to reduce its budget deficit and produce a "genuine" improvement in public finances by 2012, Piotr Kowalski, the chief executive officer of Fitch Ratings Polska, was quoted as saying.
