North American Investment Grade CDS Index 89.91 bps -6.16%
European Financial Sector CDS Index 104.32 bps -9.41%
Western Europe Sovereign Debt CDS Index 122.33 bps +5.61%
Emerging Market CDS Index 219.88 bps -3.33%
2-Year Swap Spread 18.0 +2 bps
TED Spread 18.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .16% +1 bp
Yield Curve 273.0 +1 bp
China Import Iron Ore Spot $172.90/Metric Tonne -2.54%
Citi US Economic Surprise Index +18.30 -.9 point
10-Year TIPS Spread 2.44% +5 bps
Overseas Futures:
Nikkei Futures: Indicating +155 open in Japan
DAX Futures: Indicating +10 open in Germany
Portfolio:
Higher: On gains in my Financial, Medical, Tech, Retail and Biotech long positions
Disclosed Trades: Covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short, added to my (HGSI) long
Market Exposure: Moved to 100% Net Long
BOTTOM LINE: Today's overall market action is very bullish as equities trade near session highs on volume. On the positive side, REIT, Gaming, HMO, Hospital, Biotech and Networking stocks are especially strong, rising 2.5%+. The large decline in most cds indices is a large positive. The 10-year yield is down another 3 bps, despite today's equity rally and rise in inflation expectations. There are massive gains in some individual growth stocks today(FSLR, BIDU, AKAM, ILMN, DNDN, etc.), which should give the bears pause. On the negative side, Education and Oil Service shares are under meaningful pressure, falling 3.2%+. The AAII % Bulls rose to 41.4 this week, while the % Bears fell to 28.6. China spot iron ore prices are under meaningful pressure for the second day in a row and the Shanghai Composite continues to trade poorly, falling another -1.1% last night to a new 52-week low. This index is now down -12.5% YTD. The ongoing rise in the Western Europe Sovereign Debt CDS Index is a large negative. Until European sovereign debt problems intensify further and begin to impacting the main economies in that region in a significantly negative way, investors will likely continue to perceive the situation as a net positive for U.S. equities. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less Greece contagion fear, diminishing economic fear, falling long-term rates and earnings optimism.
Papandreou Makes Austerity Pitch as Unions Slam 'Unjust' Cuts. “We find ourselves before the most savage, unprovoked and unjust attack,” said Prime Minister George Papandreou is starting his sales pitch to the Greek people as unions denounce as “unjust” budget cuts linked to a potential $159 billion European Union bailout.Spyros Papaspyros, head of the ADEDY civil servants union, after meeting Papandreou in Athens today. “The answer will be given in the street.” Greek officials will conclude talks with the EU and the International Monetary Fund in the next days as signs of agreement ended a bond market selloff that cascaded through the euro region this week.
Europe Shouldn't Bail Out 'Rich' Greece, Mobius Says. A default by “rich” Greece on its debt would be the best way to ease the European fiscal crisis and help allay fears of a contagion, Templeton Asset Management Ltd.’s Mark Mobius said. Greece should consider restructuring its debt to pay 25 cents to 50 cents for every dollar owed, cutting its borrowing to a more sustainable level, said Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset. Lending aid to Greece may drag down the European Union as other indebted nations seek a bailout in turn, he said. “A default will help to plug the leak,” Mobius said in an interview with Bloomberg Television in Singapore today. “A bailout at this stage does not make sense to me.”
Euro Sales Extend as Morgan Stanley Mulls EU Breakup. Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as Europe’s worsening fiscal crisis threatens to splinter the 16-nation currency union. Pension funds and banks sold euros this month at the fastest pace since the second half of 2008, when the currency tumbled more than 25 percent against the dollar between mid-July and the end of October, according to Bank of New York Mellon Corp., the world’s biggest custodian of financial assets with $23 trillion. Demand for options giving the right to sell the euro against the dollar versus those allowing for purchases rose yesterday to the highest level since November 2008. “The assumptions that went into the makeup of the euro- zone, and hence the euro, are now being brought into question and revalued,” said Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement System, the largest U.S. public pension, with $202 billion under management. “Central bankers and institutional investors have spent 10 years pricing out the likelihood of a euro-zone break-up, and now they have to price it in again,” said Emma Lawson, a currency strategist in London at Morgan Stanley. “The euro will no longer have this additional support going forward.” “Euro weakness is driven by a broad shift in investor attitudes, a shift which goes well beyond shorter-term foreign- exchange position changes within hedge funds,” Nomura foreign- exchange analysts Jennifer Hau in London and Jens Nordvig in New York wrote in an April 20 report to clients. “The problem with Europe, and people had forgotten about this over the past decade, is that the experiment of monetary union without political union, and without any sort of federalism across the euro-zone, puts them in a very vulnerable spot,” Scott Mather, head of global portfolio management at Pacific Investment Management Co. in Munich, said in a Bloomberg radio interview on April 26. “So when push comes to shove and you have these large imbalances that develop between countries, it is very likely that they go back to the old world of being more nationalistic,” said Mather, whose Newport Beach, California- based firm runs the $220 billion Total Return Fund, the world’s biggest bond fund.
Number of U.S. Jobless Claims Falls to One-Month Low. Fewer Americans filed claims for unemployment benefits last week, a sign the economic rebound is lifting the labor market. Initial jobless claims fell by 11,000 to 448,000 in the week ended April 24, in line with the median forecast of economists surveyed by Bloomberg News and the lowest level in a month, Labor Department figures showed today in Washington. The four-week moving average of initial claims, a less volatile measure than the weekly figures, rose to 462,500 last week from 461,000.
Wall Street Journal:
FDA Approves Dendreon's(DNDN) Prostate Cancer Vaccine Provenge. The Food and Drug Administration Thursday approved a new type of prostate cancer treatment from Dendreon Corp. (DNDN). The therapy, Provenge, is approved for certain men with advanced prostate cancer who've failed treatment with hormone therapy. Provenge is designed to use a patient's own cells to stimulate the body's immune system to fight the cancer. The company's stock was halted for news pending at shortly after 12:30 p.m. EDT, but was trading up 15% to $45.50 at the time after earlier hitting a new high.
Will E.U. Ruling Herald Hedge Fund Exodus?Christopher Fawcett, a member of the hedge fund industry’s largest trade group, told Bloomberg News that a crack down by regulators in Europe has hedge-fund managers across the zone mulling the idea of putting offices in such areas as Hong Kong, Singapore and Switzerland.
NY Post:
Settlement Day. Goldman Sachs(GS) may soon settle its fraud case with the Securities and Exchange Commission, opting to end the legal fight rather than endure a repeat of the public flogging it received Tuesday in Washington, sources familiar with the matter told The Post. After 11 hours of accusations by members of the Senate Subcommittee on Permanent Investigations, people close to the bank said Goldman is mulling closing the SEC fraud-case chapter on the belief the firm's reputation, already damaged, might not endure a street fight with the Wall Street watchdog. "It's almost a certainty that there will be a settlement," said a source. As another person put it, the SEC has an "unlimited supply of ammunition" in the form of e-mails and records that it could release, and Goldman officials would like to avoid having those documents fired back at them the way they were on Tuesday. Meanwhile, according to reports late yesterday, Goldman is in talks over a possible settlement involving a hedge fund investor that claims it went bust after it took a $100 million investment in Timberwolf, an overnight sensation for being dubbed by a senior Goldman exec as a "shi- -y deal." Basis Yield Alpha Fund claims losses of $56 million, reports said, citing sources.
Major Source of Money for Big Banks May Get Exemption From Regs. A major source of revenue for big banks may ultimately be exempt from new regulations under financial reform legislation in Congress. Lawmakers are looking to crack down on the multitrillion-dollar derivatives market that some blame for worsening the financial crisis. But they appear on the verge of handing power to the Treasury Department to decide whether to exempt foreign exchange derivatives from tougher governmental oversight. If approved, the language would be a win for the banking industry, which has argued the foreign exchange derivatives had no role in the financial crisis and therefore should not be subject to new regulations. An earlier version of financial reform legislation in the Senate had more stringent regulations of those derivatives.
Detroit News:
House Republicans Want Investigation of Rattner's Handling of Delphi. Two Republican members of Congress want an investigation into the conduct of former Obama auto czar Steve Rattner. In a letter to the chairman and ranking member of the House Oversight and Government Reform Committee, Reps. Mike Rogers, R-Brighton, and Christopher Lee, R-N.Y., urged the committee to investigate Rattner's conduct. Rattner, who headed the Obama auto task force from February until July 2009, "has been implicated in an alleged 2005 kickback scheme involving New York State pension funds through his role as a co-founder of the Quadrangle Group investment firm." The letter quotes reports as saying Rattner was involved in the "scheme" to steer payments in exchange for a state investment contract. Earlier this month, Quadrangle agreed to pay $12 million to federal and state authorities to settle the matter. Quadrangle issued a statement criticizing Rattner. "We wholly disavow the conduct engaged in by Steve Rattner. ... That conduct was inappropriate, wrong and unethical," the company said. The investigation calls "into question the integrity and objectivity of Mr. Rattner's panel, particularly the decision to allow some Delphi Corp. retirees, including many salaried retirees, to lose their pension benefits through the Pension Benefit Guaranty Corporation while simultaneously protecting the benefits of other Delphi retirees." Dozens of Congress members have sharply criticized the disparate treatment of Delphi's hourly and salaried retirees. Earlier this month, 12 members of the House Oversight Committee sent a letter to General Motors CEO Ed Whitacre Jr. questioning whether the company was being unduly influenced by its government owners -- and cited Delphi as an example.
Project Syndicate:
Why Greece Will Default by Martin Feldstein. Greece will default on its national debt. That default will be due in large part to its membership in the European Monetary Union. If it were not part of the euro system, Greece might not have gotten into its current predicament and, even if it had gotten into its current predicament, it could have avoided the need to default. Greece’s default on its national debt need not mean an explicit refusal to make principal and interest payments when they come due. More likely would be an IMF-organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds. Or it could be a “soft default” in which Greece unilaterally services its existing debt with new debt rather than paying in cash. But, whatever form the default takes, the current owners of Greek debt will get less than the full amount that they are now owed. The only way that Greece could avoid a default would be by cutting its future annual budget deficits to a level that foreign and domestic investors would be willing to finance on a voluntary basis.
L.A. Times:
Al Gore, Tipper Gore Snap up Montecito-Area Villa. The Italian-style home has an ocean view, fountains, six fireplaces, five bedrooms and nine bathrooms. Former Vice President and his wife, Tipper, have added a Montecito-area property to their real estate holdings, reports the Montecito Journal. The couple spent $8,875,000 on an ocean-view villa on 1.5 acres with a swimming pool, spa and fountains, a real estate source familiar with the deal confirms.
Politico:
Poll: Most Americans Think the Stimulus Didn't Help. Nearly two-thirds of Americans do not believe the $787 billion stimulus package the president passed last year has helped create jobs, according to a new Pew Research Center poll. Sixty-two percent of those polled said the stimulus hasn’t contributed to job creation, while 33 percent said the package has. Only a slight majority, 51 percent, of Democrats think the stimulus helped create jobs; 42 percent said it has not. Seventy-nine percent of self-identified Republicans said the stimulus didn’t aid job growth, while 18 percent thought it did. The survey also showed that voters are mixed on whether the Troubled Asset Relief Program was effective in staving off a deeper financial crisis. Forty-nine percent said TARP did not prevent a more severe crisis, compared to 42 percent who said it did.
Democrats Head to New York for Wall Street Dough. While Democrats push Wall Street regulations on the Senate floor, Banking Committee Chairman Chris Dodd (D-Conn.) and Sen. Kirsten Gillibrand (D-N.Y.) will head to Manhattan Monday for a fundraiser with deep-pocketed donors who have ties to the financial industry. According to an invitation obtained by POLITICO, the fundraiser is billed as a “political discussion” for those who want to contribute up to $10,000 for Gillibrand’s reelection campaign and spend Monday evening with the two Democratic senators. The event will be held at the Park Avenue home of Ralph Schlosstein, a former Carter administration official who is the CEO of the investment firm Evercore and used to work at Lehman Bros. Holdings. Schlosstein’s wife Jane Hartley, the event co-host, is seen as a leading New York Democratic donor, has given more than $300,000 to Democratic candidates in recent years, but is not employed in the financial industry. Also attending the event is Roger Altman, a former Clinton administration Treasury Department official and founder of Evercore; Leo Hindery, managing partner of a New York-based private equity fund; David Topper, vice chairman of JPMorgan’s investment banking outfit; Wiltold Balaban, an attorney who has represented Goldman Sachs, JPMorgan and Bank of America; hedge fund investor James Torrey and Richard Beattie, a New York-based attorney who participated in the $58 billion acquisition of Bank One Corp. by JPMorgan. Altman co-hosted a fundraiser for Senate Majority Leader Harry Reid (D-Nev.) Sunday night in New York.
Rheinische Post:
German states led by the Social Democrats, the country's leading opposition party, may oppose legislation on financial support for Greece, citing Kurt Beck, premier of Rhineland-Palatinate. The SPD will refuse to support aid in the upper house of the German parliament if banks aren't involved in the rescue and measures aren't taken to limit currency speculation. Beck said the current proposal doesn't fulfill these criteria.
TVN CNBC Biznes Television:
Poland's government recognizes that it faces a "serious risk" of contagion from Greece's fiscal crisis, Deputy Finance Minister Ludwik Kotecki was quoted as saying.
Asia Risks Overheating, Bubbles on Capital Inflows, IMF Says. Asia’s economic recovery that’s outpacing the rest of the world is attracting capital inflows that may cause the region to overheat and lead to the formation of asset bubbles, the International Monetary Fund said. Expectations of Asian exchange-rate appreciation may be boosting carry trade flows, where investors borrow cheaply in one currency and use the funds to invest in others, the Washington-based lender said in a report today. More flexible currencies and some capital controls can help limit the impact of investment flows, it said.
Junking Greece May Be Beginning of End for Euro: Mark Gilbert. Greece cheated its way into the single-currency club, lied about its deficit for years, and now brings the shame of becoming the first junk-rated member after losing investment-grade status at Standard & Poor’s this week.
Democratic National Committee to Spend $50 Million on Midterms. The Democratic National Committee plans to spend $50 million on November’s midterm elections, Chairman Tim Kaine said today. “We are very committed to holding on to strong majorities” in both the U.S. House and Senate, Kaine told reporters in Washington.
Wall Street Journal:
Apple(AAPL) to Charge a Premium to Put Ads in Mobile Apps.Setting a high bar for its debut in the advertising business, Apple Inc. aims to charge close to $1 million for ads on its mobile devices this year and perhaps even more to be among the first, ad executives say.
Goldman(GS) Shows It Can Still Lobby Hard. Goldman Sachs Group Inc. is lobbying hard to kill a provision in financial industry overhaul legislation requiring big banks to sell off their derivatives-trading businesses, and rival banks are welcoming the help, shrugging off attacks on the firm by lawmakers and securities regulators. Goldman's lobbying could put Democrats and the White House, which is lukewarm on the provision, in a difficult position. With congressional elections looming in November, lawmakers don't want to appear supportive of Goldman or Wall Street. But Goldman's leadership is less concerned about politics than the provision itself, known as "section 106."
The Insurance Mandate in Peril. First Congress said it was a regulation of commerce. Now it's supposed to be a tax. Neither claim will survive Supreme Court scrutiny.
Republican Party Demands Health Cost Probe. House Republicans on Wednesday demanded an investigation into whether the health care overhaul plan would increase national health spending, following a recent report from the Centers for Medicare and Medicaid Services that showed cost increases, at least in the first decade. They asked the Democratic chairmen of four committees to hold hearings before Memorial Day to allow Richard Foster, CMS’s chief actuary, to testify about the analysis. “Throughout the health care debate, the president promised Americans that his policies for reform would bend the health care cost curve down and decrease the deficit. Recent analysis from the administration’s own chief actuary, Richard Foster, suggests otherwise,” Republicans on the Budget Committee said in a letter to Chairman John Spratt (D-S.C.) The report was released by the nonpartisan experts at CMS last week. It found that the overhaul would cover more people than anticipated, but also cost more.
U.S. Deficit Serious, Action Needed - Policymakers. U.S. deficit woes are not as dire as the fiscal problems of Greece and other nations, but a quick, credible action plan is still needed to avoid a future crisis, economists and policymakers said on Wednesday.
Financial Times:
Goldman(GS) Pressed for CDO Loss Settlement. Goldman Sachs is in talks over a potential settlement with an investor that claims that it lost money and went out of business after buying into a $1bn (€760,000) mortgage-backed security that was later privately criticised by a senior executive at the bank. Basis Yield Alpha Fund, a hedge fund, is seeking compensation over its $100m investment in Timberwolf, a complex security, say several people familiar with the matter. Timberwolf plummeted in value months after it was launched in March 2007, at a time when Goldman had already decided to cut its exposure to the housing market. The talks are at a preliminary stage and there is no certainty they will lead to a settlement.
CDO Fees Flow to Ratings Agencies. Credit rating agencies are still being paid millions of dollars a year to report on the performance of collateralised debt obligations that have lost most of their value despite having been issued in many cases with triple A stamps of approval. The fees, known as “ratings surveillance” payments, are paid to the agencies ahead of any payments to investors under the terms of the CDO contracts – and without regard to how accurate the original ratings were.
Telegraph:
Business Leaders Warn Next Government: Either Shrink the State or Risk Economic Ruin. One of Britain's most powerful trade bodies has warned that the winner of the next election must be prepared to reduce the size of the Government immediately or risk economic problems for a decade. The Institute of Directors used its annual conference in London to criticise all of the political parties for failing to produce policies that will adequately tackle Britain's economic problems. Speaking ahead of Thursday's crucial televised debate on the economy, Miles Templeman, director general, said: "We're a week from the General Election but we're still years from bringing the deficit and the size of the Government under control. If the truth be told, no political party is advocating the scale of spending and deficit reduction we need, not just for the next few years, but for the next decade.
EMU Domino Fears as Spain Downgraded, Germany Drags Feet on Rescue. German leaders have agreed in principle to a rescue package of up to €135bn for Greece in emergency talks with EU and IMF officials, but failed to offer any clarity on the conditions for such aid. Hopes for a respite for Southern Europe's battered bond markets were quickly dashed as Standard & Poor’s downgraded Spain. Rainer Brüderle, Germany’s economy minister, said the Greek bail-out would be much larger than first thought, acknowledging that Greece cannot hope to tap the private debt markets for three years. The heads of the European Central Bank and the International Monetary Fund made a joint pilgrimage to Berlin, pleading with lawmakers in the Bundestag to throw their full weight behind rescue efforts before the chain-reaction spreads to Portugal and the rest of the EMU periphery. Their presence as supplicants in Berlin marks the symbolic moment when Germany appears the undisputed master of Europe. Dominique Strauss-Kahn, the IMF’s chief, said the stability of the eurozone itself is in danger. "We need to act swiftly and strongly,” he said. German Chancellor Angela Merkel once again refused to give concrete assurances, leaving the markets as wary as ever over the real intentions of Berlin. "This is about the stability of the euro overall, and we won't avoid this responsibility. But the challenge is for Greece to accept an ambitious program," she said. “Europe risks the biggest coordination failure in modern history,” said David Simmonds, research chief at RBS. The Berlin talks are as vague as ever. “We believe that markets will remain very sceptical.” UBS said it was disturbed by signs of counterparty fears among European banks that replicate events in credit derivatives before the financial crisis in late 2008. “Investors will need to be on their guard,” it said.
Die Welt:
Greece won't be in a position to service its debt, and restructuring the debt would "make sense," Michael Fuchs, the Christian Democratic Union's deputy leader in the German parliament, said in an interview. Fuchs "fears" that Greece will need aid "for years," citing the interview.
Xinhua:
28 Kindergarten Children Stabbed in East China. Twenty-eight children and three adults were injured when a man with a knife attacked them at a kindergarten in east China Thursday. Five of the children are critically ill in hospital after the attack in Taixing City, Jiangsu Province, said city government and police sources.
Evening Recommendations Citigroup:
Upgraded (AKAM) to Buy, target $44.
Reiterated Buy on (S), target $6.
Night Trading
Asian indices are -.50% to +.25% on average.
Asia Ex-Japan Investment Grade CDS Index 104.50 -6.0 basis points.
The Chicago Fed Nat Activity Index for March is estimated to rise to -.20 versus -.64 in February.
Initial Jobless Claims for last week are estimated to fall to 445K versus 456K the prior week.
Continuing Claims are estimated to fall to 4618K versus 4646K prior.
Upcoming Splits
(SHOO) 3-for-2
Other Potential Market Movers
The Barclays Retail and Restaurant Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and financial 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.
