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.
North American Investment Grade CDS Index 95.81 bps +2.72%
European Financial Sector CDS Index 117.30 bps +3.65%
Western Europe Sovereign Debt CDS Index 115.83 bps +4.83%
Emerging Market CDS Index 229.20 bps -.92%
2-Year Swap Spread 16.0 -7 bps
TED Spread 19.0 unch.
Economic Gauges:
3-Month T-Bill Yield .15% +1 bp
Yield Curve 272.0 unch.
China Import Iron Ore Spot $177.40/Metric Tonne -2.58%
Citi US Economic Surprise Index +19.20 -3.7 points
10-Year TIPS Spread 2.39% +5 bps
Overseas Futures:
Nikkei Futures: Indicating +50 open in Japan
DAX Futures: Indicating +21 open in Germany
Portfolio:
Slightly Higher: On gains in my Financial, Medical and Biotech 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 mildly bullish as equities trade near session highs despite rising eurozone debt concerns. On the positive side, Airline, Homebuilding, HMO and Gold stocks are especially strong, rising 1.5%+. Despite S&P's downgrade of Spain, the Spain sovereign cds is -7.11% lower on the day. Greece and Portugal sovereign cds are also declining for the first time in days. On the negative side, Disk Drive and Restaurant shares are under meaningful pressure, falling 1.25%+. The euro financial sector cds index still bares close monitoring. This index is at the highest level since June 2009. Moreover, it is a big negative to see other major cds indices rising today, despite an equity rally off the lows. Asian indices held up relatively well last night. I don't think the recent pullback is over, however another leg down may not occur until there is better understanding of the resolution to the Greece situation. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, increasing sovereign debt fear, tax hike concerns and more shorting.
Spain's Rating Cut to AA by S&P as Contagion Spreads. Spain had its credit rating cut one step by Standard & Poor’s to AA, putting it on a par with Slovenia, as contagion from Greece’s debt crisis spreads through the euro region. S&P said in a statement today that its outlook on Spain is negative, indicating possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain, which has the euro-region’s third- largest deficit after Ireland and Greece, was last cut by S&P in January 2009. The risk premium investors demand to hold Spanish bonds surged to the highest in more than a year today and the price of insuring Spanish bonds against default reached a record as concerns about Greece’s ability to pay its debt spilled over into Spanish and Portuguese markets. S&P’s move on Spain follows yesterday’s downgrades of Portugal and Greece, which the rating company cut to junk status, the first euro-region country rated less than investment grade since the start of the euro. The extra yield investors demand to hold Spanish debt rather than German equivalents rose to 112.5 basis points today, the highest in more than a year. Spain’s benchmark Ibex-35 stock index fell 3 percent and the euro slipped to a one-year low, trading at 1.3136 at 4:43 p.m. in London. S&P said that the rise in Spain’s borrowing costs and a recession that would likely be prolonged would make it difficult to reduce a deficit that reached 11.2 percent of gross domestic product last year, more than three times the EU limit. “Spain is the 800 pound gorilla in the room,” he wrote in a note. “Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP.”
Greek Collateral Concerns Trigger Surge in Bank Swaps. The cost of insuring against default on European bank bonds surged on concern the global financial system will be hurt by a “domino effect” triggered by downgrades of Greek lenders to junk status. The cuts “will force the Greek banks to post a higher amount of collateral, forcing them into a liquidity trap and that could spread the contagion globally through the financial system -- a domino effect,” London-based analysts at BNP Paribas SA wrote in a note to investors. Greek lenders will face demands to post more collateral on trades with counterparties because of the downgrades to their own bonds, and the nation’s sovereign debt to BB+, by Standard & Poor’s. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers rose as much as 22.5 basis points to 154, the highest in a year, and the gauge now exceeds the benchmark investment-grade company index by about a record 50 basis points, according to JPMorgan Chase & Co. “It’s a double whammy: you’re downgraded, so you have to post more collateral, and the collateral you post gets downgraded, so you have to post more of it,” Mehernosh Engineer, a credit strategist at BNP in London, said in an interview. “If Greek banks can’t post collateral, the counterparty gets in trouble. To resolve this, you have to start selling assets. That puts more pressure on an already weak system.” Swaps on Greek government bonds surged 116.5 basis points to a record 940.5, according to CMA DataVision prices. Contracts on Portugal, also downgraded by S&P yesterday, jumped 20 to 406 and Spain increased 2 basis points to 211, both all-time highs. The sovereign crisis is starting to hurt corporate credit markets. Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 23 basis points to 471, according to JPMorgan, the highest since Feb. 24. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5.5 basis points to 102, JPMorgan prices show, the highest since July.
Fed Pledges to Keep Low Rates for 'Extended Period.' The Federal Reserve restated its intention to keep the benchmark interest rate near zero for an “extended period” and said the labor market is “beginning to improve.” “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Federal Open Market Committee said in a statement today in Washington.
Goldman(GS) Case is Just 'The Beginning' for Banks, Malmgren Says. Goldman Sachs Group Inc.’s Senate grilling may be the start of a series of inquiries into banks in the wake of the global crisis, said Pippa Malmgren, George W. Bush’s former chief financial-markets adviser. “Various U.S. investigators, from the Justice Department to the FBI to the Federal Reserve, bank examiners, have been crawling all over these institutions, not just Goldman but others, for now two years,” she said in an interview today with Bloomberg Television from Singapore. “My guess is that we’re at the beginning of a process of uncovering all these sorts of stories. It’s not the end of it, it’s the beginning of it.”
Wall Street Begins Taking Bets on Pools of Jumbo Mortgage Bonds. Wall Street banks began taking bets on pools of jumbo-mortgage bonds as trading started today on four new credit-default-swaps indexes. The PrimeX indexes, administered by London-based Markit Group Ltd., are similar to the ABX indexes tied to subprime debt that began in early 2006, allowing easier wagers on the subsequent record defaults among homeowners with bad credit. When a plan to create the indexes linked to older prime loans larger than the limits for government-supported Fannie Mae and Freddie Mac was announced in December, Wells Fargo & Co. analyst Glenn Schultz suggested investors consider selling jumbo-mortgage securities because PrimeX trading could drive down their prices, as happened with subprime bonds and the ABX indexes he had called “Frankenstein’s monster.” “In this yield range PrimeX looks like an attractive alternative to both ABX and jumbo cash bonds,” Bank of America Corp. analysts led by Chris Flanagan in New York wrote in an April 26 report. ABX indexes may have contributed to the worst financial crisis since the Great Depression by both highlighting the falling value of subprime debt and weakening banks and bond buyers as speculators drove down the indexes by more than some investors and analysts thought reasonable, constraining credit and harming housing. Analysts such as Schultz said that in 2007 and 2008, more investors wanted to use the indexes to short subprime notes than take the opposite bets because the banks and asset managers already owned enough housing debt, allowing them to tumble.
Iron Ore Prices in China Drop on Government Tightening Concerns. Iron Ore Prices in China, the biggest consumer, dropped in the past week amid concerns government measures on the property market will curb demand. Domestic prices of the steelmaking ingredient in Tangshan, China’s biggest spot market for the material, fell 6.4 percent to 1,310 yuan ($192) a metric ton yesterday from a record 1,400 yuan on April 20, according to data from Beijing Antaike Information Development Co. Benchmark steel prices in China jumped 20 percent this year. Stockpiles of steel products leapt 34 percent to 10.74 million tons by the end of March from the start of the year, as speculators bet that prices of the material will keep increasing, the China Iron & Steel Association said. The rise in steel stockpiles and prices earlier in the year is “fragile and unstable,” the steel association said. “It can’t be sustained.”
Macau Seeks to Limit Foreign Labor Despite Casino Expansion Plans. Macau's government is proposing a new law that would restrict the number of foreign workers on construction projects, potentially derailing ambitious expansion plans by the territory's casino developers. The legislation would require one local construction worker be employed for every foreign worker brought onto a project, a Macau government spokeswoman told Dow Jones Newswires. The restrictions, if enacted, would make it difficult for casino operators to hire the workers they need to complete their projects without severe delays. A shortage of labor in Macau has prompted developers to import many of their construction workers from elsewhere, especially mainland China. Sands China Ltd. (1928.HK), a unit of Las Vegas Sands Corp. (LVS), could be particularly vulnerable to the new legislation. Analysts estimate the company will need upwards of 10,000 workers to complete a massive expansion of its existing operations in Macau's Cotai area, home to the Venetian Macao.
Countrywide And WaMu Loans Keep Eroding at BofA(BAC), JPMorgan(JPM). At J.P. Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC), the leftovers of the financial crisis keep getting moldier. Both banking giants grew during the Great Recession by purchasing crumbling rivals sinking under piles of bad loans. Bank of America purchased Countrywide Financial Corp., the California mortgage king, and grew overnight into the biggest originator of mortgages in the U.S. J.P. Morgan, for its part, scooped up failed Washington Mutual, landing a sprawling retail bank that once aspired to Wal-Mart-style dominance. Now, the risky loans that came with those deals are turning out even worse than the two banks expected. In fact, they're continuing to erode even as other loan books of all types show signs of mending. The rising cost to backstop the risky loans is a blemish on the banks' otherwise encouraging first-quarter earnings.
Business Week:
Euro May Drop to $1.30 on Greece Crisis, Creidt Agricole Says. The euro may slide to $1.30, the lowest in a year amid concerns the sovereign-debt crisis will spread from Greece, according to a unit of Credit Agricole SA. The euro will decline as the region’s economy may “face the risk of slipping into a negative spiral, stemming from austerity measures in Greece and its adverse impact on economic growth,” said Yuji Saito, director of the foreign-exchange department at Credit Agricole Corporate and Investment Bank in Tokyo, in a phone interview. “It also remains to be seen if financial aid for Greece will be implemented swiftly,” Saito said. “Even if such rescue measures are taken, that would then increase the financial burdens of peripheral nations in the region.”
NY Post:
Continental Flight From Houston to DC Diverted After Bomb Threat. A Continental plane from Houston en route to Washington Dulles Airport was diverted to Piedmont Triad International Airport in Greensboro, N.C., Wednesday after reports of a bomb threat on board, WGHP reported.
Colorado Seizes Assets of Hedge-Fund Manager Accused of Ponzi Scheme. Colorado authorities Tuesday seized the assets of a south-Denver-area hedge-fund manager accused of running a Ponzi scheme that may have involved as much as $122 million. The state said that Sean Mueller raised more than $20 million from three investors and that at least 30 more also may have made "substantial investments." Mueller threatened to kill himself Thursday and was found by Greenwood Village police, who took him to a hospital.
Financial Times:
The Greek Tragedy of the Quants. Take a good look at that chart, from BNP Paribas, for it is the stuff that quant models are made of. The tragedy of the quants is to have helped to bring about the second wave of the current crisis and to continue to buy on dips looking also for a squeeze in bearish EURUSD positions. The more we wait, the larger the potential crisis in Europe and the consequent adjustment lower in EURUSD.
Frankfurter Allgemeine Zeitung:
The euro is responsible for Greece's debt crisis because the country gave up the option of devaluation, Czech President Vaclav Klaus was cited as saying. While the euro failed "long ago" in terms of economic growth and stability, politicians will prop it up, Klaus said. "The euro caused this tragedy in Greece," he said.
Economic Information Daily:
China property prices will return to "relatively normal" levels this year, citing Wang Juelin, deputy director of the policy research center at the Minister of Housing and Urban-Rural Development, as saying.
