North American Investment Grade CDS Index 127.11 bps +.30%
European Financial Sector CDS Index 165.46 bps -4.37%
Western Europe Sovereign Debt CDS Index 130.83 bps -7.32%
Emerging Market CDS Index 287.54 bps -3.73%
2-Year Swap Spread 37.0 -3 bps
TED Spread 46.0 +1 bp
Economic Gauges:
3-Month T-Bill Yield .08% -1 bp
Yield Curve 254.0 +9 bps
China Import Iron Ore Spot $143.20/Metric Tonne -1.04%
Citi US Economic Surprise Index +3.20 +2.0 points
10-Year TIPS Spread 2.0% +6 bps
Overseas Futures:
Nikkei Futures: Indicating +203 open in Japan
DAX Futures: Indicating -1 open in Germany
Portfolio:
Higher: On gains in my Technology, Medical, Retail 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 very bullish as the S&P 500 trades near session highs on declining sovereign debt angst and less energy sector pessimism. On the positive side, Road&Rail, REIT, Homebuilding, Semi, Steel, Oil Service, Energy, Oil Tanker and Coal stocks are especially strong, rising 4.0%+. Cyclical shares are outperforming. Copper is bouncing another +1.1% today. The Spain sovereign cds is falling -17.15% to 203.38 bps and the Portugal sovereign cds is falling -8.95% to 291.20 bps. On the negative side, Education, HMO, Gold and Restaurant shares are underperforming. The Eurozone Investment Grade CDS Index is rising another +.78% today to 129.37 bps, despite the rise in the euro and global stocks. As well, the TED spread continues to grind to new 52-week highs, which is also a big negative. The Citi(C) CDS is up another +8.0% today to 228.45 bps and is trading at the upper end of the range it has been in since Sept. 2009. Moreover, the GE Capital CDS is rising another +2.2% today to 276.38 bps, which is the highest since August 2009. Some key stocks continue to meaningfully underperform the broad market, which is also a big negative. The UK's defense of (BP) today is helping the entire group, which is a key reason for the market's sharp gain. The most heavily shorted stocks are up the most today. For this rally to gain real upside traction, volume needs to improve with better performance by market leaders, in my opinion. I expect US stocks to trade modestly lower into the close from current levels on more shorting, profit-taking and tax hike worries.
Euro Advances on Speculation Crisis Won't Derail Global Growth. The euro strengthened against the dollar and the yen as stocks climbed on speculation that Europe’s fiscal debt crisis is unlikely to derail global growth, fueling investor appetite for riskier assets. Europe’s common currency also rallied after Germany’s top constitutional court rejected an emergency attempt to block the nation from granting aid guarantees and the European Central Bank’s president said its “temporary” bond purchases will continue. The dollar and yen fell after reports showed economic growth in Asia is accelerating, damping demand for the currencies as a haven.
Soros Says 'We Have Just Entered Act II' of Crisis. Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen. “The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.” Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. “When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.
AT&T(T), Boeing(BA) Buck Anti-Incumbent Trend in Giving to Democrats. While Americans may be eager to vote congressional lawmakers out of office, U.S. companies are pouring money into incumbents’ campaigns. And Democrats are the biggest beneficiaries. Democrats fighting to maintain control of the U.S. House are drawing funds from companies such as AT&T Inc.(T), Boeing Co.(BA) and Honeywell International Inc.(HON) Their corporate political action committees are among the top donors to 31 Democratic incumbents seen by analysts as the most endangered this year, a review of Federal Election Commission records shows. Corporate PACs have given the campaigns of those Democrats 14 times more money than they’ve donated to the Republican challengers in the midterm congressional elections. A Gallup Poll conducted May 24-25 found 60 percent of registered U.S. voters would rather support a House candidate who has never served in Congress, compared with 32 percent who favored a nominee with some congressional experience. Overall, corporate PACs gave $5.2 million to the most vulnerable Democrats, compared with $366,000 to their Republican challengers.
Clive Commodity Fund Loses 6% in May, Worst Decline Since 2008. Clive Capital LLP’s $3.9 billion commodity hedge fund fell 6 percent in May, the biggest drop since July 2008, mostly because of losses in energy and metals. Clive Fund Ltd. declined a cumulative 4.2 percent in the first five months of the year, London-based Clive Capital said in a monthly report to investors.
U.S. Home Seizures Jump 44% to Record as All States Show Rise. U.S. home foreclosures reached a record for the second consecutive month in May, with increases in every state, as lenders stepped up property seizures, according to RealtyTrac Inc. Bank repossessions climbed 44 percent from May 2009 to 93,777, the Irvine, California-based data company said today in a statement. Foreclosure filings, including default and auction notices, rose about 1 percent to 322,920. One out of every 400 U.S. households received a filing. “We’re nowhere near out of the woods,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in a telephone interview. “We’re likely to set a quarterly record for home seizures if June is anything like May.”
Deutsche Bank(DB) CEO Says Stress Tests Could Be 'Very Dangerous'. Deutsche Bank AG Chief Executive Officer Josef Ackermann said publishing stress tests would be “very, very dangerous” if mechanisms to support European banks weren’t in place beforehand. “If we want to disclose the results of stress testing, then we must have backstop facilities in place,” Ackermann, speaking as the chairman of the Institute of International Finance, said at a conference in Vienna today. “Otherwise the uncertainties and instability of the market will increase.”
Immelt, Gates Push to Boost Clean Energy Spending. General Electric Co.’s(GE) Jeffrey Immelt and Microsoft Corp.’s(MSFT) Bill Gates today called for the U.S. government to more than triple its spending on clean energy research and development to $16 billion a year. The executives, part of group that includes Xerox Chief Executive Officer Ursula Burns and venture capitalist John Doerr, are also recommending the creation of a national energy strategy board. The group, outside advisers created by U.S. President Barack Obama to recommend steps to boost the economy, plans to meet with the president in Washington today.
SEC Approves Halts for S&P 500 Stocks That Move 10%. The U.S. Securities and Exchange Commission approved rules that will halt trading in Standard & Poor’s 500 Index stocks during periods of volatility, a response to the May 6 plunge that wiped out $862 billion in 20 minutes.
Wall Street Journal:
U.K. Speaks Out in Defense of BP(BP). British officials offer first public signs of support for company in face of heightened criticism from U.S.
North Korea Rallies Against South. North Korea's state media over the last two weeks stepped up an anti-South Korea campaignafter being accused of sinking a South Korean warship, with reports repeatedly portraying angry citizens vowing to work harder to "get back" at the South. The reports have dominated TV newscasts monitored in Seoul and appeared in newspapers that arrive in South Korea more than a week after publication.
U.S. Faces 'Severe' AIG Losses, Says Panel. A watchdog panel reviewing the bailout of American International Group Inc. said U.S. taxpayers "remain at risk for severe losses" and that the government didn't act aggressively enough to protect U.S. taxpayers during the 2008 rescue. In a lengthy report, the bipartisan Congressional Oversight Panel concluded that the U.S. government, which owns nearly 80% of the insurance giant, is likely to "remain a significant shareholder in AIG through 2012" and it is unclear if taxpayers "will ever be repaid in full."
CNBC:
BofA(BAC) Looking at 'Citigroup-Type of Breakup': Bove. Bank of America is shedding some of its foreign banks and other assets while positioning itself for a "Citigroup-type of breakup," banking analyst Dick Bove said Thursday.
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).
Politico:
Lawmakers Seek to Gut Ethics Office. The Office of Congressional Ethics, a powerful symbol of Democrats’ promise to “drain the swamp” in Washington, is in danger of having its power stripped after the midterm elections. Members of the Congressional Black Caucus have led the charge, airing complaints about the aggressive, independent panel in a private session with House Speaker Nancy Pelosi last month, and they’ve drafted a resolution that, if approved, would severely curtail the panel’s power.
Congressman Says GM is Destroying Documents. General Motors Co. executives are destroying documents, e-mails and other records that could shed light on corporate decisions that have triggered investigations by a U.S. House oversight committee, two top Republicans allege. The accusations were made in a letter Wednesday to GM Chairman and Chief Executive Ed Whitacre, and signed by U.S. Rep. Darrell Issa, R-Calif., and U.S. Rep. Jim Jordan, R-Ohio. The politicians asked GM to stop destroying documents that could provide insight into investigations focused on GM's controversial commercial touting its repayment of $6.7 billion in federal loans, and other moves.
British PM Cameron Pledges Help in BP(BP) Oil Spill. British Prime Minister David Cameron said on Thursday he was ready to help deal with BP Plc's Gulf of Mexico oil spill, speaking out on the crisis while the beleaguered British company's shares took a fresh hit in London but rebounded from a massive slump in New York.
US Speaker Pelosi Urges BP(BP) to Halt Dividend. A top U.S. congressional leader on Thursday urged BP (BP) to suspend its dividend to make sure businesses hit by the Gulf oil spill get compensation, and accused the British energy giant of a "lack of integrity."
Telegraph:
China Faces Wave of Strikes After Foxconn Pay Rise. Fears of growing labour unrest in China deepened on Thursday as a series of strikes were reported around the country after workers at Honda and electronics assembly giant Foxconn won dramatic pay rises last week.
Der Spiegel:
How the United States Became a PR Disaster for Deutsche Bank. Deutsche Bank(DB) is deeply involved in the American real estate crisis. After initially profiting from subprime mortgages, it is now arranging to have many of these homes sold at foreclosure auctions. The damage to the bank's image in the United States is growing.
Frankfurter Allgemeine Zeitung:
German Chancellor Angela Merkel's demand to expel overspending members from the euro region as a measure of last resort is a "political provocation" that's not in line with European Union treaties, Italian Foreign Minister Franco Frattini said. Even proposals to suspend the voting rights of high-deficit euro region member states have no chance of implementation because such a move would require changes to EU treaties, he said. "For a reform there needs to be unanimity, but there won't be any," Frattini said.
Cinco Dias:
Spanish lenders are applying to become members of central counterparty systems such as Eurex and London Clearing House to offset the lack of short term financing in the interbank market, citing an industry official.
El Pais:
Negotiations between Spanish unions and employers over proposed changes to labor legislation ended without agreement early today, citing people in the Labor Ministry it didn't identify.
China Daily:
Home sales in Beijing hit a record low of 428 last week and could fall further, citing real-estate agents and analysts. The average daily volume of home sales fell to under 100 for the fourth week running, citing government data.The government's "stringent" second-home mortgage policy, which went into effect on April 15, and a wait-and-see attitude from buyers are being blamed for the decline.
Trichet Under Pressure Over Bond Purchases as Spreads Widen. European Central Bank President Jean-Claude Trichet is under pressure to explain how far he’s prepared to wade into government bond markets as the ECB’s purchases split policy makers and borrowing costs in some countries continue to climb. Since the ECB announced its bond program on May 10 to restore “normal functioning” on markets, the extra yield that investors demand to hold Spanish and Italian debt has advanced to euro-era highs. Portuguese and Irish yields are also rising. Trichet holds a press conference at 2:30 p.m. in Frankfurt today after a policy meeting at which economists predict the ECB will leave its benchmark rate at a record low of 1 percent. “There are so many questions, and Trichet must answer them convincingly,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages $17 billion. “As investors we need a predictable and credible ECB.” Trichet has so far given no information about how much the ECB plans to spend on government debt or which countries’ bonds the central bank is buying. Critics say the purchases amount to bailing out governments and could fuel inflation, breaching two of the ECB’s founding principles and undermining its credibility. “It will take more confirmation on the ground that some of the austerity programs are starting to bite and fiscal ratios are looking more sustainable” to bring yields down, said Christoph Rieger, co-head of fixed income strategy Commerzbank AG in Frankfurt. “I cannot think of a single event that could help spreads to recover sharply.” “It looks like the ECB’s resolve is waning,” said Juergen Michels, chief euro-area economist at Citigroup Inc in London. “It doesn’t really have the backing of the entire Governing Council.”
Obama Scolding BP(BP) on Dividend Favors Fisherman Over Retirees. Miriam Sullivan may lose about $10,000 a year of her retirement income if BP Plc suspends its dividend because of the Gulf of Mexico oil spill. “It’s a nice amount of money to have coming in,” said Sullivan, the 74-year-old wife of a retired schoolteacher in Haddonfield, New Jersey, and one of the 39 percent of BP shareholders who live in the U.S. “They’re penalizing people that are innocent by cutting the dividend at this point, when they don’t even need to. It seems very political.” “It’s a horrible thing that happened, but how do you decide a fisherman has priority over a grandmother who needs a pension to sustain herself?” said Christine Tiscareno, an analyst at Standard & Poor’s in London. “The company’s not running away from any of its obligations, and if it were up to Tony, they would pay the dividend.” In the U.S., pension funds holding BP shares include the California Public Employees Retirement System, New Jersey Division of Investment and the Texas Teachers Retirement System, Bloomberg data show. U.S. institutions own 25 percent of BP shares, while individual investors in the country hold 14 percent, according to the company’s website. A group of 43 lawmakers led by Peter Welch, a Democrat from Vermont, and Lois Capps, a Democrat from California, this week told Hayward to suspend the dividend to “put progress before profits.” Many pension funds in the U.K. hold stocks in proportion to the FTSE Index and so haven’t sold as 50 billion pounds ($73 billion) was wiped off BP’s market value since the accident, according to the National Association of Pension Funds. BP’s weighting in the index implies that the company accounts for about 1.5 percent of all U.K. pension fund holdings, the NAPF said. “If you’re on a pension, it needs to be stable,” said Gudmund Halle Isfeldt, an analyst at DnB NOR ASA in Oslo. “Tony Hayward wants to deliver. But maybe they’ll pay a lower dividend to get some goodwill from Obama.”
In Case of Euro Crisis, Break Deutsche Mark Glass: Mark Gilbert. Juergen Stark keeps a framed sheet of deutsche marks bearing his signature on his office wall at the European Central Bank in Frankfurt. He should consider adding a sign saying “In Case of Emergency, Break Glass.” The rescue package cobbled together to prevent Greece from defaulting has trashed investor confidence in the common currency project. I hope the Bundesbank, where Stark learned the craft of central banking before joining the ECB’s board, has a locked safe somewhere in the basement containing a blueprint for a euro exit strategy.
Brazil Raises Rate to 10.25% to Slow Economic Growth. Brazilian policy makers raised their benchmark interest rate today for a second straight meeting in a bid to bring inflation back to target amid forecasts the economy will expand this year at the fastest pace in decades. The eight-member board led by President Henrique Meirelles voted unanimously to increase the Selic by 75 basis points to 10.25 percent from 9.50 percent, as expected by 50 of 52 analysts surveyed by Bloomberg. “The central bank focused on signs that the domestic economy is too heated,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said in a phone interview from Sao Paulo. “The bank didn’t hint at any change in its future strategy -- they’ll raise the rate by another 75 basis points next month.” While annual inflation, as measured by the benchmark IPCA index, slowed to 5.22 percent in May from 5.26 percent in April -- the first deceleration in seven months -- the rate remained above 4.5 percent for a fifth straight month. “Policy makers cannot be lenient with inflation,” Zeina Latif, chief economist at ING Bank NV, said in a phone interview from Sao Paulo. “The economy is expanding above potential and the central bank needs to act.”
China's Biggest Risk Remains Europe Crisis, RCM's Chung Says. China’s economy remains vulnerable to Europe’s escalating sovereign-debt crisis and investors should avoid property stocks because the government isn’t done with policy tightening, according to RCM Asia Pacific Ltd. “The biggest risks to China remain external, of a deterioration in Europe,” Christina Chung, senior portfolio manager at RCM, which oversees $146 billion in assets worldwide, said in an interview in Shanghai yesterday. “Valuations look reasonable but are based on earnings assumptions and there’s the risk of downside if the external economy rolls over.” “Unless there is a double dip in the global economy, the government is likely to maintain a tight policy on the property industry,” Chung said. “The correction in property stocks may take a longer time to play out.”
China's Mills Are Resisting Higher Iron Ore Prices. Steel mills in China, the world’s biggest, are resisting efforts by Vale SA, Rio Tinto Group and BHP Billiton Ltd. to raise contract prices after steel dropped and the European debt crisis roiled markets, the China Iron & Steel Association said. “The outlook for the European market is unclear and steel prices may keep falling,” Shan Shanghua, general secretary of the association, said in an interview. “I dare say right now no Chinese steelmakers would accept the third-quarter prices asked.” Chinese steel prices have fallen 10 percent from an 18- month high on April 15, as the government imposed measures to curb speculation in the property market. Demand from makers of cars and appliances have also slowed, according to Baosteel, the nation’s second-largest mill.
Citigroup Says 'Too Early' to Buy China Steelmakers on Output. It’s still “too early to bottom fish” China’s steelmakers as value will emerge only when monthly production drops to March 2009 levels, according to Citigroup Inc. analysts Scarlett Chen and Thomas Wrigglesworth in a report obtained today. The analysts cut their rating on the Hong Kong-traded stock of Angang Steel Co. to “sell” from “hold” and lowered the share-price estimates for Angang, Maanshan Iron & Steel Co. and Baoshan Iron & Steel Co.
Goldman(GS) Sued by Hedge Fund Basis Over Timberwolf CDO. Goldman Sachs Group Inc. was sued for $1 billion by an Australian hedge fund that claimed it was forced into insolvency after buying mortgage-linked securities that the New York-based firm created and one of its executives termed “one shi**y deal.” The lawsuit by Basis Capital’s Basis Yield Alpha Fund was filed today in Manhattan federal court over Goldman Sachs’s sale of the “now notorious Timberwolf collateralized debt obligation,” Basis said in a statement. “Goldman was pressuring investors to take the risk of toxic securities off its books with knowingly false sales pitches,” Eric Lewis, the lawyer for Basis Capital, said in the statement. “Goldman should be called to account.” The U.S. Securities and Exchange Commission sued Goldman Sachs on April 16, alleging fraud tied to a CDO known as Abacus 2007-AC1. Later that month, U.S. Senate lawmakers released internal Goldman Sachs e-mails in which Thomas K. Montag, former head of sales and trading in the Americas at Goldman Sachs, called the Timberwolf Ltd. CDO “one shi**y deal.”
'Vulture' Investors May Shield Prices in Bankruptcy. Distressed-debt investors shouldn’t have to disclose the price or purchase date of their securities when they participate in bankruptcy cases, a U.S. judiciary advisory group said. Hedge funds and other so-called vulture investors that form a group during a bankruptcy won’t be forced to make public details of their debt holdings under a proposed change to the bankruptcy code drafted by an advisory panel of the Administrative Office of the U.S. Courts. The move is a victory for funds that invest in the debt of ailing companies and sometimes seek to take control after a bankruptcy.
Southern Copper(PCU) to Reach Full Copper Production Next Year. Southern Copper Corp., which won control this week over its largest mine in Mexico after a three- year strike, expects to reach full production capacity next year, Chief Executive Officer Oscar Gonzalez Rocha said today. The company plans to invest at least $50 million and will take as many as six months to restart the mine, shut periodically since July 2007, Gonzalez said in an interview on the sidelines of the Bloomberg Peru Economic Summit in Lima. “Police have entered the mine, enabling us to restart our investment plan,” Gonzalez said today. “Next year will be a normal full year for production.”
U.S. Concern Over China Military Growing, Mullen Says. U.S. President Barack Obama’s top military adviser said he has grown “genuinely concerned” over China’s motives for building up its armed forces. Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, said he was worried by China’s “heavy investments” in sea and air capabilities and its rejection of military contacts with the U.S. that had resumed last year, according to the text of a speech he gave to the Asia Society Washington tonight. “A gap as wide as what seems to be forming between China’s stated intent and its military programs leaves me more than curious about the end result,” Mullen said. “Indeed, I have moved from being curious to being genuinely concerned.”
Wall Street Journal:
U.S. Ramps Up Tab on BP(BP). Stock Plunges as White House Insists Company Pay All Idled Oil Workers in Gulf.
Lincoln's Win Juices Overhaul Effort. Sen. Blanche Lincoln's surprising victory in Tuesday's Democratic primary in Arkansas appears to have hardened an anti-Wall Street bent in Congress's financial-overhaul bill. Ms. Lincoln wrote a controversial provision in the bill that could force banks to spin off their lucrative derivatives-trading operations. Bankers and many lawmakers assumed the provision would wither once Ms. Lincoln lost her primary—or even if she won, given the diminished political imperative to look tough on Wall Street. But her victory appeared to have the opposite effect, with Democrats saying her standing is now strengthened, particularly as it appears the populist provision resonated with voters. "We're going to work hard to keep it in," Ms. Lincoln said after leaving a meeting Wednesday in which she was loudly applauded by fellow senators.
Google(GOOG) Asks U.S., EU to Press China.Google Inc.'s top lawyer said Wednesday the company is asking the U.S. and European governments to press China to lift Internet censorship, describing it as an unfair barrier to free trade. David Drummond told reporters that Western countries should defend the free trade in information with the same kind of rules that they use to complain of China's below-cost sale of products.
Goldman(GS) Cuts Euro Forecast to $1.15 on Policy Risk. Goldman Sachs Group Inc. reversed a forecast for the euro to rise, saying it will fall to $1.15 in three months as the probability of “continued policy mishaps” encourages investors to sell the 16-nation currency. “European politics remained a major source of uncertainty,” analysts including Thomas Stolper at Goldman Sachs in London wrote in the note to clients. “The likelihood of continued policy mishaps remains very high in the near term and as a result the euro will likely remain under pressure.”
CNBC:
Obama's BP(BP) Attacks Spark Worries in the UK. UK industry expressed alarm yesterday at the “inappropriate” and increasingly aggressive rhetoric being deployed against BP by Barack Obama, US president, and warned that the attacks on the oil company could damage transatlantic relations.
China Labor Unrest Spreads, Posing Challenge to Beijing. Labor protests that have forced shutdowns at overseas-owned factories in China have spread beyond the country’s southern industrial heartland, posing a dangerous new challenge for Beijing.
U.S. Embraces Model That's Failed Europe. The newspaper headlines say it all. On the one hand, "Crisis Imperils Liberal Benefits Long Expected by Europeans," while in this country: "Private Pay Plummets, Government Handouts Soar." The modern European welfare state has proven unsustainable. From Greece to Britain, from France to Portugal, European countries are slashing social welfare benefits, raising the retirement age and dismantling government bureaucracies. Yet, even as Europe is learning that you can't forever rob Peter in order to pay Paul, the U.S. is racing to transform itself into a copy of the failing European model.
Zero Hedge:
Transatlantic Financial Risk Inverts: European Bank Default Risk Greater Than American For First Time. JPM pointed out yesterday, not only do European banks use more leverage, but the "the larger size of Europe’s banks argue against using simple GDP weights to assess potential risks to global markets. Due to a buyer’s strike over the last month, European banks now have 3.5x as much debt to issue than U.S. banks over the remainder of the year."
CNNMoney:
Congress Keeps Medicare Doctors Waiting. As lawmakers tussle over freezing a 21% cut to doctors' Medicare fees, physicians are stuck waiting for word as to how much they'll be paid -- and when. Officially, a massive cut to the rates that the government pays doctors to treat Medicare patients took effect June 1.
Obama's British Bias. There is not much nationalism in Britain about BP--or at least there wasn't until Barack Obama started chucking his weight around like some bar-brawl drunk, accentuating the Britishness of the (actually multinational) oil company and ranting about its chief executive, Tony Hayward. Once again this president has left the impression that he dislikes us Brits. Forgive us if, increasingly, we wonder if it is time to reciprocate that ill feeling.
Dems May Raid Stimulus Funds to Pay Teachers. Crossing a line they had hoped to avoid, Democrats are now actively discussing budget options that would mean going back into last year’s Recovery Act and redirecting billions in unspent stimulus funds to more pressing needs, such as averting threatened layoffs of public school teachers next fall. No final decision has been made but the strategy was discussed at a meeting Wednesday night of House leaders and Appropriations Committee Chairman David Obey (D-Wis.).
Reuters:
Citi Finds Few Buyers for Unwanted Retail Cards. Citigroup Inc (C) is having trouble finding buyers for its $50 billion portfolio of retailers' credit card loans, and it might end up holding onto the business for years, people familiar with the assets said. Buyers are reluctant to buy credit card assets of any kind now, because regulators are revamping rules for the industry, making profits more difficult to forecast.But the portfolio that Citigroup is selling is particularly difficult to unload, in part because it is big and because these types of cards are prone to higher-than-average losses.
NY Fed Failed to Exhaust AIG Rescue Options - Panel. The New York Federal Reserve under Timothy Geithner failed to exhaust all options to arrange a private-sector rescue of American International Group before launching a taxpayer-funded bailout in 2008, a government watchdog group said on Thursday. A report by the Congressional Oversight Panel said Geithner, now U.S. Treasury Secretary, on Sept. 15, 2008 left the task of finding a private bailout for AIG (AIG.N) to two Wall Street banks, JPMorgan Chase (JPM.N) and Goldman Sachs Group (GS.N). Within hours, the firms had concluded no private sector deal was possible. "The Panel is concerned that the government put the effort to organize a private AIG rescue in the hands of only two banks -- banks with severe conflicts of interest as they would have been among the largest beneficiaries of a taxpayer bailout," the report said. "By failing to bring in other players, the government neglected to use all of its negotiating leverage." The report is the latest salvo in a barrage of criticism of the Fed's and Treasury's handling of the AIG bailout from government auditors and U.S. lawmakers in recent months. The rescue, prompted by billions of dollars in cash calls from credit default swaps that AIG sold during the housing boom, was the costliest of the financial crisis at about $182 billion.
Double-Dip Recession Can't Be Ruled Out: World Bank. The World Bank on Wednesday said a double-dip recession could not be ruled out in some countries if investors lose faith in efforts in Europe and elsewhere to tackle rising debt levels. The World Bank's Global Economic Prospects 2010 report said slower growth in developed economies would deprive developing countries of healthy markets for their goods and would cut into investment.
Short Interest Rises in Late May. Short interest on the New York Stock Exchange rose 0.6 percent in late May, according to the exchange. As of May 28, positions rose to about 13.99 billion shares, compared to a revised 13.91 billion shares as of May 14. This is equivalent to 3.66 percent of the total shares outstanding.
Financial Times:
SEC Probes Second Goldman(GS) Security. The US Securities and Exchange Commission has stepped up its inquiries into a complex mortgage-backed deal by Goldman Sachs that was not part of the civil fraud charges filed against the bank in April, according to people close to the matter. SEC interest in Hudson Mezzanine Funding, a $2bn collaterised debt obligation, comes amid settlement talks with Goldman over accusations that the bank defrauded investors in Abacus, a similar CDO. The inquiry into Hudson Mezzanine is part of a wider investigation into the CDO activities of Wall Street banks. People close to the situation said the probe was preliminary and there was no certainty that it would lead to additional actions against Goldman. The bank created and sold Hudson Mezzanine, which contained residential mortgage-backed securities from its own balance sheet, in late 2006. In an internal e-mail unearthed by the Senate investigation, a Goldman employee said a potential investor in the CDO was "too smart to buy this kind of junk". Goldman went "short" on Hudson Mezzanine, buying protection on the entire value of the CDO, according to internal documents. Less than 18 months later, as the US housing bubble burst, Hudson Mezzanine's credit rating had plunged to junk status, causing losses for investors and enabling Goldman to collect on the insurance. Legal experts said that inquiries into Hudson Mezzanine were likely to focus on whether Goldman provided investors with adequate disclosure. In a marketing document, Goldman stated its interests were "aligned" with investors because it would buy equity in the CDO. In legal disclaimers, Goldman also said it would buy protection on the security, but it did not specify how much.
US Blames Europe as Turkey Opposes Iran Sanctions. The US on Wednesday blamed Europe for alienating Turkey from the west as the country became one of two members of the United Nations Security Council to vote against stepping up sanctions on Iran. Susan Rice, US ambassador to the UN, attacked the “very unfortunate choices” by Turkey and Brazil, the other country to oppose the measures. “They are now the outliers,” she said of the two traditional US allies. “They are standing outside of the rest of the Security Council, outside of the body of the international community.” Russia and China, long doubtful about sanctions, voted in favour after a dogged US campaign for support.
The Chosun Ilbo:
Kim Jong-il's Bloody Purges. North Korean leader Kim Jong-il is apparently conducting another purge of senior officials to cement his hold on power, the latest in a series of such maneuvers since he came to power in the 1990s. Some 100 senior officials were ousted in the latest purge, including Pak Nam-gi, the director of the Workers Party's Planning and Finance Department, who was executed by firing squad over the botched currency reform late last year. That was Kim's fifth massive purge. A South Korean security official said, "Kim Jong-il used to keep tight control over senior officials by taking advantage of their fear of purges, but there seems to have been some unusually strong opposition this time."
The Daily Reckoning:
The Housing Non-Recovery by Whitney Tilson. This is an excerpt from Whitney Tilson's presentation to the Value Investing Congress in Pasadena, California on May 5, 2010. Whitney Tilson is the founder and Managing Partner of T2 Partners LLC and the Tilson Mutual Funds. Two years ago, we stood up here on this exact stage and delivered a very downbeat presentation on the US housing market. We return today to provide an update...and a new forecast.
Evening Recommendations Citigroup:
Reiterated Buy on (CIEN), target $25.
Night Trading
Asian indices are -.50% to +1.0% on average.
Asia Ex-Japan Investment Grade CDS Index 151.0 +3.0 basis points.
The Trade Deficit for April is estimated to widen to -$41.0B versus -$40.4B in March.
Initial Jobless Claims for last week are estimated to fall to 450K versus 453K the prior week.
Continuing Claims are estimated to fall to 4640K versus 4666K prior.
2:00 pm EST
The Monthly Budget Deficit for May is estimated at -$140.0B versus -$189.7B in April.
Upcoming Splits
(DHR) 2-for-1
Other Potential Market Movers
The $13 Billion 30-Year Treasury Bond auction, the Treasury's Geithner speaking, weekly EIA natural gas inventory report, Jefferies Life Sciences Conference, UBS Tech/Services Conference, BMO Capital Ad/Marketing Services Conference, Needham Healthcare Conference, RBC Tech/Media/Communications Conference, (NPO) analyst meeting, (MCO) investor day and the (AHL) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.
North American Investment Grade CDS Index 126.73 bps -3.07%
European Financial Sector CDS Index 175.28 bps -4.24%
Western Europe Sovereign Debt CDS Index 141.17 bps -1.63%
Emerging Market CDS Index 300.91 bps -.44%
2-Year Swap Spread 40.0 -3 bps
TED Spread 45.0 +2 bs
Economic Gauges:
3-Month T-Bill Yield .09% -1 bp
Yield Curve 245.0 +2 bps
China Import Iron Ore Spot $144.70/Metric Tonne -1.30%
Citi US Economic Surprise Index +1.20 -1.4 points
10-Year TIPS Spread 1.94% +1 bp
Overseas Futures:
Nikkei Futures: Indicating +46 open in Japan
DAX Futures: Indicating -46 open in Germany
Portfolio:
Slightly Higher: On gains in my Medical, Retail and Biotech long positions
Disclosed Trades: Added to my (IWM)/(QQQQ) hedges and added to my (EEM) short
Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 reverses morning gains and trades near session lows despite another bounce in the euro and gains in most overseas equity markets. On the positive side, Airline, Construction, Paper and Ag stocks are especially strong, rising 1.0%+. Copper is bouncing another +1.4% today. The Spain sovereign cds is falling -9.4% to 244.65 bps, the Hungary sovereign cds is dropping -9.6% to 345.0 bps and the Portugal sovereign cds is falling -10.9% to 313.35 bps. On the negative side, Education, Homebuilding, Utility, Gold, Energy, Disk Drive, I-Banking, Bank, Semi and Internet shares are falling more than -.5%. Action in the tech sector is a bit worrisome again with several market leaders under meaningful pressure today, which is a large broad market negative. (XLF) has underperformed throughout most of the day. The Eurozone Investment Grade CDS Index is rising another +1.3% today to 132.17 bps, despite the rise in the euro and European stocks. As well, the TED spread continues to grind to new 52-week highs, which is also a big negative. I suspect the oil spill/(BP) issues and US housing worries are the main culprits spurring today's afternoon weakness. MBA weekly home purchase applications fell to the lowest level since the week of December 27th, 1996 this week. I would expect to see overseas markets come under pressure tonight given our reversal lower, which could further pressure US stocks in the morning. I expect US stocks to trade modestly lower into the close from current levels on technical selling, more shorting, rising economic fear, oil spill concerns and tax hike worries.
