10-Year AAA CMBS Spread to Treasuries Graph

(click on image to enlarge)

BOTTOM LINE: Yields on commercial-mortgage backed securities are falling substantially relative to Treasuries. The 1-year graph above is a Morgan Stanley index showing the average spread above similar Treasuries for 10-year AAA commercial-mortgage bonds. This spread dropped 27 basis points last week to 254 basis points, which was one of the largest weekly drops on record going back to 1996. Moreover, the spread has plunged 155 basis points from a high of 409 on March 14th. Spreads on AAA credit-default swaps have fallen 177 basis points since they peaked at 277 on March 10, according to Bloomberg. Most investors believed the rise in spreads didn't reflect the credit quality of the underlying loans. The recent declines in spreads reflect more rational sentiment regarding the prospects for the US economy and commercial real estate. While spreads are still high relative to historic norms, this is a significant positive.

Bear Radar

Style Underperformer:

Mid-cap Value -.09%

Sector Underperformers:

Software (-1.04%), Papers (-1.01%) and Construction (-.77%)

Stocks Falling on Unusual Volume:

FSNM, CNA, ACV, MOS, RSH, CG, TNE, MSA and POT

Stocks With Unusual Put Option Activity:

1) RSH 2) CIEN 3) SOHU 4) ADM 5) PDE

Bull Radar

Style Outperformer:

Large-cap Growth (+.35%)

Sector Outperformers:

Foods (+1.45%), Wireless (+1.15%) and Hospitals (+.94%)

Stocks Rising on Unusual Volume:

SOHU, ISYS, SINA, BEAV, LBAI, MNTA, LNCE, AMCN, JRJC, PVTB, AMED, PWRD, GIFI, EURX, MASI, HNSN, NTES, MVSN, ISIS, OMCL, WWY, NMR, IPSU, KWK, FIG, CEO, NOK, STO, JNPR, SQM, OME, CSG, VVI, TAR, HSY, DCO, SYY, NMR, SDA and NTY

Stocks With Unusual Call Option Activity:

1) SOHU 2) AUO 3) SINA 4) AFL 5) ABB

Economic Releases

- None of note

Links of Interest

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Monday Watch

Weekend Headlines
Bloomberg:
- US stock markets, hammered by the subprime mortgage crisis and a slowing domestic economy, may recover this year and post gains of about 10% by mid-2009, a group of money managers and strategists told Barron’s. “When we look back, we’ll probably see the St. Patrick’s Day bailout as the low point,” said Malcolm Polley, chief investment officer of Stewart Capital Advisors.
- US business-jet owners would pay 65% more in fuel taxes to finance federal air-traffic control upgrades, under an agreement among Senate leaders. The levy would increase to 36 cents a gallon from 21.8 cents now, under the accord announced in a statement Friday by Senator Jay Rockefeller, a West Virginia Democrat.
- Barack Obama rejected Hillary Clinton’s challenge to a debate before Democratic presidential primaries in Indiana and North Carolina on May 6, saying he wants to speak directly to voters.
- Asian currencies slumped last week, with the Singapore dollar posting its worst week this year, as speculation the Fed’s interest-rate reductions are nearing an end boosted the allure of the US dollar.
- California Public Employees’ Retirement System Chief Executive Officer Fred Buenrostro may leave amid tensions with the board, becoming the third top executive to depart this year.
- Chinese companies should build factories and buy resources overseas while the yuan is rising, said Fu Ziying, vice minister of commerce.
- Microsoft Corp.(MSFT) CEO Steve Ballmer may start a fight to oust Yahoo!’s(YHOO) board and pave the way for a takeover, after the Internet company let his deadline pass without agreeing to a deal.
- OPEC won’t consider increasing crude output before September, even amid investor concern that record oil prices may cause a global economic recession, according to the group’s president, Chakib Khelil.
- Continental Airlines(CAL) had decided against merging with another airline and to remain independent.
- The cost of protecting Japanese and Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 7 basis points to 73 basis points in Tokyo, according to Morgan Stanley. The benchmark for Australian bond risk declined 5 basis points to 88 basis points, Citigroup said.
- China should raise interest rates by at least 1 percentage point to tame inflation and reduce the risk of a hard landing for the world’s fourth-biggest economy, said Stephen Roach, chairman of Morgan Stanley’s Asia division. “History tells you it’s a dangerous combination to see wages and prices going up at the rate they are going up now with negative real short-term interest rates.”
- European corporate credit quality is sinking at an “alarming” rate as rising oil prices, the possibility of a US recession and the euro’s strength restrain the region’s economy, Moody’s Investors Service said.

Wall Street Journal:
- A rare form of blindness inched closer to a cure, after two groups published preliminary studies on replacing the bad gene that causes the condition. The results are likely to boost the prospects of gene therapy, a technique that shows promise.
- Obama-Clinton: A Dream Ticket for McCain.

MarketWatch.com:
- Amid rising inflation and slowing growth, India’s central bank may stay pat.
- Big-box retailers undaunted by slow economy.
- Rackspace refiles IPO after eight years. Profitable computer services firm Rackspace Inc. plans to trade under the symbol RAX on the NYSE.

CNBC.com:
- With Credit Still Tight, Fed Mulls Ways to Boost Liquidity.
- The Case For Ending Interest Rate Cuts. If the US Fed wants to restrain oil and food prices and help consumers, the best thing it can do is stop cutting interest rates.

NY Times:
- Where Was Citigroup’s(C) Rubin During Credit Crisis?
- Research In Motion(RIMM), maker of the BlackBerry e-mail phone, may be developing a touch-screen version of the device in a bid to compete with Apple Inc.’s(AAPL) iPhone, citing analysts. BlackBerry’s US market share fell to 40% at the end of 2007 from 45% a year earlier as the iPhone took a 17.4% share in its first six months.
- Google(GOOG) researchers say they have a software technology intended to do for digital images on the Web what the company’s original PageRank software did for searches of Web pages.

IBD:
- Excluding financials, S&P 500 profits should rise 8.6% in Q1.

Financial Week:
- Subprime-related lawsuits clogging up courts. Cases mounting quickly, may eventually surpass number of suits filed in S&L scandal; on average, two suits filed every day.

San Francisco Chronicle:
- As ARMs reset, little of the expected chaos is coming to fruition. You’re not hearing much about this ARM reset problem today because it has been ameliorated by the Fed’s steep interest rate cuts and credit-market lubrication. Many homeowners facing ARM resets today will find that their interest rates – instead of skyrocketing as predicted – won’t change a lot. “If they go up, it won’t be much. Some might even be lower,” says Steve Cochrane, senior managing director at Moody’s Economy.com.

LA Times:
- The great mortgage reset of 2008 isn’t turning out quite as advertised. Thanks to interest rate cuts by the Fed, payments on sub-prime loans with expiring “teaser” rates are going up only modestly when the loans start adjusting – by just 1% on average last month, one study found.

clarionledger.com:
- The current housing market does offer opportunities, particularly for first-time homebuyers looking for relatively inexpensive starter houses, experts say.

Santa Cruz Sentinel:
- The race is on to put more electric cars on the road.

Washington Post:
- The protracted and increasingly acrimonious fight for the Democratic presidential nomination is unnerving core constituencies – African Americans and wealthy liberals – who are becoming convinced that the party could suffer irreversible harm if Senator Hillary Rodham Clinton maintains her sharp line of attack against Senator Barack Obama.

Business Week:
- A Clearer Picture for Flat-Panel TVs. Sound legend Dolby(DLB) and rival THX are offering new ways to bring those images into much sharper focus.
- REITs Show Strength. S&P has buy or strong buy recommendations on 17 names in the industry.
- Security Software to Hit $10.5 Billion.

VentureBeat:
- Roundup: The “biodiesel miracle,” bargain-priced “green” gasoline and a sweet new biofuel source. UMass researchers develop cheaper, “green” gasoline – No, that’s not a typo: A team of researchers at UMass has developed a new process to refine hydrocarbons from cellulose. This “green” petroleum can be produced from a variety of biomass sources, including feed stocks, wood scraps and corn husks, and, because it’s made of hydrocarbons, can be pumped directly into existing car engines. One the process hits a 100% yield – it’s at 50% now – it could eventually drop the price of gasoline to around $1 per gallon.

USA Today:
- Mini Cooper Clubman makes a huge impression. You’ve got a car popular largely because it’s small, so you make it bigger. Disaster? Delight.
- Bush: Tax rebate checks are on the way.

EE Times:
- Market research firm iSuppli suggests the worst may be over for suppliers of DRAMs and has upgraded its rating on the devices to “neutral” from the “negative” rating of November 2007.

CNNMoney.com:
- These 33 companies made both the Fortune 1000 and Best Companies to Work For lists this year.
- Why the worst may be over. The credit crunch may be behind us and earnings have been better than expected. That could lead to happier times if the Fed starts focusing on inflation.

Reuters:
- Markit Group Ltd. plans to start an index next month that allows investors to make bets in the $429 billion market for municipal bonds. The MCDX is expected to begin trading on May 6 and will be tied to the debt of 50 municipal issuers.
- Fed likely to cut US rates, could signal pause.
- Strike closes major British oil pipeline.

Financial Times:
- Hedge funds and investment banks are swapping their Gucci for gumboots as they bet on rising food prices by buying farms. Billions of dollars are flowing into farmland across the world as investors gorge themselves on vast tracts of Australia, South America and eastern Europe.
- Is this the beginning of the end of the credit crisis? Both investment-grade and riskier high-yield corporate credit have rallied forcefully this month. The supply of new issues has also picked up, as companies have tempted investors back with attractive yields. Banks such as Citigroup(C) and Deutsche Bank have negotiated multi-billion dollar sales of leveraged loans to private equity groups, meaningfully reducing the overhang of such debt on their balance sheets. Dozens of asset managers have established funds to invest in distressed asset-backed securities, collateralized debt obligations and other structured credit instruments. But hedge funds rely on using borrowed money to amplify their returns. And therein lies the rub.
- IEA warns against retreat on biofuels. Biofuel production is critical to meeting current and future fuel demand, the west’s energy watchdog has warned. Biofuels already make up about 50% of the extra fuel coming to the market from sources outside the OPEC’s oil cartel this year. William Ramsey, deputy executive director at the IEA, said: “If we didn’t have those barrels, I am not sure where we would be getting those half a million barrels from,” adding that OPEC has said it would not raise supply. The UN’s Food and Agriculture Organization says biofuels are not a major cause of food inflation. The FAO estimates biofuels account for 10% of the food price spike.
- Investors pull out of mutual funds. All but one of the 25 largest US mutual fund managers saw their long-term assets fall in the first quarter. In the worst start to a year for more than a decade, most money managers had retail outflows.
- Oil majors rebuked for lack of openness. Most leading oil multinationals fall well short of best practices on revealing financial data and combating corruption, a survey by Transparency International, the anti-graft group, claims.
- Russia may invest as much as $25 billion from its national wealth fund in overseas equities and corporate bonds starting next year.
- Hedge fund managers in danger of missing out on lucrative performance fees routinely raise their exposure to risk in a gamble to meet their performance targets, according to new research.

TimesOnline:
- It’s a myth that the world’s oil is running out. The oil is there, but with current production yielding about $120 a barrel, there is no incentive to find more, especially since new production might drive down prices as demand from the slowing American economy falls.
- Hopes that falling American residential property prices may soon start to bottom out were raised yesterday after one Wall Street fund that specializes in buying distressed real estate revealed plans to start spending its $1 billion investment portfolio in the next three to six months. Weis Group, a NY-based fund, said that it was in talks with a handful of America’s biggest banks to acquire residential property that has been seized by lenders and is languishing on their books.

The Independent:
- The tendency of rules, regulations, peer group pressure and received wisdoms that reinforce bubbles interests me. We saw it in the dotcom bubble, the credit boom of recent years and now all over again in commodity prices, which are being driven to what everyone instinctively knows are unsustainably high levels. How do apparently sane investors and money managers allow themselves to get drawn in?

Le Figaro:
- The French are flocking to buy real estate in US cities, particularly in NYC and Miami, spurred by a weak dollar and the fall of American property prices. Foreign buyers accounted for 3% of the US residential real-estate sales in 2007.

International Business Times:
- Hedge funds are losing money but that doesn’t mean the $1.8 trillion industry is losing clients – yet. Pension funds and endowments, whose big bets on hedge funds helped double industry assets in the last five year, are sticking with loosely regulated hedge funds for now, even as returns sag. But they are also paying extra close attention to who is up and who is down, moving faster then ever in rotating among the industry’s estimated 10.000 individual funds.

Bernama:
- Indonesia will spend $32.5 million to launch an electronic “smart” card before July to curb fuel consumption. Under the program, consumers will be given quotas and will be required to show the “smart card” when buying fuel. Digital records of each consumer’s fuel purchase in a given period will be embedded in the card.

Hindustan Times:
- The Indian government is contemplating a ban on futures trading in iron and steel. This will be in addition to a host of tax incentives to bring down the price of steel in the country. In addition, the government is likely to ban futures trading in almost all major farm goods.

Middle East Economic Digest:
- Saudi Aramco will spend $13.7 billion on a five-year plan to drill wells around the kingdom and boost oil production. Saudi Aramco, under a five-year program starting next year, will increase the number of wells drilled to 248, compared with an original target of 187.

Arab News:
- Huge Volume of Bad Loans Raises Concern. A Saudi economist expressed deep concern at the increasing tendency among Saudis to borrow large sums of money. While the most common form of borrowing is for car purchases, a considerable amount of money is being borrowed to invest.

Weekend Recommendations
Barron's:
- Made positive comments on (COV), (GOOG), (AAPL), (ABG), (CMI), (SKX) and (JOE).
- Made negative comments on (HAL) and (FCX).

Citigroup:
- Reiterated Buy on (ONNN), target $10, Added to Top Picks Live, Deleted (SMTC) from Top Picks Live, maintained Buy.
- Upgraded (MASI) to Buy, target $33.

Night Trading
Asian indices are -.25% to +.50% on avg.
S&P 500 futures -.09%.
NASDAQ 100 futures unch..

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Earnings of Note
Company/Estimate
- (SYY)/.38
- (BEAV)/.51
- (SOHU)/.45
- (HUM)/.45
- (VZ)/.62
- (CVD)/.73
- (ATHR)/.28
- (MCHP)/.39
- (V)/.48
- (CGNX)/.17
- (FLS)/.94
- (TRID)/.12
- (MTW)/.73
- (PCL)/.19
- (TSN)/.01
- (PCU)/1.99
- (FCN)/.47
- (LTR)/1.20
- (WCG)/1.61
- (JDAS)/.31
- (RSH)/.29
- (CNA)/1.04

Upcoming Splits
- None of note

Economic Releases
- None of note

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.