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.
Greek Junk Contagion Presses EU to Broaden Bailout After Rout. Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland. As German Chancellor Angela Merkel delays approval of a 45 billion-euro ($59 billion) Greek rescue, the crisis is spreading. Portugal’s benchmark stock index yesterday fell the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds rose to a 10-month high. The danger for European officials is that the fiscal turmoil which started six months ago with fudged Greek budget data will spin out of their control. As Greece waits for its euro-region partners to disperse funds, the European Union has announced no concrete plans to help other nations should aid be needed. The euro weakened to the lowest in a year. “The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis,” said Axel Botte, a fixed- income strategist at AXA Investment Managers in Paris. “The contagion risk is real.” The crisis is deepening as German lawmakers debate whether to put taxpayers’ money at risk in the face of public opposition and an election in the state of North Rhine-Westphalia on May 9. Bild Zeitung, Germany’s biggest-selling tabloid, yesterday ran a front-page headline asking: “Why do we have to pay Greece’s luxury pensions?”
Greece Bondholders May Lose $265 Billion as S&P Sees 70% Loss. Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s. The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product. “It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam. The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion- euro emergency-aid package failed to reassure investors, a European diplomat and Spanish official said. German Chancellor Angela Merkel said she won’t release funds for the indebted nation until its government has a “sustainable” plan to reduce the deficit. S&P indicated the cuts, which may force investors who are prevented from owning anything but investment-grade rated bonds to sell, may not be over, assigning Greece a “negative” outlook. Credit-default swaps on Greek government bonds climbed 111 basis points to 821 basis points yesterday, according to CMA DataVision. Only contracts tied to Venezuela and Argentina debt trade at higher levels, according to Bloomberg data. Venezuela is at about 846 basis points and Argentina is at about 844, Bloomberg data show.
Ben Nelson, Wife Own as Much as $6 Million in Berkshire(BRK/A) Stock. Senator Ben Nelson, who supported an exemption to proposed derivatives rules sought by Warren Buffett’s Berkshire Hathaway Inc., owned as much as $6 million worth of stock with his wife in the Omaha, Nebraska-based company, financial disclosures show. A Nebraska Democrat, Nelson reported last year that he owned between $500,000 and $1 million of stock in Berkshire in 2008, and his wife owned between $1 million and $5 million. Senators report their holdings each year in broad ranges. New financial disclosure reports are due May 15. Nelson and his wife, Diane, owned more shares in Berkshire than any other member of Congress, according to the Center for Responsive Politics, a Washington-based research group. The senator, 68, said his ownership of stock in Berkshire, a Nebraska company with “probably hundreds of thousands of shareholders,” didn’t pose a conflict of interest or an appearance of ethical impropriety. He said he had owned the stock since before he became governor and his wife had been a Berkshire stockholder for 30 years. “It doesn’t influence my decision at all; never has, never will,” said Nelson, who was governor from 1991-1999. Berkshire sought a provision that would exempt previously written derivatives contracts from proposed rules on collateral, according to a Democratic aide speaking on condition of anonymity. Berkshire owns derivatives tied to about $63 billion in assets. Nelson said earlier today that he and his staff spoke with Berkshire Hathaway representatives, not Buffett, “all along the way” in order “to understand the issue and why it’s important.”
Brazil Rates Set to Surge 2.25 Points in Trading. Brazilian policy makers are poised to raise borrowing costs at the fastest pace since President Luiz Inacio Lula da Silva took office in 2003 after central bank chief Henrique Meirelles pledged “vigorous action” on inflation, the futures market shows. The biggest two-day surge in six months on yields of the overnight interest rate futures contract due in July reflects expectations that Meirelles will raise the benchmark Selic rate 2.25 percentage points to 11 percent by the June policy meeting, according to data compiled by Bloomberg.
Goldman(GS) Armed Salespeople to Dump Bonds, E-Mails Show. Goldman Sachs Group Inc., seeking to reduce assets tied to the declining U.S. housing market, urged its sales force in 2006 and 2007 to sell those products to clients, newly disclosed internal e-mails show. The e-mails, including communications from Chief Executive Officer Lloyd Blankfein, show that employees discussed how to “arm” salespeople to shed bonds the firm found too risky to hold.
Oil Volatility Sinks as Shortage Concern Eases: Energy Markets. Crude oil volatility is falling to the lowest level in almost three years as brimming stockpiles and rising OPEC investment in production capacity eases concern of shortages. Oil’s 50-day historical volatility, a measure of how much crude fluctuates around its average price during that period, declined to 23 percent yesterday, the lowest since July 2007. The measure rose to a record 108 percent at the beginning of 2009 as prices collapsed following the demise of Lehman Brothers Holdings Inc. and the onset of global recession. The Organization of Petroleum Exporting Countries said it is planning 140 oil projects over the next five years and that its 6 million barrels a day of unused production is enough to meet demand and avoid a repeat of the price swings of 2008. U.S. crude stockpiles rose to 356 million barrels on April 2, the highest since June, and inventories held on ships are climbing, according to Morgan Stanley. “When inventories go up, the precariousness of the market starts to fall as there is so much of this stuff sloshing around,” said Michael Lewis, head of commodity research at Deutsche Bank AG in London. “People are not so fearful of a supply event because spare capacity is higher.” Oil has held between $69 and $88 a barrel in New York this year and is up 3.2 percent amid speculation the global economic recovery will spur demand. Prices slumped from a record $147 a barrel in July 2008 to $32 in December that year.
Emerging Bonds Plunge Most in 13 Months. Emerging-market bonds plunged the most in 13 months as credit-rating cuts for Greece and Portugal added to concern that indebted European nations are moving closer to default, spurring a selloff in riskier assets. The 1.1 percent retreat in JPMorgan Chase & Co.’s EMBI+ Index of developing-nation debt sent the extra yield investors demand to own the securities over U.S. Treasuries up 20 basis points to 2.63 percentage points, the highest since March 22. “We could see another wave of forced deleveraging, which could obviously affect any high-yielding assets, including emerging-markets debt,” said Luis Costa, an emerging markets strategist at Citigroup Inc. The extra yield investors demand to own Russian debt over U.S. Treasuries soared 28 basis points to 1.85 percentage points, the biggest increase since April 2009, according to the EMBI+ index. Spreads on Argentina’s debt rose 29 basis points 6.49 percentage points, while Bulgaria’s increased 41 basis points to 2 percentage points.
Colon Cancer Risks Slashed With Single, Five-Minute Procedure. A single, five-minute procedure to detect and remove growths from the colon slashes cancer rates by one-third and reduces deaths by 43 percent, researchers said. The 16-year study involving more than 170,000 people in the U.K. found a simple procedure known as sigmoidoscopy may have lifelong implications for preventing the second-biggest cancer killer worldwide, said lead researcher Wendy Atkin from Imperial College London. More than 1 million people are diagnosed with colorectal cancer each year, and 600,000 die from it. The study results appear today in the medical journal Lancet.
Obama Debt Panel Consider Ideas to Reduce Red Ink. President Barack Obama’s debt commission began wrestling today with how to reduce the federal government’s red ink in the first of a series of meetings aimed at producing a plan that could be voted on by Congress. The panel’s three-hour meeting produced little disagreement over the dimensions of the fiscal challenge, underscored by testimony from Federal Reserve Chairman Ben S. Bernanke and White House Budget Director Peter Orszag on the potential for the nation’s debt eventually precipitating an economic crisis. and spending cuts that can get backing from at least 14 of the 18 its members, the number needed to forward any plan to Capitol Hill, and then win support in Congress. The challenge facing the panel is devising a plan proposing hundreds of billions in tax increases“This debt is like a cancer; it’s a cancer that’s going to destroy our country from within,” said Erskine Bowles, White House chief of staff under former President Bill Clinton and the panel’s co-chairman.
Most U.S. Factory Jobs Lost in Slump May Stay Empty in Recovery. U.S. manufacturers will fill fewer than 30 percent of 2 million lost factory jobs as the economy recovers over the next six years, according to an estimate from an industry trade group. Most of the hiring will come in 2011 and 2012, David Huether, chief economist for the National Association of Manufacturers, said yesterday after NAM President John Engler spoke on a job-growth panel at the Milken Conference in Los Angeles. “I wish there were a silver bullet where we just walk in and just sprinkle this pixie dust,” Ron Bloom, a conference panelist and senior White House adviser for manufacturing policy, said in an interview. “But this is slow, hard work.”
Wall Street Journal:
SEC Probes 'Side Pocket' Arrangements. Federal regulators are probing whether hedge-fund managers abused tools known as "side pockets" that helped prevent clients from withdrawing billions of dollars of assets during the financial crisis. The issue is one of several investigative priorities recently set by a newly organized Securities and Exchange Commission enforcement unit focused on ferreting out misbehavior by private-equity funds, hedge funds and other asset managers. The group, run by co-chiefs Rob Kaplan and Bruce Karpati, held its first full staff meeting this week. Some 60 attorneys are assigned to the unit across nine offices, said people familiar with the matter. The unit is delving into a number of issues surrounding hedge funds and asset managers, including whether the funds are assigning fair values to assets and accurately disclosing information about investment strategies, assets and performance to investors. During the crisis, clients complained managers weren't disclosing reasons for creating side pockets, nor disclosing which assets were being stashed there. Some funds being probed by the SEC might have misvalued assets in side pockets while continuing to charge fees based on the inflated values, said one person close to the matter. Some investors say they were effectively held hostage by the side-pocket arrangements while continuing to pay fees on holdings. The SEC's enforcement division has two investigations into the use of side pockets it hopes to bring to the commission for approval within the next six months, said the people familiar with the matter. In investigating the issue, Messrs. Kaplan and Karpati have focused on outside parties, including third-party administrators and auditors, people close to the matter said. Investigations also are likely to focus on offshore funds' directors and questions about whether directors shirked responsibilities related to valuations and investor disclosure. Managers of offshore hedge funds, which for tax purposes are located in places such as the Cayman Islands and Bermuda, commonly hire directors who in some cases may hold similar positions with hundreds of hedge funds. Some investors who turned to offshore directors during the crisis found the directors referred the investors to offshore lawyers, a response many found frustrating. Other priorities for the new enforcement unit include evaluating how honest managers are when they say they have their own wealth invested in their funds, said a person close to the matter. One continuing SEC hedge-fund investigation that touches on asset valuations, client redemptions and side-pocketing of holdings is focused on New York-based Ram Capital Resources LLC, people familiar with the matter say. The SEC has sent subpoenas to investors in the firm's Truk Opportunity and Shelter Island Opportunity funds asking for emails between Ram and investors, fund marketing materials, and investor letters from Ram, says a person familiar with the probe. Ram's performance declined when the value of loans its funds made to companies declined, the person says. The Ram investigation is in addition to the two side-pocket cases SEC attorneys hope to bring to the commission in the next six months, a person close to the matter says.
Biotech Firms Seek Speedier Reviews of Seeds. Approval Time for Genetically Modified Crops Doubles under Obama as Some Fear Tougher Stance. The crop-biotechnology industry, growing frustrated as it watches the approval time for new seeds almost double under the Obama administration, is pressuring Washington to clear inventions more quickly. The logjam at the U.S. Department of Agriculture, which must clear genetically modified seeds, is slowing the launch of products that could give farmers more alternatives to seeds from crop biotech giant Monsanto Co.(MON) Also, some biotech-industry executives worry the delays signal that the Obama administration, which has painted itself as pro-biotech, is gearing up for a far tougher analysis of the potential environmental impact of these crops.
Swiss Banks Move From Tax Havens to Tax Cops. Swiss banks such as UBS AG(UBS) are getting tougher with European clients they suspect of dodging home-country taxes, a move that could mark the beginning of the end of this country's mysterious yet lucrative global franchise.
Goldman Sachs(GS) Gains as Senate Hearing Questions Executives. Goldman Sachs Group Inc. was one of only three stocks among 79 financial companies that gained in the Standard & Poor’s 500, as current and former executives of the firm testified in front of U.S. senators probing the bank’s mortgage business. Goldman Sachs climbed $1.75, or 1.2 percent, to $152.73 at 1:45 p.m. in New York Stock Exchange composite trading as Michigan Senator Carl Levin, chairman of the subcommittee holding today’s hearings, led questioning about the mortgage- securities business leading to the biggest financial crisis since the Great Depression. The S&P’s 500 Financials Index fell 1.7 percent. “The case is not going to hurt Goldman’s earnings,” said Keith Springer, president of Sacramento, California-based Capital Financial Advisory Services Inc. “It is going to give them a black eye which will go away in a week. Now bargain hunters are coming in because the stock is cheap based on earnings, based on what they can earn and will earn.” “Is this the best they’ve got?,” said Matthew McCormick, who helps oversee $2.8 billion at Bahl & Gaynor Inc. in Cincinnati. “The senators seem to be all over the place. Most people think that prosecution has been less than sharp.”
CNBC.com:
GM: Who Do You Think You Are Kidding? Repaying Us With Our Own Money?GM is running TV ads claiming that they have repaid their government TARP loan of $8 billion and change early. Eight billion? The taxpayer invested 80 billion of TARP money into GM and Chrysler, most of that to GM. How does $8 billion pay that off? It doesn’t. What it bought us is 61% ownership in the new GM and a block of stock for the UAW. Previous shareholders and bondholders got virtually nothing.
In Shanghai, Bootleg Goods Move to Secret Rooms. In China, embarrassments are usually hidden from sight when the world comes visiting, and that is what has happened to a large supply of bootleg DVDs and CDs as Shanghai prepares for the World Expo, which is expected to attract 70 million visitors.
Marketwatch.com:
Crisis Expert Says Derivatives Market Still 'Grave Threat'. Risks of a major accident from derivatives use remain -- or may even be on the rise -- amid a wave of re-leveraging, according to an expert of the causes of the global financial crisis. Noted financial author Richard Duncan said banks and other financial institutions are beginning to pile back into the opaque financial instruments, as the total value of such contracts is "probably back" to $650 trillion. "This is a grave threat not only to the financial sector but also the entire global economy," Duncan said. Duncan, the former London-based head of global investment strategy for ABN Amro, says investment banking culture hasn't changed much in the wake of the crisis. The over-the-counter derivates market contracted in the wake of the financial crisis to $547 trillion in December of 2008, but ballooned more than $50 trillion in the following six months. It could now be approaching its former high of $683 trillion in June 2008, according to Duncan, who cited data from the semi-annual figures published by the Bank for International Settlements. Roughly speaking, a 1% default rate would amount loss ratio of $7 trillion, or about 50% of annual U.S. gross domestic product, while a 10% loss rate would exceed the value of all goods and service produced around the world in a year. Duncan continues to advocate tougher oversight of the derivatives market, but acknowledges bringing them to heel will come with risks. Among them, global commodity markets could decline sharply, particularly crude oil, where supply and demand dynamics don't support prices anywhere near the $80-per-barrel level, he says. "There is a good chance that a lot of commodities, if not all commodity prices are being manipulated through derivatives," Duncan says. Another worry is what may surface as the opaque market comes under greater regulatory scrutiny. "There is a really good possibly that new derivatives have been created each year to manipulate the price of derivatives in prior years. And if they forced everyone to trade through exchanges ... it could suddenly expose trillion of dollars of losses throughout the financial sector," Duncan says. Another concern is the fallout for bank's bottom lines. Duncan says bank profits swelled along with the explosive growth in the derivatives trading, to occupy a disproportional large share of total corporate profits. That will likely come to an end, he says, if regulations tighten meaningfully.
IBD:
Small Businesses Use Smart Phones for Electronic Payments. Whenever you use a credit or debit card, there's a good chance it gets swiped through a VeriFone (PAY) electronic payment system, the ubiquity of which contributes to the gradual disappearance of cash from daily life.
Fox News:
Top Treasury Official is Involved in Subprime Mess?A top Treasury Department official helping craft financial overhaul legislation is facing questions about his involvement in the subprime mortgage crisis.
Goldman Sachs'(GS) German Problem. The man on the hot seat is Fabrice Tourre, the 31-year-old Goldman vice president who is the only individual civilly charged in the case, and his silence about IKB, a German bank that lost $150 million in the collateralized debt obligation Tourre structured, is deafening. It indicates the main vulnerability for Goldman from the SEC’s suit. The problem for Tourre and Goldman is that it has been suggested that Goldman did not lose money in the deal because in the end it took out insurance on its position, and that the only reason it retained exposure at all was that Goldman could not unload it to someone else. There is nothing in Tourre’s statements that refutes the central idea promoted by the SEC that he and Goldman failed to disclose information to IKB. The question then will be, was the information he did not disclose material? If so, expect the SEC to attack there.
Reid Reject Energy Bill Compromise. Senate Majority Leader Harry Reid rejected a proposal from supporters of a stalled Senate energy bill that would move immigration reform through the regular committee process on a priority basis and allow the energy bill to move forward on the Senate floor. The proposal would tentatively set action on immigration for November, after the midterm elections — a delay that even some Democrats would welcome. “Such an idea might have been floated by someone, but as far as I can tell, it’s a nonstarter,” said Jim Manley, a Reid spokesman. “For what it’s worth, I have never heard of fast-tracking something through the regular committee process, especially the Judiciary Committee, where the debates are usually long, sharp and fierce.” The swift rejection of the potential compromise came a day after the energy reform package was sent to the Environmental Protection Agency for analysis — a sign that the measure’s co-sponsors, Sens. John Kerry (D-Mass.), Joe Lieberman (I-Conn.) and Lindsey Graham (R-S.C.), have not given up on it. In a meeting with reporters on Capitol Hill, Kerry said the trio were still “working very hard and constructively to pull pieces back together.
Real Clear Politics:
Gallup: GOP Up 20 Points Among 'Very Enthusiastic' Voters. On the heels of yesterday's report showing nearly half of young voters aged 18-29 - a critical piece of Obama's 2008 coalition - are "not enthusiastic" about voting in this year's election, Gallup is out with another body blow for Democrats today with a survey showing that the GOP leads Democrats by 20 points among those voters most enthusiastic about the 2010 midterms. Among all registered voters, the GOP leads in the generic congressional ballot in the current Gallup survey by just one point, 46 to 45. But among those who are "very enthusiastic" about voting in November, the GOP lead over Democrats balloons to a 57/37 gap:
LA Times:
FCC Need to Step Up Regulation of Internet Broadband Service. A battle is about to erupt between federal regulators and telecom companies, and nothing less than the future of the Internet could be on the line. At issue is a seemingly benign question: Is the Net an information service or a telecommunication service? As it stands, high-speed Internet service is classified by the Federal Communications Commission as a "Title I" information service in the same way that Google is an information service. This means broadband providers such as phone and cable companies are only lightly regulated by the agency. By reclassifying broadband as a "Title II" telecom service — like, say, phone service — the FCC would be able to more closely oversee providers' actions and pricing, and would be better positioned to implement its recently announced 10-year plan to bring high-speed Net access to virtually every U.S. home. I know: This is wonky stuff. But the stakes couldn't be higher, especially at a time when broadband Internet service is playing an increasingly vital role in a wide variety of areas, including entertainment, education and healthcare. "This could determine whether the FCC really has the power to act on its broadband plan," said Ben Scott, policy director with Free Press, a communications advocacy group. "It will define who really runs the Net."
It's a Sad Day for Happy Meals in Santa Clara County. Happy Meal toys and other promotions that come with high-calorie children's meals will soon be banned in parts of Santa Clara County unless the restaurants meet nutritional guidelines approved Tuesday by the county Board of Supervisors. "This ordinance prevents restaurants from preying on children's' love of toys" to sell high-calorie, unhealthful food, said Supervisor Ken Yeager, who sponsored the measure. "This ordinance breaks the link between unhealthy food and prizes."Voting against the measure was Supervisor Donald Gage, who said parents should be responsible for their children.
EU Wants Sight of Data on OTC Trades. Michel Barnier, the European Union official driving reform of the bloc’s financial regulation, has told US Treasury secretary Tim Geithner that EU regulators will need “unfettered access” to data on swaps trading held in “trade repositories” as they tighten scrutiny of the over-the-counter derivatives market. His comment, in a letter to Mr Geithner seen by the Financial Times, is a sign that the issue of such repositories is becoming politically sensitive amid an overhaul of the over-the-counter, or off-exchange, markets for derivatives. Trade repositories store, electronically, records of who traded what off-exchange derivatives and at what price.
Telegraph:
Paris-to-Atlanta Flight Diverted Over Passenger 'With Explosives'. A flight from Paris to Atlanta was diverted to Maine on Tuesday after an American passenger claimed to have a fake passport and said he had explosives in his luggage, US officials said. Susan Elliott, a Delta spokesman, said there were 235 passengers and eight crew aboard the Airbus A330, which landed safely at Bangor International Airport. Federal officials met the aircraft at the airport. The TSA said the passenger was being interviewed by law enforcement.
ECB May Have to Turn to 'Nuclear Option' to Prevent Southern European Debt Collapse. The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy. “We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day. “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.” Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities. Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”
crikey:
Don't Write Off Another Credit Crunch if Greece Defaults.Just as the subprime crisis in the US produced a contagion effect across the rest of the global financial system and economy (which everyone said wouldn’t happen), Greece could see pressure on Spain, Portugal, Ireland, Italy and then the UK in coming weeks. Does anyone seriously think that the global financial system can withstand the shock of a Greek default (unless managed by the ECB and EU and Greece itself), less than three years after the big crunch hit in August, 2007? A Greek default would see banks refuse to extend any more credit to the likes of those countries (including the UK). The same banks that lend in Europe, lend in the US or into the US market. Remember the credit crunch started in Europe on August 8, 2007, then spread to the US that night and into Asia the next day. (It did not start in the US when Lehman Brothers collapsed in September, 2008). In fact if Greece was a company, it would be on the verge of administration, so fraught is its current financial status of rising debt and interest bills, a major loan about to become due and declining or non-existent cash flows to at least repay the debt (the holders are unlikely to agree to it being rolled over).
Perth Now:
9/11 Retaliation Surprised Bin Laden, Claims Former Terrorist. OSAMA bin Laden did not expect the United States to strike back at al-Qaeda as hard as it did, a former terrorist has claimed. Noman Benotman, who was the head of the Libyan Islamic Fighting Group in 2000 and a former associate of Bin Laden, told a US radio station: “What happened after the 11th of September (2001) was beyond their imagination.” He said that al-Qaeda was overly confident, based on the US response to the terror group’s attacks on embassies in Kenya and Tanzania in 1998. Following the attacks on America on September 11, 2001, President George Bush ordered the invasion of Afghanistan, where Bin Laden had been a guest of the country's Taliban rulers. “I’m 100 per cent sure they had no clue about what was going to happen,” he said. A former CIA official, on the condition of anonymity, backed up his claims. Start of sidebar. Skip to end of sidebar. End of sidebar. Return to start of sidebar. He said several captured terrorists had stated publicly that al-Qaeda never expected the World Trade Centre towers to fall. "Their goal was to frighten people and impact the US economy, so they really didn't plan for the massive response the US launched," the official said.
China Daily:
China's recent efforts to cool its property market are "just the beginning," the China Daily newspaper said in an editorial today. If the latest campaign to cool the property market succeeds, policymakers must come up with more targeted measures to effectively curb property speculation, according to the editorial, which said local governments and authorities should also try to help to alleviate property bubbles.
21st Century Business Herald:
China's banking regulator is tightening credit from trust companies to property developers. China Banking Regulatory Commission will require property companies to provide adequate proof of minimum capital requirements for projects when obtaining trust company financing.
Chosun Ilbo:
North Korean lead Kim Jong Il's likely successor is amassing his own secret funds. Kim's youngest son, Kim Jong Un, has a company under his direct management to help him divert foreign exchange to his personal coffers. North Korea's ruling party is also forcing government agencies to make monetary contributions to him. Kim Jong Il collects between $200 million and $300 million every year to spend on personal luxury items. In 2008, he imported more than $100 million worth of whiskey, sedans and pet dogs.
China Business News:
China is "very likely" to test a property tax this year, citing Gu Yunchang, a vice chairman at the China Real Estate Research Association.
Shanghai Securities News:
China's foreign exchange rate and interest rates should be kept "appropriately" flexible, Shanghai Securities News reported Zhou Qiren, a central bank advisor, as saying at a conference. Banks should be prepared for flexible changes in monetary policy over the next two years, the report said.
Evening Recommendations Citigroup:
Upgraded (ACE) to Buy, added to Top Picks live list, target $64.
Reiterated Buy on (RHI), target $34.
Reiterated Buy on (NSC), target $68.
Night Trading
Asian indices are -1.50% to -.50% on average.
Asia Ex-Japan Investment Grade CDS Index 110.50 +14.0 basis points.
Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,050,000 barrels versus a +1,894,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +800,000 barrels versus a +3,587,000 barrel gain the prior week. Distillate inventories are expected to rise by +1,500,000 barrels versus a +2,096,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to remain unch. versus a +.34% gain the prior week.
2:15 pm EST
The FOMC is expected to leave the benchmark fed funds rate at .25%.
Upcoming Splits
(SHOO) 3-for-2
Other Potential Market Movers
The weekly MBA Mortgage Applications report and the $42 Billion 5-Year Treasury Notes Auction could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.
North American Investment Grade CDS Index 93.27 bps +4.70%
European Financial Sector CDS Index 117.30 bps +16.36%
Western Europe Sovereign Debt CDS Index 110.50 bps +1.22%
Emerging Market CDS Index 228.47 bps +6.16%
2-Year Swap Spread 23.0 +3 bps
TED Spread 19.0 +2 bps
Economic Gauges:
3-Month T-Bill Yield .14% -1 bp
Yield Curve 272.0 -3 bps
China Import Iron Ore Spot $182.10/Metric Tonne unch.
Citi US Economic Surprise Index +22.90 +3.2 points
10-Year TIPS Spread 2.34% -1 bp
Overseas Futures:
Nikkei Futures: Indicating -292 open in Japan
DAX Futures: Indicating -10 open in Germany
Portfolio:
Lower: On losses in my Retail, Financial and Tech long positions
Disclosed Trades: Added (IWM)/(QQQQ) hedges, added to my (EEM) short, took profits in existing longs
Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish as equities trade meaningfully lower on rising sovereign debt angst and increasing financial sector pessimism. On the positive side, Hospital, Education and Gold stocks are relatively strong, rising slightly. Long-term rates are breaking down, with the 10-year yield falling -12 bps. On the negative side, Airline, Homebuilding, Insurance, Disk Drive, Semi, Paper, Steel, Oil Service, Oil Tanker and Coal shares are under meaningful pressure, falling 3.0%+. The Greece sovereign cds is rising another +11.68% today to 833.40 bps and the Portugal sovereign cds is jumping +22.43% to 377.87 bps. Russia and China sovereign cds are also up substantially, rising +10.3% and +8.6%, respectively. The 2-Year swap spread is breaking convincingly up through its 50-day moving average for the first time since December. The TED spread has already broken convincingly through its 50-day a few days ago and is now right at its 200-day. Another big jump in the euro financial sector cds index also bares close monitoring. This index is now at the highest level since June 2009. Investor perceptions towards what is happening in Europe seem too sanguine to me. Weekly retail sales decelerated further this week, rising +2.7%, which is down from a +3.9% gain the week of April 6th. I suspect that the real economies of Europe, which are barely growing, may begin a mild contraction over the coming months as a result of current events. As well, fears over a potential hard-landing in several key emerging economies will likely intensify. This will likely result in a further pullback in US stocks from current levels. The most cyclical global companies that have had massive run-ups on hopes of a v-shaped recovery and that are very crowded longs are most at risk. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, China hard-landing worries, rising financial sector pessimism, increasing sovereign debt fear, tax hike concerns and more shorting.
