Friday, September 19, 2008

Today's Headlines

- U.S. stocks surged in the biggest two-day global rally in history as the government announced plans to purge banks of bad assets and crack down on speculators who drove down shares of financial companies. The Standard & Poor's 500 Index rose as much as 4.9 percent, its steepest gain in six years. The Dow Jones Industrial Average added almost 1,000 points from yesterday's low.

- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds fell relative to government notes for a third day and benchmark credit-default swap indexes signaled a jump in subprime-bond prices, after the U.S. moved to halt a credit-market seizure. The difference between yields on Fannie's current-coupon 30- year fixed-rate securities and 10-year Treasuries narrowed 11 basis point to 154 basis points as of 11:00 a.m. in New York, data compiled by Bloomberg show. The ABX-HE-PENAAA 07-2 index of swaps tied to subprime bonds rated AAA when created in the first half of 2007 rose about 7 percent to a mid-price of 55, according to a 10:35 a.m. note to clients from Goldman Sachs Group Inc.

- Morgan Stanley and Goldman Sachs Group Inc. led a drop in the cost of default protection on corporate bonds as a plan by U.S. lawmakers to shore up financial company balance sheets eased turmoil in credit markets. Credit-default swaps on Morgan Stanley tumbled 303 basis points to 563 basis points, according to London-based CMA Datavision. Contracts on Goldman dropped 147 basis points to 345, and Wachovia Corp., the fourth-largest U.S. bank, fell 171 basis points to 475, CMA data show. The contracts, used to hedge against losses or speculate on creditworthiness, decline as investor confidence improves. Contracts on the Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, dropped 22 basis points to 153 basis points as of 12:32 p.m. in New York, according to broker Phoenix Partners Group. Credit-default swaps on Citigroup Inc., the biggest U.S. bank by assets, dropped 103 basis points to 203 basis points. Contracts on GE Capital, the finance arm of General Electric Co. fell 122 basis points to 315. The cost to protect U.S. high-yield, high-risk loans from default also fell. The Markit LCDX index, which rises as protection costs drop, rose 1.55 percentage point to a mid-price of about 96.1, according to Goldman.

- Spreads between two-year interest- rate swaps and Treasury yields narrowed the most in five years after the U.S. Treasury announced plans to help stymie the collapse in financial markets and the Federal Reserve took steps to shore-up the money markets. The rate on a two-year interest-rate swap, used by companies to hedge and investors to speculate on rate changes, narrowed 17 percent to 111.50 basis points, the most since September 2003. The spread reached 157.25 basis points yesterday, the most above Treasury note yields since 1988, or as far back as Bloomberg compiles data. Swap spread movements usually reflect changing perceptions of credit risk and expectations for the London Interbank Offer Rate, or Libor.

- Russia's ruble fell for a fourth week against the central bank's dollar-euro basket as Standard & Poor's cut the country's credit outlook to ``stable'' from ``positive.'' A withdrawal of capital from Russia and worsening investor confidence will put added pressure on it to spend its oil funds, undermining the nation's credit strength, S&P analysts including Frank Gill in London wrote in a report today. Investors have pulled about $35 billion from Russia since it invaded Georgia in August, BNP Paribas SA said last week.

- Gold futures in New York fell the most in almost 28 years as central banks eased investor concern by pumping cash into global credit markets and U.S. officials said they were developing a plan to stop banks from failing. Gold futures for December delivery on the Comex division of the New York Mercantile Exchange were 6 percent lower at $843.20 an ounce in electronic trading as of 10:56 a.m. London time. Earlier they fell as much as $68.50, or 7.6 percent, to $828.50, the biggest percentage decline since Nov. 7, 1980.

- Wang Tao, associate director of technical strategy at UBS AG, says gold will ‘correct sharply’, oil will fall as low as $50 a barrel.

- News Corp.(NWS/A) is attracting value investors and so-called quant fund managers after losing more than one-third of its value this year, a sign the selling in Rupert Murdoch's media company may have run its course.

- The U.S. Securities and Exchange Commission and the U.K. Financial Services Authority spurred the ``mother of all bear squeezes'' with their ban on short sales of financial stocks, according to Ashburton Ltd.'s Peter Lucas. WaMu, the Seattle-based savings and loan that's seeking a buyer, had 26 percent of its float sold short, the highest among the six, exchange data compiled by Bloomberg show. Cleveland- based National City's short interest increased the most, rising 451 percent to 166.1 million shares, or 22 percent of the float. ``Regulators and governments are orchestrating the mother of all bear squeezes,'' said Lucas, the global investment strategist at Jersey, Channel Islands-based Ashburton, which manages about $1.7 billion. ``All these measures are going to stop what had become a vicious downward spiral in confidence and in financial companies' situations.''

- Morgan Stanley, whose 50 percent share price plunge forced it into merger talks, is continuing negotiations after the government announced a bailout plan aimed at stabilizing financial companies, a person close to the investment bank said.

Wall Street Journal:
- As Barack Obama and John McCain battle for the Hispanic vote, a leading Latino backer of Hillary Clinton is crossing party lines to support the Republican presidential nominee. In an interview Thursday, Miguel D. Lausell, a Puerto Rican businessman and longtime Democratic activist and fund-raiser, came out for Sen. McCain. While he said he doesn't agree with all the policy positions of the Republican candidate and his running mate, Sarah Palin, Mr. Lausell added: "I find McCain to be a sound person and a man with a track record. I know where he is coming from." Mr. Lausell had been a major backer of Bill Clinton and served as a senior political adviser to Sen. Clinton's unsuccessful bid this year for the Democratic presidential nomination.

- Debora Wilson stepped down as CEO of the Weather Channel Inc. as General Electric’s(GE) NBC Universal and two private equity firms completed their purchase of the channel for nearly $3.5 billion. Wilson had been with the Weather Channel for 14 years.

- Major shareholders are pursuing an effort to try to help pay off the federal government's loan to American International Group Inc. in time to avoid having Washington take an 80% stake in the company, according to a person familiar with the matter.

NY Post:

- The JPMorgan Chase(JPM) CEO is seeing the coffers of the bank he runs being filled with "billions of dollars a day" coming from hedge funds that have pulled their cash from Morgan Stanley(MS) and Goldman Sachs(GS), according to several large hedge-fund managers and other Wall Street sources.

USA Today:
- Anxiety-detecting machines could spot terrorists.

- The American Federation of State, Country and Municipal Employees union paid $5.5 million to three groups to fund attack ads against Republican congressional candidates.

- Hedge funds are likely to increase short exposure to retail stocks following a ban on short selling financial shares imposed by UK and U.S. regulators, industry insiders said on Friday. Equity long/short and market neutral hedge funds will be among those most affected by the ban as short selling -- betting the price of a share will fall -- is a key component of their investment strategies. Shorting financial stocks has been a popular trade among hedge funds this year, but now they will be forced to switch their attention to other sectors. The retail sector is already the most shorted sector. Research firm data shows that at Tuesday's close retail stocks had an average of 8.2 percent of their shares in issue on loan, a reliable indicator of the amount of short selling on a company. Bank banks were only the fifth most shorted sector, with 5.9 percent of their shares on loan on average.

- JPMorgan Securities said on Friday the actions taken by the U.S. government aimed at stemming systemic risk have created a bottom in prices for cash and derivative segments of the asset-backed securities market. "The actions taken this week and those that are forthcoming make it extremely likely that we have seen the bottom in ABS, ABX and non-agency MBS prices," said Chris Flanagan, analyst at JPMorgan Securities. "Even after Friday morning's sharp rally, we still see extraordinary value and move to overweight," the analyst said in a report.

Daily Express:

- By his feet is a cardboard box containing a few personal possessions – all that he now has to show for his career. He is one of more than 4,000 workers caught up in the collapse of the investment bank Lehman Brothers. A few miles west in the bars and restaurants of Mayfair, the spiritual home of the hedge fund managers, there is a sense of barely contained glee at the financial meltdown. It is accompanied by the unmistakable sound of popping champagne corks. As panic engulfed the City, culminating in the fire sale of HBOS and the threat of thousands more lost jobs, hedge fund managers were in their element. Cashing in on the misery of others is what they do best and when they target banks, we all become vulnerable – savings and pensions are hit, jobs are lost and interest rates may rise. Whereas most investors thrive when companies do well and share prices rise, the controllers of hedge funds may also hope for the opposite.

Globe and Mail:
- U.S. market regulators issued an emergency ban on the short-selling of financial stocks on Friday, igniting big rallies in the sector that has been targeted by sellers as the credit crisis gathered pace. The U.S. ban came a day after the U.K. Financial Services Authority imposed its own temporary four-month ban on short-selling of financial stocks. National market watchdogs in France, Portugal, and Ireland took similar steps. French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the ban would snowball. The U.S. short-selling ban covers 799 financial stocks, including commercial banks, insurers and the two remaining big investment banks Goldman Sachs Group Inc and Morgan Stanley. The SEC's emergency order also requires institutional money managers to report new short sales of certain publicly traded securities. "The SEC seems to be lurching from order to order late at night. If short sellers begin publishing their positions, CEOs could look at that list, and if they don't like it they could use shareholder money and bring frivolous lawsuits against short sellers," Jim Chanos, a well-known short seller who runs hedge fund Kynikos Associates, told CNBC television. The SEC order will end at 11:59 p.m. EDT on October 2, and could be extended for 10 days. The SEC measure can only last a total of 30 calendar days.

Borsa Italiana:
- Hedge funds won't stop betting on declining shares, despite moves by regulators on both sides of the Atlantic to ban short positions on financial stocks, experts said Friday. "Institutional investors, frustrated by not being able to exploit share declines on the markets, will look for other ways to bet on declines," Arden Partners analyst Sarah Spikes said. "Sure, if managers don't adapt, they risk a short squeeze, but hedge funds will always find innovative ways to express a negative view on stocks - and the regulator is always two steps behind," said Jacob Schmidt, chief executive of investment consultant Schmidt Research Partners. It will take a bit of time for managers to go through the small print, but early ideas include shorting indexes or using an exchange-traded fund, or ETF, a synthetic security that tracks an index, commodity or basket of assets and trades on an exchange like a stock. Hedge funds can also look at related sectors and companies - for example, a financial stock's holding company may be quoted in a country outside the U.S. and U.K where shorting isn't banned. Derivatives that are based on the value of a company's debt rather than its stock is another possibility, Schmidt said. Many hedge funds will already be suffering as market volatility exacerbated by the collapse of Lehman Brothers Holdings Inc. (LEH) and worry over the few remaining Wall Street banks has had them scrambling to cover exposed shorts as stocks rebound. While much of the hedge funds' industry business is conducted in the U.S. and the U.K., other countries are looking into further regulation following the action by the SEC and FSA.

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