Thursday, September 24, 2009

Today's Headlines


- The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 4 basis points to 561, according to JPMorgan Chase & Co. prices at 11:56 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and a rise indicates deterioration in the perception of credit quality; a decline signals the opposite.

- Crude oil fell to a one-month low in New York as sales of existing homes unexpectedly slumped, bolstering skepticism about the speed of the economy’s recovery from the recession. Oil declined as much as 4.6 percent as the National Association of Realtors said that purchases dropped 2.7 percent to a 5.1 million annual rate. An Energy Department report yesterday showed a larger-than-forecast gain in U.S. fuel supplies, bolstering speculation that a glut in supply is forming in the world’s biggest energy-consuming country. “There comes a point when you have to pay attention to the fundamentals,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Today we are looking at a much more convincingly bearish picture,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “We are not only looking at high inventory levels. The dollar is showing some strength and the S&P 500 is convincingly down.” Global oil consumption will drop 1.9 million barrels a day to 84.4 million this year, according to an International Energy Agency report released on Sept. 10. U.S. gasoline stockpiles surged 5.41 million barrels last week, more than 10 times what was forecast by analysts in a Bloomberg News survey, according to yesterday’s Energy Department report. Inventories of distillate fuel, a category that includes heating oil and diesel, rose 2.96 million barrels, almost double what was estimated. “There’s no question that yesterday’s report was extremely bearish,” Mueller said. “It fell enough to break through some support lines, which got the attention of the technical guy.” The November contract broke below the 100-day moving average of $69.53 yesterday, a signal to so-called technical traders that prices will move lower.

- Copper prices tumbled to a one- month low as rising metal inventories and downbeat economic reports stoked concern that demand may dwindle. Stockpiles in warehouses monitored by the London Metal Exchange have jumped 14 percent this month. Sales of existing U.S. homes unexpectedly fell in August, and German business confidence trailed analysts’ forecasts. Copper prices are headed for a fourth straight weekly decline. “People are trying to determine what the next direction in copper will be, and they’re getting worried that demand is not strong,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “The rising inventories are causing concern.” LME inventories increased 2.7 percent today to 340,875 tons, the highest since May 20.

- Obama Pledge to Engage UN Runs Into Resentment of US Power.

- The Internal Revenue Service told its auditors in Manhattan to develop cases against offshore hedge funds and foreign companies it said are trying to avoid taxes on income from loans they make in the U.S. The agency, in a Sept. 22 directive, urged the Manhattan field director of the IRS financial services section to pursue a transaction the agency says seeks to improperly take advantage of an otherwise legal tax break. The agency also urged the official to be watchful for similar techniques. “We understand that foreign corporations and non-resident aliens may have used other strategies to originate loans in the United States, giving rise” to tax obligations, Steven Musher, the top lawyer in the IRS’s international department, wrote in a memo to Kathy Robbins, the Manhattan field director. “We encourage you to develop these cases and we stand ready to assist you in the legal analysis,” Musher wrote.

- Beijing’s traffic-choked streets will be almost devoid of cars on Oct. 1 as China’s capital enacts strict controls to make way for a military parade that will include nuclear missiles, tanks and aircraft. About 7,000 traffic police will be on hand to enforce the city’s biggest traffic restriction “in history,” deploying along the roads circling Beijing and other points of access to its center to block entry for most vehicles, the official Xinhua News Agency reported today. China celebrates 60 years of rule by the Communist Party on Oct. 1, staging a 300 million yuan ($44 million) military parade to showcase the country’s achievements and boost national pride. The parade will include the country’s “newest nuclear missiles” among the 52 weapons, the official China Daily reported, citing People’s Liberation Army General Gao Jianguo.

- Investors should sell shares of most dry-bulk commodity shipping companies because charter rates will probably extend their decline, according to Fearnley Fonds ASA, an investment bank that specializes in shipping. The Baltic Dry Index dropped 49% from this year’s high in June as China imported less coal and iron ore. “We have a sell recommendation on the dry bulk sector and weaker dry-bulk rates have historically affected all companies independent of contract coverage,” Rikard Vabo, an Oslo-based analyst at Fearnley, said. “With potential weaker rates we are negative on most share prices.” China’s iron-ore imports fell 14% in August while stockpiles rose this month to the highest level since data became available in 2006. Coal imports fell 15% last month. The expansion of the dry-bulk fleet may also affect vessel demand. Net growth has quickened to an annualized rate of 8-9% from about 3% in the first quarter. Meantime, the ratio of the capsize fleet tied up by port congestion has dropped to 4% from as much as 15% during the Northern Hemisphere’s summer, he wrote.

- Iran’s government is developing detonators capable of setting off a nuclear bomb, an Iranian resistance group said. The detonators, which use conventional explosives and are designed to ignite the uranium payload of a nuclear weapon, are being developed as prototypes at a secret site called Metfaz in a military zone about 30 kilometers (19 miles) east of Tehran, the National Council of Resistance of Iran said today. The research center for the project is in Pars in eastern Tehran.

- The Federal Reserve said it will shrink its emergency programs that auction loans to commercial banks and Treasury securities to bond dealers, citing “continued improvements” in financial markets. The Term Auction Facility will sell $50 billion in 70-day funds next month, down from $75 billion in 84-day funds in September, with the auctions’ size and maturity decreasing more in November and December, the Fed said today in a statement in Washington. The Term Securities Lending Facility will shrink to $50 billion, and then $25 billion, from $75 billion.

- Rite Aid Corp.(RAD), the third-largest U.S. drugstore chain, cut its full-year forecast, saying it expects customers will remain focused on discounts in a “tough economy.” The shares declined as much as 14 percent.

- Former Federal Reserve Chairman Paul Volcker criticized the Obama administration’s plan to subject “systemically important” financial firms to more stringent regulation by the Fed. Volcker told lawmakers today that such a designation would imply government readiness to support the firms in a crisis, encouraging even more risky behavior in a phenomenon known as “moral hazard.” “Whether they say it or not, that carries the connotation in the market that they’re too big to fail,” Volcker, who is chairman of the White House Economic Recovery Advisory Board, said in testimony to the House Financial Services Committee. “The danger is the spread of moral hazard could make the next crisis much bigger,” said Volcker, who serves as an outside economic adviser to Obama. Volcker has criticized key elements of the Obama administration regulatory plan in recent public statements, and his remarks today largely reprised those criticisms. Volcker also called for stricter controls on commercial banks and bank holding companies than the Obama administration has proposed, saying they should be barred from owning or sponsoring hedge funds and private equity funds and forbidden to engage in proprietary trading. He also criticized an administration proposal to create a council of regulatory agencies that would be headed by the Treasury Department.

- Luxury hotel owners risk defaulting on their debt as the recession cuts occupancies and the credit crunch constrains refinancing. Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, a credit rating company that tracks commercial mortgage-backed securities. Some of the biggest loans, put on the company’s watch list because of late payments, decreasing occupancies or cash flow, were made to luxury properties where rooms can cost more than $850 a night.

- Sales of existing U.S. homes unexpectedly fell last month for the first time since March, signaling the housing recovery will be slow to gain speed. Purchases dropped 2.7 percent in August to a 5.1 million annual rate, the second-highest level in the last 23 months, the National Association of Realtors said today in Washington. The median price dropped 12.5 percent from August 2008.

Wall Street Journal:

- Maybe Senate Finance Chairman Max Baucus should put a gag order on Douglas Elmendorf too. On Tuesday, the Congressional Budget Office director told Mr. Baucus's committee that its plan to cut $123 billion from Medicare Advantage—the program that gives almost one-fourth of seniors private health-insurance options—will result in lower benefits and some 2.7 million people losing this coverage. Imagine that. Last week Mr. Baucus ordered Medicare regulators to investigate and likely punish Humana Inc. for trying to educate enrollees in its Advantage plans about precisely this fact.

- Terror suspect Najibullah Zazi was indicted Thursday by a federal grand jury in New York on charges that he conspired to use weapons of mass destruction. The 24-year-old airport-shuttle driver in Aurora, Colo., and former longtime resident of the New York City borough of Queens, faces a single count in the indictment after having already been charged with lying to authorities in a terrorism investigation. Mr. Zazi, an immigrant from Afghanistan, is a legal permanent resident of the U.S. and was expected to appear in federal court in Denver later today on the original charge of making false statements to investigators.

- The Obama administration has dropped plans for legislation to authorize the indefinite detention of accused terrorists, and instead plans to rely on existing legal authority if necessary, administration officials said. Democrats in Congress and human-rights groups have fiercely opposed plans, outlined by President Barack Obama in a high-profile national security speech at the National Archives in May, for a new regime to indefinitely detain some prisoners who may not be put on trial but are deemed too dangerous to release.

- Benefits for seniors on Medicare emerged as a flashpoint Thursday as senators writing a sweeping health-care overhaul began their third day of slow-moving deliberations with tempers flaring. The Senate Finance Committee voted 13-10, along party lines, to reject an amendment by Sen. Orrin Hatch (R., Utah) that would have delayed coverage for the uninsured if a million or more people who now have insurance wound up having to pay higher premiums as a result of the legislation. Mr. Hatch said his amendment was intended to protect seniors who signed up for private insurance plans through Medicare and could lose some benefits as a result of cuts to the commercial plans. About 10 million seniors are now signed up through the private plans, about one-fourth of Medicare recipients. The "Medicare Advantage" plans can offer enhanced benefits because the government pays them more than it costs to care for seniors in traditional Medicare.

- Twitter, the messaging web site that has become an Internet sensation, is nearing a deal to close as much as $100 million of new funding from as many as seven investors, according to people familiar with the deal. The investor group includes mutual fund giant T. Rowe Price and private-equity firm Insight Venture Partners, which are new investors to Twitter. The $100 million investment is about twice as much as Twitter was reportedly expected to haul in this latest round of fund-raising.


- Tony Crescenzi, a market strategist and portfolio manager at PIMCO, told CNBC that the re-regulation of the financial system in Group of 20 countries will constrain bank lending and growth. (video)

- Treasurys pared some of their earlier gains despite an auction that seemed to fetch decent demand. The sale of seven-year Treasury notes saw solid buying despite a disappointing debt auction from the previous day.

NY Post:
- For Goldman Sachs(GS) CEO Lloyd Blankfein, an embarrassment of riches has turned into embarrassing riches. Goldman's bonus pool is expected to swell to an estimated $16 billion after what's expected to be another stellar quarter, and Blankfein is struggling to figure out how to pay his employees in a way that keeps them happy while avoiding another round of populist and political outrage like the bank experienced over the summer. According to people familiar with the matter, Goldman's human-resources department is toying with a number of changes to employee compensation, including imposing longer vesting periods for stock options. Also under consideration is paying top executives' bonuses almost entirely in stock to keep from making the biggest cash payments. And while a typical CEO would be cheering such news, for Blankfein another gold-plated quarter represents a huge headache, as the firm's success has been greeted with intense scorn on both Wall Street and Main Street.

- Hell hath no fury like a first lady of New York scorned! Michelle Paterson yesterday lashed out at President Obama for pushing Gov. Paterson not to run for election next year, particularly since the slight to the state's first black governor came from the nation's first black president. "I never heard of a president asking a governor not to run, a sitting governor not to run, so I thought it was very unusual that this would be asked of David, and I don't think this is right," she told The Post during a luncheon hosted by columnist Cindy Adams. She said her husband was hurt to learn he did not have Obama's support, and she did not spare the Democratic Party her wrath, saying she "most definitely" feels the party has abandoned the governor.


- This month's new vehicle sales (including fleet sales) are expected to be 742,000 units, a 22.9 percent decrease from September 2008 and a 41.1 percent decrease from August 2009, according to, the premier online resource for automotive information. analysts predict that September’s Seasonally Adjusted Annualized Rate (SAAR) will be 9.34 million, down from 14.06 in August. “The aftereffects of Cash for Clunkers are being felt in two ways: first, a significant number of September sales were pulled ahead into August, and second, the low inventories and often higher prices give shoppers few reasons to buy,” noted CEO Jeremy Anwyl.


- The Fed's portfolio of mortgage-backed securities has risen from zero last year to $685 billion today. If they go bad, guess who pays? And while the subprime industry may sleep with The Sopranos, there's a new subprime lender in town: the First National Bank of You and Me.

LA Times:

- The biggest find in the state in 35 years, somewhere in Kern County, could herald new exploration in California and the U.S., experts say. Occidental's engineers may have done it. The Westwood company revealed in July that it had found the equivalent of 150 million to 250 million barrels of oil and natural gas in an undisclosed part of Kern County using techniques that the oil company's executives would rather not talk about. It was California's biggest find in 35 years. "Certainly this kind of success will send other people back to California to rethink the geology and rethink the theories of the area," said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and author of the Pulitzer Prize-winning history of the oil industry "The Prize: The Epic Quest for Oil, Money and Power." Joe Hahn knows firsthand the significance of finding that much crude in California.

- The backlash has begun. Today's Marist poll finds 62 percent of New Yorkers think it was wrong for President Obama to stick his nose into local politics and pressure Gov. David Paterson not to run in 2010. Even a majority of Obama's fellow Democrats (51 percent) agree the administration was meddling and should let New York manage its own political affairs. When presented with the scenario that Paterson's low poll numbers will drag down other Democratic candidates, New Yorkers are unmoved. Sixty percent continue to say the White House should butt out.


- While Apple has until December of 2010 to implement new rules for reporting its earnings, a report predicts that Apple will adopt the changes by its next financial quarter. In his latest research note to investors, analyst Gene Munster with Piper Jaffray said that the changes to generally accepted accounting principles (GAAP) from the Financial Accounting Standards Board, formally adopted Wednesday, will boost the company's reported earnings per share from $5.71 to $8.21. In addition, he believes the impact in the 2010 fiscal year will go from $6.00 per share to $8.90. Munster has raised his price target for AAPL stock to $235, up from $186.


- President Obama is scheduled to be the first U.S. chief executive to chair a meeting of the Security Council, but the views most U.S. voters have of the United Nations remain largely unchanged. A new Rasmussen Reports national telephone survey finds that just 29% of voters see the United Nations as an ally of the United States, while 15% regard the international organization as an enemy. For 47%, the U.S. falls somewhere in between the two.

Insurance Claims And Issues:

- Insurers have in the past invested happily in hedge funds. However, hedge funds in recent months have reportedly returned 25 percent losses. There is reportedly an even greater loss in value to investors in hedge funds, greater even than the loss of return on invested money. Reportedly, hedge funds have lost two characteristics that attracted Insurance Company investments: Steady returns and low volatility. These losses in hedge fund value have caused many investing Insurance Companies to bid hedge funds farewell. See Kevin Crowley, "Lloyd's of London Insurers Punish Hedge Funds After 2008 Losses" (, Thursday, September 17, 2009).

USA Today:

- Despite being in the minority in Congress, Republican campaign committees outraised Democrats by $1.7 million in August as they have aggressively collected political cash amid the rancorous debate over health care. Republicans also held an edge over Democrats in the amount of money available, when counting debts, as both parties set the stage for the 2010 elections, in which more than three dozen competitive House and Senate seats are at stake. The GOP spike is a departure. In each of the past four years, the party in power — whether Democrat or Republican — raised more than the minority's fundraising committees in August, a USA TODAY review of campaign records shows.

- A study of rapid influenza tests found they miss many cases of swine flu and U.S. health experts said on Thursday they are not worth the trouble for this flu season.A study looking at the effectiveness of a rapid flu test in the first few weeks of the H1N1 pandemic in May found it detected less than half of the cases later confirmed by more sophisticated tests.

- A U.S. Treasury Department watchdog will study decisions by General Motors Co [GM.UL] and Chrysler to cut more than 2,000 dealers, a key bailout watchdog said on Thursday. Neil Barofsky, special inspector general for the Troubled Asset Relief Program, said his office will examine the process used by the automakers to identify which dealerships to maintain or terminate, as part of their restructuring processes. The Obama administration's autos task force has provided more than $60 billion in bailout financing from the TARP fund for GM and Chrysler, which have both emerged from bankruptcy. Hundreds of dealers assert that their rights were trampled on during the automakers' bankruptcies, leaving them with little or no legal recourse.

Financial Times:
- “Stop, children, what’s that sound, everybody look what’s going down”. Buffalo Springfield knew what was what back in 1967, and Ben Bernanke knows what is going down now. On Wednesday, the Federal Open Market Committee left the target interest rate near zero and told investors to expect it to remain low for some time yet. What is the Fed so worried about? What’s going down are broader measures of money supply. Notes and coins, as well as deposit, savings and money market accounts, or M2, has been falling since the end of June, for example. That fall hardly seems possible given that the so-called monetary base (currency in circulation plus bank reserves) has more than doubled in the past year, almost entirely due to the Fed’s emergency lending programs. Bank reserves have exploded from $50bn to almost $850bn in 12 months. But the frightening reality is that bank lending is now contracting faster than the Fed is buying assets from the non-bank private sector, as part of its efforts to lower yields and revive failed markets. No matter how much the Fed seems to do, banks are not extending loans. US consumer credit, for example, fell at an annualized 10 per cent in July. Total debt outstanding is where it was a year ago. Some wonder about the wisdom of attempting to mend the wreckage of a debt-bubble with yet more debt. Even so, the economic consequences of shriveling broad money do not bear thinking about – the long-term growth rate of M2, for example, is normally about 10 per cent per year. So forget about inflation. Goldman Sachs notes that inflation has the highest correlation to broader measures of money supply.

- Could another AIG-style disaster shake the financial markets again? It is not an entirely idle question. This month, there has been plenty of hand-wringing about the anniversary of the Lehman Brothers collapse. But behind the scenes the issue of AIG – and its links to the credit derivatives market – is currently provoking even more debate among some finance officials. After all, when AIG imploded in September 2008, the potential losses on its credit derivatives contracts were so devastating for the system, because they were so concentrated, that the US government used tens of billions of dollars to honour the deals, benefiting groups such as Goldman Sachs, Société Générale and Barclays. And that money, remember, will not return to the Treasury’s purse. the grim fact remains that the CDS sector still faces a peculiar contradiction. When credit derivatives were first developed 15 years ago, they were presented as products which would encourage the dispersion of credit risk, among banks, hedge funds, asset managers and companies. In practice, many corporate users have never really adopted the instruments on any scale. That is in stark contrast to the world of interest or currency swaps, where such instruments are very widely used. That pattern has left the CDS market marked by striking levels of circularity, since a limited pool of large financial players dominate much activity. In some respects, this sense of concentration has actually risen – not fallen – in the last year, because hedge funds and other players (including AIG) have been forced out of the sector. The Banque de France, for example, calculates that the 10 largest dealers now account for 90 per cent of trading volume (it was below 75 per cent in 2004). In the US, JPMorgan Chase alone now apparently represents 30 per cent of the US market. This is similar – ironically – to its share a decade ago when it first pioneered the CDS world.

- Despite all this pain, the remaining financial market participants gained significant benefits from government bailouts. The Group of 20 nations’ average support for the financial sector is more than 30 per cent of gross domestic product (including capital injections, guarantees, treasury lending and asset purchases, liquidity provision, and other central bank support). In our political response to this crisis, new forms of fiscal burden-sharing will be needed. One of these is a global financial-transaction tax.

- Barack Obama has opened an unprecedented United Nations session, laying out his vision of a nuclear-free world, even as his agenda faces mounting obstacles in Washington.

Globe and Mail:

- Canadians continued to pile up credit card debt in the second quarter of this year in lockstep with rising joblessness and personal bankruptcies. The country's charge-off rate – a measure of credit default – hit a record 4.8 per cent in the quarter, said Moody's Investors Service in its latest credit card indices report for Canada. It expects charge-offs will worsen further in the coming months, though the rate of deterioration should ease. At 4.8 per cent in the quarter, the Canadian charge-off rate index is up almost 60 per cent from a year earlier. It's the tenth straight quarter of year-over-year increases for the index.

- Prime Minister Benjamin Netanyahu told Haaretz on Wednesday that he would not agree to a Palestinian demand that Israel accept the 1967 borders as a condition for renewing peace negotiations. Netanyahu also gave a condition of his own, saying Thursday that he would never drop his demand that the Palestinians recognize Israel as a Jewish state. "I told Abu Mazen [Abbas] I believe peace hinges first on his readiness to stand before his people and say, 'We...are committed to recognizing Israel as the nation-state of the Jewish people'," Netanyahu said. "I will not drop this subject and other important issues under any final peace agreement," Netanyahu said.

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