Today's Headlines

Bloomberg:

- Germany’s economic recovery unexpectedly stalled in the fourth quarter of 2009 as waning consumption and investment offset export growth. Gross domestic product, adjusted for seasonal effects, was unchanged from the third quarter, when it rose 0.7 percent, the Federal Statistics Office in Wiesbaden said today. The German slowdown weighed on euro-area growth, which slowed to 0.1 percent from 0.4 percent in the previous quarter. Economists had expected 0.3 percent expansion.

- The Greek budget crisis is a symptom of imbalances that will lead to the breakup of the euro region, according to Societe Generale SA strategist Albert Edwards, and Harvard University Professor Martin Feldstein said monetary union “isn’t working” in its current form. Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, top-ranked Edwards wrote in a report today. Feldstein, speaking on Bloomberg Radio, said a one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ. The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Edwards wrote. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.”

- China’s central bank took the second step in a month to restrain inflation and damp asset prices, ordering lenders on the eve of a weeklong holiday to set aside larger reserves. The reserve requirement will rise 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site yesterday. The existing level is 16 percent for the biggest banks and 14 percent for smaller ones. Policy makers are reining in credit growth after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months.

- Developing-nation currencies weakened and the MSCI Emerging Markets Index fell for the first time in four days after China raised reserve requirements for banks and Europe’s economic growth trailed estimates. Brazil’s real led declines against the dollar, losing 0.9 percent to 1.8599 at 2:33 p.m. in London. The ruble slid 0.3 percent as Russia’s Micex stock index dropped 1.8 percent. South Africa’s rand weaken 0.8 percent, while Hungary’s forint, the Czech koruna and Polish zloty dropped against the euro. “The withdrawal of liquidity by central banks is one of the main themes this year,” said Elisabeth Gruie, an emerging- market strategist at BNP Paribas SA in London. Slowing growth in western Europe “could have spillover effects on other markets in central Europe, given their dependence on exports to Germany and other euro-area countries.” The extra yield investors demand to own emerging-market debt over U.S. Treasuries widened five basis points to 3.02 percentage points, JPMorgan Chase & Co.’s EMBI+ Index shows.

- The cost to protect against a default by Dubai surged to the highest since state-controlled Dubai World delayed debt repayments in November, as Greece’s financial crisis reignited concern riskier emerging-market debt might not be repaid. Credit-default swaps linked to Dubai debt jumped the most in two months, rising 53 basis points to 638 basis points at 9:15 a.m. in New York, according to CMA Datavision. The contracts are at the highest since Nov. 27. Dubai’s Islamic bond due 2014 fell to 87.125 cents on the dollar from 89 cents, the lowest since the debt was sold in October, according to Royal Bank of Scotland Group Plc prices.

- Crude oil and copper paced the worst decline for commodities in a week as China, the world’s fastest- growing major economy, sought to cool growth. The S&P GSCI Index of 24 raw materials fell 1.5 percent to 494.132 as of 1:22 p.m. in London, the most since Feb. 5. Oil dropped 1.9 percent in New York trading and copper slid 2.1 percent in London. Aluminum, wheat and gold also declined. “It’s taking everyone by surprise,” said Daniel Brebner, an analyst at Deutsche Bank AG in London. “It’s going to get everybody thinking, ‘How much more tightening will we see out of China?’ This will obviously impact industrial materials.”

- Just 8 percent of Americans want the members of Congress re-elected, according to a CBS News-New York Times poll taken nine months before roughly one-third of the Senate and the entire House face voters. The Feb. 5-10 survey found 81 percent of respondents saying the lawmakers shouldn’t receive another term. By 80 percent to 13 percent, Americans said members of Congress are more interested in serving special interests than the people they represent. Also, 75 percent disapproved of the job Congress is doing, the highest level since 74 percent said they disapproved in October 2008. Congress’s job approval rating was 15 percent in the current survey; it was 12 percent in October 2008.

- Gary Gensler, chairman of the Commodity Futures Trading Commission, is shattering any illusions that his 18 years at Goldman Sachs Group Inc.(GS) would make him sympathetic to Wall Street’s effort to weaken derivatives legislation.

- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates. “I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009. Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($965 million) 74- story China World Tower 3. Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble. “There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”

- Rome was today hit by its heaviest snowstorm since 1986, covering the Italian capital’s historic monuments with a veil of white and slowing traffic in a city unaccustomed to extreme winter weather.

Wall Street Journal:

- President Barack Obama will sign a $1.9 trillion increase in the federal government's borrowing limit into law Friday, the White House said. The debt-limit boost, passed last week by the House of Representatives, brings the total amount the federal government can borrow to $14.3 trillion and will allow the government to function for the rest of the year. Though the increase represents money already spent by the Treasury Department, it comes as lawmakers struggle to convince voters that they are taking steps to address the record budget deficit, which is on course to reach $1.6 trillion in the current fiscal year.

CNBC:

- The tremors from Europe and China are sparking selloffs in stocks, but the turmoil could be setting up the US market for a strong buying opportunity, strategists say.

NY Times:

- The tiny Baltic states have pursued closer integration with Europe with enormous zeal. But the price of monetary union may be giving them pause. Economists and ordinary citizens alike are watching the protests rumbling through the streets of Athens and the slow response to Greece’s problems coming out of Brussels. “Countries like Estonia and Latvia were once desperate to get in,” said Alf Vanags, director of the Baltic International Center for Economic Policy Studies in Riga. “The euro is not looking so attractive now.”

The Business Insider:

- Hugh Hendry: Here are Four Reasons China Will Start Sucking Wind. Here's why China is not that great, according to Hendry: China, now the world's biggest creditor, is also running persistent trade surpluses. That's only happened twice before: with the US economy in the 1920s and with the Japanese economy in the 1980s. Unlike in most countries, China's share of consumption within its economy has fallen relentlessly, reaching 35% of GDP in 2008. Foreign demand for its exports dropped. Now China relies on a massive surge in domestic bank lending to fuel its growth rate. China's state planners have favored investment over consumption. China's investment spending has tripled since 2001. Domestic consumption never grows fast enough to absorb the supply, and Chinese profitability is already low.

- The Secret Aluminum Shipments That Show China Is De-Stockpilng Its Commodities.

- Financial Times Forcing Journalists Into ‘Risky Situation’ In China, Staffers Say.

- Upstart research firm Waverley Advisors continues to put out some very interesting research and analysis. In a note today they apply Dow Theory to the surging dollar and conclude this move is real.

CNNMoney.com:

- The iPad that launched a thousand apps. Data gathered in January show a rush of new projects on the iPhone operating system.

Detroit Free Press:

- Saying that body scanners violate Islamic law, Muslim-American groups are supporting a “fatwa” – a religious ruling – that forbids Muslims from going through the scanners at airports.

Rassmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove which gives Obama a Presidential Approval Index rating of -15 (see trends).

Politico:

- House Speaker Nancy Pelosi’s increasingly public disagreements with President Barack Obama are a reflection of something deeper: the seething resentment some Democrats feel over what they see as cavalier treatment from a wounded White House. For months, the California lawmaker has been pushing Obama hard in private while praising him in public. But now she’s being more open in her criticism, in part because she feels the White House was wrong — in the wake of the Democrats’ loss in Massachusetts — to push the Senate health care bill on the House when she knew there was no way it would pass.

The Detroit News:

- JD Power sees positive year ahead for automakers.

TheMacObserver:

- Charlie Wolf, an analyst with Needham, sent a note to investors on Friday noting that Mac and iPhone sales are considerably higher than his projection in September, 2009. He estimates that Apple will sell 48+ million iPhones in 2011 and 6 million iPads in 2011. His target price for AAPL is now US$280.00. In a long term projection seldom seen amongst analysts, Mr. Wolf predicted that Apple would sell 142+ million iPhones in 2019.

Financial Times:

- Wall Street loves a piñata party – singling out a company or country, making it the piñata, grabbing their sticks and banging it until it breaks. As in the child’s game, the piñata is left in shreds. Unlike the child’s game, in the Wall Street version the piñata is stuffed with money for the bankers to scoop up with both hands, instead of sweets. We see this game being played today, with Greece as the piñata. Investors trying to understand why their portfolios have begun to melt down for the second time in five years are becoming experts in the fiscal policy of Greece. A look at the piñata party might make things clearer. Greece’s travails are often measured by reference to the market in credit default swaps (CDS), a kind of insurance against default by Greece. As with any insurance, greater risks entail higher prices to buy the protection. But what happens if the price of insurance is no longer anchored to the underlying risk? When we look behind CDS prices, we don’t see an objective measure of the public finances of Greece, but something very different. Sellers are typically pension funds looking to earn an “insurance” premium and buyers are often hedge funds looking to make a quick turn. In the middle you have Goldman Sachs or another large bank booking a fat spread. Now the piñata party begins. Banks grab their sticks and start pounding thinly traded Greek bonds and pushing out the spread between Greek and the benchmark German CDS price. Step two is a call on the pension funds to put up more margin, or security, as the price has moved in favor of the buyer. The margin money is shoveled to the hedge funds, which enjoy the cash and paper profits and the 20 per cent performance fees that follow. How convenient when this happens in December in time for the annual accounts, as was recently the case. This dynamic of pushing out spreads and calling in margin is the same one that played out at Long-Term Capital Management in 1998 and AIG in 2008 and it is happening again, this time in Europe. Eventually the money flow will be reversed, when a bail-out is announced, but in the meantime pension funds earn premium, banks earn spreads, hedge funds earn fees and everyone’s a winner – except the hapless hedge fund investors, who suffer the fees on fleeting performance, and the unfortunate inhabitants of the piñata. What does any of this have to do with Greece? Very little. It is not much more than a floating craps game in an alley off Wall Street. This is where the idea of CDS as insurance breaks down. For over 250 years, insurance markets have required buyers to have an insurable interest; another name for skin in the game. Your neighbor cannot buy insurance on your house because they have no insurable interest in it. Such insurance is considered unhealthy because it would cause the neighbor to want your house to burn down – and maybe even light the match. When the CDS market started in the 1990s the whiz-kid inventors neglected the concept of insurable interest. Anyone could bet on anything, creating a perverse wish for the failure of companies and countries by those holding side bets but having no interest in the underlying bonds or enterprises. We have given Wall Street huge incentives to burn down your house.

Caijing:

- China’s bank loans slowed in the first week of February, citing a person close to the regulator. Many banks have set smaller bank loan quotas for February compared with January, citing the person.