Monday, May 10, 2010

Today's Headlines

  • Stocks, Commodities, Greek Bonds Rally on European Loan Package. Stocks rallied around the world, sending the MSCI World Index up the most in 13 months, while Greek, Spanish and Portuguese bonds soared after European policy makers announced an almost $1 trillion loan package to end the region’s sovereign-debt crisis. The euro pared an earlier rally. The MSCI World gauge of stocks in 23 developed nations jumped 4.5 percent at 1:04 p.m. in New York, while the Standard & Poor’s 500 Index rose 3.9 percent and Spain’s IBEX 35 Index surged a record 14 percent.
  • Greece May Have Rating Lowered to Junk, Moody's Says. Greece may have its credit rating lowered to junk within the next month, Moody’s Investors Service said, citing the country’s “dismal” economic prospects. “We expect to conclude our review in the coming four weeks,” Moody’s, which currently has the nation’s A3 rating on review for a downgrade, said in a report today. “The migration will most likely be substantial, probably within the Baa range; but an adjustment to below investment grade is also possible.” Portugal’s rating, which is also on review for a downgrade, will probably be lowered one level to Aa3 from Aa2, though an “adjustment” of two steps to A1 can’t be ruled out, Moody’s said. No “significant” rating action is likely “in the short run” for Ireland, which has a negative outlook on its Aa1 rating, the company said. Cutting Greece to junk would be a downgrade of at least four steps. Standard & Poor’s already rates Greece BB+, one level below investment grade. A downgrade “will depend on developments in the Greek economy once the fog of financial panic, support-mobilization and street demonstrations dissipates,” Moody’s said.
  • Exchanges Seek Faster Circuit Breakers After May 6 Stock Plunge. The biggest U.S. equity exchanges said they must align trading rules to prevent conflicting systems from repeating the failures of handling buy and sell orders that worsened last week’s rout. Circuit breakers designed to slow trading or shut markets during volatile periods may have prevented the biggest losses on May 6, when the Dow Jones Industrial Average fell 998.5 points intraday, according to Bats Global Markets Inc., Direct Edge Holdings LLC and White Cap Trading LLC. The Securities and Exchange Commission is studying changes to calm markets when prices tumble, people familiar with the matter said May 7.
  • Euro Rally Temporary, Will Resume Decline, UBS Says. The euro’s rally after European policy makers announced a loan package worth nearly $1 trillion as well as government-bond purchases will be “temporary,” according to UBS AG, the second-largest currency trader. Policy in the region is becoming “very unfavorable,” said Mansoor Mohi-uddin, Singapore-based global head of currency strategy at UBS. The European package may drive a “temporary rally” in the euro toward $1.35 before it resumes its decline, said Mohi- uddin. “The euro will definitely hit what we call its long-term fair value at $1.20 and it may easily overshoot that if difficulties in Europe persist,” he said. “The policy mix in Europe is becoming very unfavorable to the currency.”
  • Default Swaps Tumble After EU Goes 'All In': Credit Markets. Credit markets rallied around the world after the European Union agreed on an aid package worth almost $1 trillion to halt the sovereign debt crisis. “There has been a poker game going on between the markets and the EU,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “This is probably reaching a climax as the EU has just gone ‘all in.’” Credit-default swaps on the Markit iTraxx Europe Index of 125 investment-grade companies tumbled 32 basis points to a mid- price of 101 as of 4:46 p.m. in London, with banks leading the biggest ever one-day decline, according to Markit Group Ltd. Swaps on Greece fell 358.5 basis points to 557, Portugal dropped 178 to 247 and Spain declined 82.5 to 156 basis points, according to CMA DataVision. The Markit CDX North America Investment Grade Index, an indicator of perceived credit risk linked to 125 companies in the U.S. and Canada, fell 17.3 basis points to a mid-price of 101.4 basis points as of 11:49 a.m. in New York, Markit prices show. Swaps on JPMorgan Chase & Co., the second-biggest U.S. bank by assets, fell about 10 basis points to 105, according to broker Phoenix Partners Group. Contracts on Goldman Sachs Group Inc., the bank facing fraud allegations from the U.S. Securities and Exchange Commission, fell 18 basis points to a mid-price of 195 basis points, Phoenix prices show. The Markit iTraxx Financial Index of credit-default swaps on 25 European banks and insurers fell 42 basis points to 135 basis points and earlier dropped to 119, the biggest one-day drop ever, JPMorgan prices show. That’s still only the lowest in a week and is higher than the 87 basis-point level on April 13. The difference between three-month dollar Libor and the overnight indexed swap rate, the so-called Libor-OIS spread that’s a barometer of the reluctance of banks to lend, jumped to 19.13 basis points today from 18.11 basis points on May 7. The spread, which earlier reached 20 basis points, is more than three times the 6 basis-point spread on March 15 and is at the highest levels since August. “Credit investors should not overlook that this is more of a sovereign bailout rather than a private-sector bailout,” Philip Gisdakis, the head of credit strategy at UniCredit SpA in Munich, wrote in a note to investors. “The austerity measures that will be part of the program will have a negative impact on corporate spreads.”
  • Fannie Mae Seeks $8.4 Billion in New Aid After Loss. The company lost $11.5 billion in the first three months of this year, it said today in a Securities and Exchange Commission filing. Fannie Mae had posted $136.8 billion in losses in the preceding 10 quarters, and the new aid request would bring its total draw from the Treasury to $84.6 billion since April 2009. Even with the assistance, Fannie Mae increased foreclosures to almost 62,000 homes from about 47,000 in the prior quarter, according to the filing. The company’s foreclosure rate increased and its inventory of homes grew from $8.5 billion to $11.4 billion during the first quarter. “We expect our foreclosures to increase in 2010 as a result of the adverse impact that the weak economy and high unemployment have had and are expected to have on the financial condition of borrowers,” the company said in a press release. Credit-related expenses, including home-loan delinquencies and defaults, increased to $5.1 billion in the first quarter from $4.1 billion three months earlier, the company said. Non- performing loans were $223.9 billion as of March 31, up from $216.5 billion at the end of December.
  • Dollar Libor Holds Near 9-Month High After EU Aid. The rate banks say they pay for three-month loans in dollars stayed near the highest level in about nine months on concern an almost $1 trillion European loan plan may not be enough to restore confidence in markets. The London interbank offered rate, or Libor, for such loans slipped to 0.421 percent today, from 0.428 percent on May 7, the highest since Aug. 17, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, widened more than 1 basis point to 19.2 basis points.
  • EU Hedge-Fund Legislation Vote is Postponed, Lawmaker Says. European Union lawmakers postponed a vote on hedge-fund legislation that would have stopped EU investors from sending money to funds based in off-shore tax havens. Members of the European Parliament’s Economic and Monetary Affairs Committee postponed a scheduled vote that could have seen European authorities bar hedge funds from countries that don’t meet tax disclosure rules. The parliament will now vote on the proposals May 17, said Sharon Bowles, the chairwoman of the committee. “More time is needed” to resolve differences, Bowles told the lawmakers at a hearing today. The vote was postponed to give “more consideration” to the Parliament’s legal affairs committee, the EU institution later said in a statement.
  • Goldman Sachs(GS) Says It Expects More Lawsuits Over CDOs.
  • Kocherlakota Says Bailouts Are Inevitable, Backs Taxes on Firms. Narayana Kocherlakota, the Federal Reserve’s newest policy maker, said financial firms should be taxed as a way to limit the size of future bailouts because legislation won’t eliminate the prospect of such rescues. “Bailouts are inevitable,” he said in the text of a speech today in Minneapolis. “Policy makers inevitably resort to bailouts even when they have explicitly resolved, in the strongest possible terms, to let firms fail” because governments can’t risk a systemic collapse. He suggested imposition of a tax based on the government’s estimated, discounted cost for bailing out a firm any time over the next one to 30 years.
  • China's Stocks Rebound After Briefly Entering a Bear Market. China’s stocks rebounded after briefly entering a bear market on speculation a slowdown in the economy may delay increases in borrowing costs and a Europe loan package will keep the region’s credit crisis from spreading. The Shanghai Composite Index added 10.38, or 0.4 percent, to 2,698.76 at the close after falling as much as 1.6 percent. The measure briefly slid more than 20 percent from the close of 3,338.66 on Nov. 23, a sign analysts say is a bear market.
  • Goldman Sachs(GS) Has First Quarter With No Trading Loss. Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before. Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time. Trading accounted for 76 percent of first-quarter revenue. The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, said one shareholder. “It will reinforce the heads we win, tails you lose mentality that people think actually exists and promotes the concept of an unfair advantage,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, which oversees about $2 billion in assets including Goldman Sachs shares. “It’s too politically charged not to, how is that possible that they only make money?”
  • N.J. Democrats Want Tax on Rich, Christie Seeks Curbs. New Jersey's Democratic lawmakers called for an income-tax surcharge on residents who earn at least $1 million a year, as Republican Governor Chris Christie proposed limits on spending by state and local government.
  • Chavez's Threats May Make Economy Worse, Ramos Says. Venezuelan President Hugo Chavez’s threats to stem currency speculation will likely deepen an economic slump and force the government to spend more dollars in the foreign-exchange market to slow a rout in the bolivar, Goldman Sachs Group Inc. said. “Chavez continues to misdiagnose the problem and feels the solution is more socialism and less speculation,” Goldman Sachs economist Alberto Ramos said in a telephone interview from New York.

Wall Street Journal:
  • Real Estate's Far Reach Will Continue to Pinch. Highflying property prices drove the most-recent economic boom, and a collapse in real-estate values hammered it back down. Now, as the economy struggles to regain strength, real estate is expected to continue to act as a brake, rather than an accelerator. Despite clear signs of revival in the larger economy, including upturns in manufacturing and consumer spending, the nation's market for homes and office buildings remains mired in foreclosures and oversupply. That imbalance will be worked out over time, but in the meantime, it is slowing the recovery in myriad ways. Here's how it breaks down: Less construction means fewer jobs. Home owners who once felt rich are feeling poorer. Small businesses aren't borrowing as much. Lower real-estate values translate into lower property taxes, crimping government spending.
  • Skype to Offer Group Video Chat, for a Fee. Internet calling service Skype Ltd. unveiled a new group video chat service and subscription plans, as it builds out its strategy of offering a free service that makes money by charging for extras. Skype will next week launch a free trial of an upgrade to its PC-based calling software that lets up to five people make a video call at the same time. The trial will be free, but the company will begin charging for the group feature — one of its users' biggest requests — later in the summer.
  • IDC: Cloud Computing Server Sales to Reach $12.6 Billion by 2014. Server sales related to cloud computing are expected to jump to $12.6 billion in the next five years as more businesses embrace the era of automated and virtualized data centers.
  • Fed's Swap Decision Could Ratchet Up Political Pressure. The U.S. Federal Reserve's decision to reopen swap lines with the European Central Bank and central banks in Japan, Switzerland, England and Canada puts it in a delicate political position. The U.S. Congress is in the midst of rewriting a financial regulatory overhaul that could rein in the Fed amid sharp criticism of its actions before and during the financial crisis. The overseas lending program it reopened Sunday in response to pleas from Europe has been among the programs lawmakers have criticized, with some suggesting it is bailout out foreign banks and other saying the Fed is too secretive about details. Under the swap lines, the Fed makes loans to foreign central banks, which in turn use the funds to make U.S. dollar loans to financial institutions in their home markets. Fed officials say they face little risk in these loans, because their counterparties are central banks and not foreign financial institutions.
  • Obama Nominates Kagan to Seat on Supreme Court. President Barack Obama announced the nomination of Solicitor General Elena Kagan to the Supreme Court, calling her a "trailblazing leader" who could build consensus across ideological lines. If confirmed by the Senate, Ms. Kagan would be the first justice in nearly 40 years to join the court without previous experience as a judge.
  • Housing Prices to Rise 3-5% This Year: John Paulson. John S. Paulson, the hedge fund manager who made $15 billion shorting the real estate market, said Monday that he expects housing prices to rise between 3 percent and 5 percent this year and another 8 to 12 percent in 2011. He also said he expects a strong V-shaped economic recovery.
Fox News:
  • Paulson to Close Biggest Funds to New Investors. Paulson & Co. said Monday that it will close the firm's largest hedge funds to new investors later this year. The Advantage funds, which oversee roughly $19 billion in assets, will only allow new investors in if current investors redeem, creating space, John Paulson, head of Paulson & Co., explained during a conference call with clients. Paulson & Co.'s other hedge funds - the Credit, Merger, Recovery and Gold funds - aren't affected and will remain open to new investors, Paulson added.
NY Times:
  • Banks Lobby Against Ban on Derivatives Trading. Cory Strupp, who represents Wall Street in Washington, spent the last six months lobbying for more than two dozen changes in the derivatives chapter of the Senate’s financial legislation. He has spent the last two weeks focused on one: eliminating a new provision that would require banks to leave the lucrative business of derivatives trading, Binyamin Appelbaum and Eric Lichtblau report in The New York Times.
Business Insider:
  • Moody's(MCO) CEO Dumped Shares The Day SEC's "Well's Notice" Arrived -- And So Did Buffett!. We suspect Moody's investors will also be interested to know that CEO Raymond McDaniel dumped 100,000 shares of stock at $29 a share the day the Wells Notice arrived. And that Berkshire Hathaway (BRK) sold ~678,000 shares that day and another ~300,000 or so in the week that followed. Did Raymond McDaniel and Berkshire know about the Wells Notice when they sold their stock? If so, couldn't this be trading while in possession of material non-public information?
  • The Danish People's Party broke with Denmark's ruling coalition, to which it provides parliamentary support, over European finance ministers' package to strengthen the euro, calling it "unacceptable," citing Pia Adelsteen, a spokesman for the People's Party. Getting rid of the euro and allowing countries to devalue their old currencies is the best solution to the current crisis, Adelsteen said.

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