Tuesday, May 18, 2010

Today's Headlines

  • Sovereign Crisis Spurs 'Lehman II' Concern in Europe. Europe’s banks are facing déjà vu. Less than two years after the collapse of Lehman Brothers Holdings Inc., fresh tremors in the debt markets are threatening to shake the financial system. This time the concern isn’t about subprime mortgages or exotic derivatives, it’s about banks’ holdings of bonds sold by European Union governments including Greece, Portugal and Spain. Pledges of $1 trillion in EU aid have failed to shore up the euro or dispel doubts about the region’s finances. Investors have punished the shares of European financial firms and driven up the cost of insuring against default by banks and insurers on concern measures aimed at reducing the region’s budget deficits will choke economic growth. In a worst- case scenario, government debt restructurings could erode capital and spark another credit crunch, analysts say. “There’s a concern this may be Lehman II,” said Konrad Becker, a Munich-based banking analyst at Merck Finck & Co. “The direct risks of writedowns and loan defaults combined with indirect ones such as mistrust between banks could lead to a systemic crisis.”
  • Merchant Commodity Fund Lost 19% in Four Months on Agriculture. Michael Coleman and Doug King’s $1.13 billion Merchant Commodity Fund dropped 19.4 percent in the first four months of the year, lagging behind the industry average, because of losses in agriculture. The fund fell 5.3 percent last month, after a 13.1 percent drop in March, according to a report to investors obtained by Bloomberg News. Agriculture lost 21 percent in the first four months, wiping out gains in energy and freight. Coleman, the Singapore-based managing director of the fund’s manager, Aisling Analytics Pte, declined to comment. The S&P GSCI Agriculture Index lost 15 percent through the end of April as New York-traded raw sugar slumped 44 percent.

Wall Street Journal:
  • Market-Wide Circuit Breakers Could Start June 14. U.S. stock exchanges and regulators are expected to propose a six-month pilot program Tuesday of market-wide measures designed to guard against events like the May 6 stock market "flash crash", according to people familiar with the matter. As a coordinated response to the crash that at one point sent the Dow Jones Industrial Average plunging nearly 1,000 points before bouncing back somewhat, "circuit breakers" would be established around specific stocks first, with broader market-wide safeguards tied to index levels to be rolled out later. The pilot program will start on June 14, these people said. The levels that would set off the stock-specific circuit breakers have been the subject of considerable debate, but people familiar with the talks expect a 10% movement in individual stocks to be the trigger for a slowing or time-out in trading of the volatile stocks across trading platforms.
  • Toxic CDOs Beset FDIC as Banks Fail. The FDIC has inherited hundreds of potentially worthless bonds that have come back to haunt the Wall Street firms that sold them, the credit-rating firms that graded them and the hundreds of small banks that bought them. The Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more than 250 collateralized debt obligations that were purchased by small institutions that later failed. Although the bonds have a book value of more than $400 million, they are a headache for the agency as it grapples with the toxic assets flowing from many banks around the country.
  • Smart Phones: Will There Be More Than Two Mobile Platforms? Right now, the smart phone landscape seems completely cluttered with software platforms: IPhone OS, Android, Windows, Symbian, Maemo, BlackBerry OS, WebOS and a number of others. But that’s not likely to be the case forever. Some of the players will end up being exposed as pretenders. Ashok Kumar, an analyst with Rodman & Renshaw, made the fascinating (and highly controversial) assertion in a research note on Monday that when the dust settles, the market could be down to just two players: Google (GOOG) Android and Apple’s (AAPL) iPhone. Kumar in one short note throws out some astounding predictions:
Bloomberg Businessweek:
  • Merkel Pressed on Financial Tax as EU Loans Plan Goes to Vote. Chancellor Angela Merkel’s coalition pressed for a financial levy to be introduced “as quickly as possible,” as they prepared to put the euro-region’s $1 trillion bailout plan to the German parliament this week. The three ruling parties agreed to pursue a financial transaction tax or a levy on financial activities, as well as a ban on naked short selling, Volker Kauder, parliamentary leader of Merkel’s Christian Democrats, told reporters in Berlin today after a meeting of the party caucuses. “We agree that the financial sector must share in the cost of the crisis,” said Birgit Homburger, floor leader of Merkel’s Free Democratic coalition partner. “Those who speculate at the taxpayer’s expense must participate.”
  • Euro May Drop to Six-Year Low, Credit Suisse Says in Revision. The euro may fall over the next three months to $1.16 as the sovereign-debt crisis forces the European Central Bank to keep borrowing costs low, according to Credit Suisse Group AG. The last time the euro traded at that level was in November 2003, according to Bloomberg data. Credit Suisse previously forecast that the 16-nation currency would trade at $1.29. The euro will reach $1.25 by the end of the year, according to the median forecast of 42 economists in a Bloomberg survey. “The euro is now a low-yielding currency suffering a deeper crisis of confidence than we expected, with little near- term outlook for support from interest-rate policy,” Credit Suisse strategists including Ray Farris in London and Daniel Katzive in New York wrote in a note to clients today. “We think that euro-dollar will need to trade to obviously cheap levels to generate sustained buying interest in the near term.”
  • Credit-Card Industry Faces 'Volcanic' Senate Eruption. Credit-card firms caught off-guard by U.S. Senate passage of curbs on debit fees are facing what one executive sees as a “volcanic” eruption of legislation, including possible limits on interest rates. Sheldon Whitehouse, a Rhode Island Democrat, said yesterday states should be able to enforce their own rate limits on cards, regardless of where the issuer is located. Whitehouse pushed his amendment on the Senate floor the same day that his colleagues voted to let consumers get credit scores for free. The industry already was reeling from the Senate’s surprise passage last week of limits on debit-card “swipe” fees, the levy charged to merchants for each transaction. The stream of proposed rules “rivals only the Icelandic volcanic reports,” Discover Financial Services Chief Financial Officer Roy Guthrie told investors and analysts. “Every half-day we’re getting a new batch,” Guthrie said today during the Barclays Capital Financial Services Conference. “I hope that calmer heads prevail.”
  • Feldstein Says Falling Permits May Signal U.S. Housing Slump. A decline in U.S. homebuilding permits last month may indicate a renewed housing slump as demand weakens after the expiration of tax credits, Harvard University economics professor Martin Feldstein said. Permits in April fell by the most since December 2008, according to Commerce Department figures released today in Washington. The report also showed housing starts rose to a 672,000 annual rate last month, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since October 2008. “Permits are an indication of what is going to happen in the future,” Feldstein said in a Bloomberg Television interview. “With the first-time home-buyer credit behind us, we are not going to see the strength of housing demand we have in the last few months as people rushed to take advantage of that program.”
  • Senate Rejects Proposal to Prevent Bailouts of U.S. States. The U.S. Senate rejected an amendment to financial-regulation legislation aimed at preventing taxpayer bailouts of state and local governments that have defaulted or are at risk of defaulting on debt. Senator Judd Gregg’s proposal, which would have barred use of federal funds to purchase or guarantee debt or extend lines of credit to governments facing default, failed to win the 60 votes required for adoption. “They shouldn’t expect the federal government to come in and take them out of their distress,” Senator Judd Gregg said before the vote. “There should be nothing that’s too big to fail in this country, including state governments,” said New Hampshire’s Gregg, the top Republican on the Budget Committee. “The people of California, because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their pension programs, their public pension programs which they can’t afford to pay,” Gregg said. “And why did they run up those obligations? So the people running for office in California could get elected.”
NY Post:
  • DC's Carried Away. Dem's to Unveil Plan on Private-Equity Partners Tax. Congressional Democrats as soon as today could unveil a plan to raise the tax that private-equity partners pay on the profits they make, but the increase will be phased in over a 10-year period, according to a person familiar with the matter. Under the plan, the tax on carried interest would begin inching upward a year after the legislation was enacted, starting at the current 15 percent and ending at the present ordinary income rate of 35 percent by the 10th year. The hike is part of an amended $200 billion Tax Extenders bill that is also expected to include a tax on oil and the postponement for five years of Medicare cuts that were part of the Health Reform bill. That postponement is estimated to carry a $90 billion price tag. According to the source, to offset some of the costs linked to postponing the Medicare cuts, and extending popular provisions like deductions for state and local sales taxes through the 2010 tax year, the Democrats are proposing an increase in the tax on crude oil and other petroleum products with an eye toward raising $10 billion over 10 years. Lawmakers are also looking to close a tax loophole that allows partners in S-corporations, such as law firms, to take low salaries and get most of their income in the form of distributions in order to avoid paying Social Security and Medicare taxes.
Business Insider:
Zero Hedge:
NY Daily News:
  • Rev. Jeremiah Wright Claims President Obama 'Threw Me Under the Bus' in Letter to African Aid Group. The Rev. Jeremiah Wright, Barack Obama's controversial ex-pastor, threw a hissy fit in a letter to an African aid group, claiming that the president "threw me under the bus" and the White House views him as "toxic." In a missive obtained by the Associated Press, Wright told Africa 6000 International that the Obama administration would likely ignore his efforts to release frozen funds for use in earthquake-stricken Haiti. "No one in the Obama administration will respond to me, listen to me, talk to me or read anything that I write to them. I am 'toxic' in terms of the Obama administration," Wright wrote the president of the Pennsylvania-based group, Joseph Prischak, earlier this year.
The Atlantic:
  • Effort to Bring Fannie and Freddie on Budget Fails. Just because we own it doesn't meant we have to recognize it. That was the message of the Senate on Monday evening when it voted down an amendment (.pdf) which would have required the government-sponsored entities Fannie Mae and Freddie Mac be brought on budget. The government promised to stand behind the institutions and put them into conservatorship in 2008. The measure, sponsored by Sen. Mike Crapo (R-ID), failed by a vote of 47-46. Because it was brought up as a motion to waive a budget point of order, it would have required 60 votes. It's pretty confusing to understand how Congress can get away with not recognizing in its budget nationalized corporations that have become part of the federal government. At this time any losses these companies incur will be covered by taxpayers. So shouldn't its "outlays, receipts, deficits or surpluses" be a part of the "Budget of the United States Government"? You would think so. But then you wouldn't know much about politics. This amendment failed for two main reasons. First, it would likely require Congress to raise the debt ceiling. That's something they surely have no desire to do. Second, Congress really has very little desire to rein in Fannie and Freddie.
  • Times Square Bomb Suspect Considered Other Targets. Failed Times Square bomb suspect Faisal Shahzad had considered targeting several other locations in the city -- including Grand Central and Rockefeller Center -- before deciding to leave an explosives-laden SUV at the "crossroads of the world," law enforcement sources said.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17. That matches the lowest rating earned by the president since the passage of his health care proposal two months ago (see trends).
  • 64% Favor Offshore Drilling. Despite the major oil rig leak that continues to spew an estimated 5,000 barrels a day into the Gulf of Mexico, the majority of U.S. voters still support offshore oil drilling. The latest Rasmussen Reports national telephone survey of Likely Voters shows 64% believe offshore oil drilling should be allowed, up from 58% earlier this month. Twenty-one percent (21%) say offshore drilling should not be allowed.
  • Schaueble Plans to Ban Short-Selling - Sources. German Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight, coalition sources told Reuters on Tuesday.
  • Southern California Homes Sales Dip in April. Sales of new and resale homes totaled 20,299 in Los Angeles, Orange, San Diego, Riverside, San Bernardino and Ventura counties last month, down 0.9 percent from March and down 1.0 percent from a year earlier, the report by the real estate information service said.
Der Spiegel:
  • Bailout Plan Is All About 'Rescuing Banks and Rich Greeks'. Greece will never be able to repay its debts and may one day have to leave the euro area, former Bundesbank President Karl Otto Poehl said in an interview. The bailout "was about protecting German banks, but especially the French banks, from debt write-offs," Poehl said.
O Globo:
  • Brazil's government spending and the country's high interest rates stand as obstacles to receiving a higher debt rating from S&P, citing the rating agency's head in Brazil, Regina Nunes.
  • Dropping Demand in Europe and Intel CPU Shortages Create Dilemma for Notebook Players. Taiwan-based notebook players have expressed concerns that buying sentiment in Europe may be conservative in the third quarter of 2010, despite the traditional peak season; however, the fact that Intel's 32nm processors are currently facing tight supply has put players into a position forcing them to decide whether they should build up or reduce their inventory. Since future demand in Europe is currently uncertain, most makers are already considering reducing their inventory preparations, but with concerns that the Europe issue may turn out to be fine, the makers are maintaining their Intel CPU orders to avoid shortages of the critical component, sources from notebook players noted. The makers are also keeping a close eye on demand from Europe and are being more careful with their inventory management to prevent overstocked CPU inventories, the sources noted.
Xinhua News:
  • China needs to increase the supply of housing to effectively curb the rise in property prices, citing economist Li Yining. Reducing demand alone will cause problems for the construction industry and hurt economic development, Li said.
China Central Television:
  • Chinese Premier Wen Jiabao said the global economic crisis is more complicated and serious than expected, and the foundations of the recovery remain fragile.

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