Friday, September 17, 2010

Today's Headlines


Bloomberg:

  • Irish Government Bond Spread, Swaps Jump to Record on Renewed Bank Concern. Irish bonds led declines by the debt of so-called peripheral euro-region countries on renewed concern the nation’s banks may require further government aid. The cost of protecting Irish government debt from default jumped to a record. Yields on the nation’s 10-year debt rose to the highest relative to similar-maturity benchmark German bunds since at least 1991, and the Portuguese-German yield spread was near the most on record. John Gormley, leader of Ireland’s Green Party and a member of the ruling coalition, said spreads would widen should Ireland consider renegotiating with Anglo Irish Bank Corp. bondholders, as suggested by the opposition. “When you get spread-widening pressures, Ireland tends to widen more than the rest because it’s seen as the weakest link,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “There’s a lot of negative news out there. There’s concern about the banking sector, about further budget cuts that may hurt the economy. These things add up.” The yield on the 10-year Irish bond climbed 29 basis points to 6.40 percent as of 2:25 p.m. in London. The spread with bunds widened to as much as 387 basis points, or 3.87 percentage points, the most on record, according to Bloomberg generic data. Portugal’s 10-year securities yielded 366 basis points more than bunds, while investors demanded a 178 basis-point yield premium to hold Spanish securities instead of German debt, up from 172 basis points yesterday. Contracts insuring against default on Ireland rose 38 basis points to 428.3 basis points, according to data-provider CMA. German bonds climbed as investors favored the region’s safest assets. The yield on the bund fell 6 basis points to 2.42 percent, with French 10-year yields also sliding 6 basis points, to 2.78 percent. The euro snapped a four-day gain, trading at $1.3071, after strengthening to $1.3159. The Greek 10-year spread over bunds widened 5 basis points to 912 basis points, with the Italian-German yield premium increasing 6 basis points to 149 basis points.
  • U.S. Consumer Sentiment Unexpectedly Declines. Confidence among U.S. consumers unexpectedly dropped to a one-year low in September, indicating the biggest part of the economy is being handcuffed by a struggling labor market. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.6 from 68.9 in August, the group said today. This month’s reading was less than the most pessimistic forecast in a Bloomberg News survey. Flagging optimism with unemployment close to a 26-year high may increase the risk consumers will cut back on their purchases, which account for 70 percent of the economy. The University of Michigan gauge of consumer expectations for six months from now, which more closely projects the direction of consumer spending, decreased to 59.1, the lowest since March 2009. About 67 percent of Americans in the Michigan survey said they anticipate “bad financial conditions” in the coming year, according to the report.
  • Sovereign Default Swaps at Record Over Companies on Deficits. Investors are paying record-high premiums to insure against default on European sovereign bonds relative to corporate notes as governments struggle to reduce fiscal deficits while companies repair balance sheets. An index of credit-default swaps on 15 European governments now exceeds a gauge of investment-grade credit risk by about 50 basis points, according to data from CMA and JPMorgan Chase & Co. Corporate swaps are historically more expensive than sovereign contracts. The gap between the indexes “highlights the difference between how fundamentally strong non-financial corporate credit is versus how weak governments are,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. The Markit iTraxx SovX Western Europe Index is trading at 156.5 basis points, near an all-time high, while the Markit iTraxx Europe Index has more than halved from its 2008 peak to 106.25.
  • Discover(DFS) Agrees to Buy Citigroup's(C) Student Loan Corp.(STU). Discover Financial Services agreed to buy Citigroup Inc.’s Student Loan Corp. in a deal valued at $600 million to become the third-biggest U.S. provider of private student loans. Discover, the No. 4 U.S. payment-card network, will pay $30 a share for the Stamford, Connecticut-based lender, the companies said today in separate statements. The price was about 40 percent higher than the closing value yesterday on the New York Stock Exchange.
  • Crude Oil Falls a Fourth Day on Concern U.S. Economy Will Be Slow to Recover. Crude oil fell for a fourth day on speculation that the U.S. economic recovery is slowing, reducing fuel demand in the world’s biggest oil-consuming country. Oil slipped as much as 1.5 percent after the Thomson Reuters/University of Michigan preliminary September index of consumer sentiment fell to 66.6 from 68.9 a month earlier. Crude oil for October delivery declined 90 cents, or 1.2 percent, to $73.67 a barrel at 10:54 a.m. on the New York Mercantile Exchange. Futures touched $73.48, the lowest level since Sept. 8. U.S. gasoline consumption in August averaged 9.23 million barrels a day, down from 9.3 million in August 2009, the American Petroleum Institute said today in a report. Demand averaged 9 million barrels a day during the first eight months of 2010, down 0.2 percent from the same period a year earlier. “I expected that gasoline demand would be stronger by now,” John Felmy, chief economist with the Washington-based API, said in a telephone interview. “We saw some signs of improvement earlier this year, but that’s no longer the case. The overall economy isn’t that robust and that’s being reflected in driving behavior.”
  • Gold Gains to Record on Wealth Demand; Silver Near 30-Year High. Gold futures climbed to a record for the third time this week as investors stepped up demand for a haven from financial turmoil. Before today, gold gained 16 percent this year, outperforming stocks, bonds and many commodities as sovereign- debt concerns and an uneven economic recovery roil financial markets. Silver was little changed after approaching the highest price since 1980. “Gold is accelerating,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “We’re getting to a point where the public is getting spooked by the instability in financial markets. Gold is going to be the asset of choice when investors are seeking safe havens.”
  • SEC Proposes Short-Term Borrowing Disclosure to Discourage Masking Debt. U.S. regulators voted to propose rules that may make it harder for companies to mask debt after Lehman Brothers Holdings Inc. was accused of misleading investors by temporarily moving assets off its books. U.S. Securities and Exchange Commission members voted 5-0 today to seek rules that would expand what firms must disclose about short-term borrowing arrangements. Under the proposal, banks would have to tell shareholders the maximum amount of debt they had each quarter and the average amount of debt.
  • Paychecks Could Be Whacked If U.S. Tax Vote Slips. Americans may pay higher income taxes next year, at least temporarily, even if Congress decides not to let rates rise. Unless Congress votes by November to extend tax cuts enacted under President George W. Bush, the Internal Revenue Service will advise employers to increase deductions from paychecks beginning Jan. 1, payroll experts said. The reason: The IRS needs time to prepare and distribute tables used to calculate withholding taxes, and employers need time to implement them. Even though the Bush-era tax cuts don’t expire until Dec. 31, the bureaucracy has to act sooner.
  • Household Worth in U.S. Declined $1.5 Trillion in Second Quarter, Fed Says. Household wealth in the U.S. fell 2.8 percent in the second quarter as share prices were depressed by the European debt crisis, marking a setback for Americans’ efforts to repair finances battered by the recession. Net worth for households and non-profit groups declined by $1.5 trillion to $53.5 trillion, according to the Federal Reserve’s Flow of Funds report issued today in Washington.
  • Citadel May Lower Its Management Fees as Hedge-Fund Industry Seeks Clients. Citadel LLC is considering cutting fees on its two main funds as it attempts to attract clients during the worst climate for raising money in two decades, said two people with knowledge of the firm’s plans. The Kensington and Wellington hedge funds at Chicago-based Citadel, the $11.1 billion firm founded by Ken Griffin, are among a handful that pass along all expenses to clients rather than charging the industry-standard 2 percent annual management fee. Expenses at the firm have reached as much as 8 percent of assets, and typically range from 4 percent to 6 percent. Citadel lost 55 percent of assets as markets tumbled in 2008, and when investors sought to take out $1.2 billion the firm suspended redemptions before restoring them in late 2009.
  • Peripheral Nations Should Restructure Debt, MIT's Johnson Says: Tom Keene. European sovereigns such as Ireland that are dealing with unsustainable budget deficits should restructure debt rather than seek international bailouts, said Massachusetts Institute of Technology professor Simon Johnson. “The pressure is very much on Ireland right now,” Johnson said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “Ireland, in terms of its fiscal position and in term of the sustainability of those policies and the external support polices from the ECB and others, looks pretty fragile.”

Wall Street Journal:
  • Consumer Bureau Gets Launch Deadline. Treasury Department officials plan to transfer existing enforcement, examination and rule-writing powers from federal banking regulators to the new Bureau of Consumer Financial Protection by July 2011, people familiar with the matter said.
CNBC:
MarketWatch:
New York Post:
  • Mortgage Giants Freddie, Fannie to Cost Government $53 Billion Next Decade. Federal mortgage giants Fannie Mae and Freddie Mac will cost the U.S. government $53 billion over the next decade under so-called "fair-value" accounting, the Congressional Budget Office (CBO) estimated Thursday. The fully government-owned agencies own masses of U.S. mortgages that have dropped in value amid the housing crisis. The CBO estimate contrasted sharply with that of the Obama administration, which forecasted $44 billion in savings from the lenders under a different forecasting method. "The fair-value approach...provides a more comprehensive measure of cost because it recognizes the cost to taxpayers when the government assumes financial risk," CBO Director Douglas W. Elmendorf wrote.
  • NBC's Fall Guys. NBC Universal is looking at a new fall lineup -- not just on the screen but in the executive suite. Sources said Comcast, which is awaiting regulatory approval, is preparing to put a new regime in place sometime in October or November before it closes on the NBC deal, expected by the end of the year.
Business Insider:
Zero Hedge:
  • The Foreign Exchange Market and CDS Spreads. We are continually amazed at movements in the foreign exchange market that come as a direct consequence of moves in peripheral 5-Year Credit Default Swaps (CDS). The chart below details the relative correlation of a GDP weighted basket of the relevant countries within the Euro.
Forbes:
  • LA Agencies Got $111 Million Stimulus, Created Few Jobs. Despite lingering unemployment, audits released by the Los Angeles city controller found that two departments that received $111 million in federal stimulus dollars have only created 55 jobs so far. The reports released by City Controller Wendy Greuel looked at how the Department of Transportation and Department of Public Works used millions in American Recovery and Reinvestment Act funds. The two departments received the largest amount of the $594 million in federal funding that was awarded to the city in March. Of that, the transportation department received $40.8 million and created or retained 9 jobs while public works received $70 million and created 45 jobs. Greuel, who released the audits Thursday, said she was "disappointed" by the low number of job created. "With our local unemployment rate over 12 percent we need to do a better job cutting the red tape and putting Angelenos back to work," she said.
Chicago Tribune:
  • Retirement Perks Cost Towns Millions. Government officials add thousands to their pensions, as suburbs face budget woes. Lax pension rules are costing suburban taxpayers millions of dollars by allowing job perks and hefty pay hikes to inflate retirement checks for local leaders, the Tribune has found. In Glencoe, a free Jeep, bonuses and other perks to an outgoing parks director cost local taxpayers an extra $350,000.
    Joliet officials literally wrote pension spiking into the employee handbook, costing taxpayers there nearly $500,000 extra on the outgoing city manager alone. And in Evanston, four administrators cashed in their careers' worth of unused sick and vacation time in a way that helped boost their pensions, costing an extra $1.2 million in pension payments. Even with governments struggling to provide basic services, the tab for inflated pensions grows as Illinois does not take on reforms other states adopted years ago.
Rasmussen Reports:
Politico:
  • Nancy Pelosi Keeps Losing Democrats on Tax Cuts. If the House works its will, the top income tax brackets will enjoy at least one more year of the Bush tax cuts — a development that would be a sharp rebuke of House Speaker Nancy Pelosi (D-Calif.) and President Barack Obama. At least 38 House Democrats have now come out publicly in favor of at least a short-term extension of current income tax rates for couples earning more than $250,000 and individuals over the $200,000 threshhold — bucking calls from Obama and Pelosi to let taxes increase on wealthier Americans.
Reuters:
  • China's imports of liquefied natural gas in August doubled from a year earlier to a record of about 1 million metric tons, citing an official who had seen the August trade data.
  • Banks May Disappoint Hopes for Hybrid Redemptions. Investors betting European banks will promptly redeem high volumes of subordinated debt could be disappointed, as some look likely to keep the bonds for as long as regulators will let them, to preserve their capital ratios. Banks have used hybrid Tier 1 bonds in the past to maintain obligatory capital levels to cushion against bad loans, but these bonds will no longer count as capital under new rules unveiled at the weekend by the Basel Committee on Banking Supervision.
Financial Times:
  • A Year in the Life of Sovereign CDS. With Ireland spreads widening on Friday, it’s an apt time to turn to Fitch’s latest edition of its annual survey of credit derivative traders. Not least because it offers some revealing insights on how sovereign CDS contracts are actually used in the market. Or at least, on bank desks:
Dziennik Gazeta Prawna:
  • Luxembourg Prime Minister Jean-Claude Juncker said that the financial crisis isn't over yet and that he sees "first signs" of a recovery. The end of public stimulus is a possible danger for the euro, he said. Juncker, who chairs meetings of euro-region finance ministers, said he couldn't rule out that some banks may face "serious trouble with financial liquidity" in case the recovery stops, Juncker said.
Diario de Noticias:
  • Portugal may need aid from the IMF to solve its foreign debt problems, citing three former finance ministers.

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