Thursday, April 14, 2011

Thursday Watch

Evening Headlines

  • Senate Panel Says Goldman(GS) Mislead Clients, Lawmakers on CDOs. Goldman Sachs Group Inc. (GS) designed, marketed and sold collateralized debt obligations that misled investors and created conflicts of interest as the company built short positions before the U.S. housing market collapsed, a Senate panel said in its report on the financial crisis. In the case of one CDO, Hudson Mezzanine Funding 2006-1, Goldman Sachs told investors its interests were aligned with theirs while the firm held 100 percent of the short side, according to the report released today by the Senate’s Permanent Subcommittee on Investigations. Senator Carl Levin, the Michigan Democrat who leads the panel, urged regulators to review all of the structured finance transactions described in the report. At a briefing today, Levin said he believed Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. He said he would refer the testimony to the Justice Department for possible perjury charges. “In my judgment, Goldman clearly misled their clients and they misled the Congress,” Levin said. With today’s release, the Senate panel completes a two-year investigation of mortgage firms, federal regulators and Wall Street banks highlighted by the expletive-laden interrogation of Goldman Sachs executives including Chairman and Chief Executive Officer Lloyd Blankfein a year ago this month. “Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing,” Levin told reporters today. Levin and Senator Tom Coburn of Oklahoma, the panel’s top Republican, held four public hearings on the financial crisis last year, examining regulatory failures, the collapse of Washington Mutual Inc. (WAMUQ), the role of credit-rating firms in fueling bets on high-risk debt and the business practices of Goldman Sachs and rival investment banks. The Senate report also faults Deutsche Bank AG (DB), saying the Frankfurt-based company created a $1.1 billion CDO with assets that its traders referred to as “crap” and then attempted to sell “before the market falls off a cliff.” The subcommittee urged regulators to “identify any violations of law” in the investment-bank transactions described in the report.
  • Goldman(GS) Traders Tried to Manipulate Derivatives Market in '07, Report Says. Goldman Sachs Group Inc. (GS) mortgage traders tried to manipulate prices of derivatives linked to subprime home loans in May 2007 for their own benefit, according to a U.S. Senate report. Company documents show traders led by Michael J. Swenson sought to encourage a “short squeeze” by putting artificially low prices on derivatives that would gain in value as mortgage securities fell, according to the report yesterday by the Permanent Subcommittee on Investigations. The idea, abandoned after market conditions worsened, was to drive holders of such credit-default swaps to sell and help Goldman Sachs traders buy at reduced prices, according to the report. “We began to encourage this squeeze, with plans of getting very short again,” Deeb Salem, a trader in the structured product group, said in a 2007 self-evaluation excerpted in the report. Swenson, Salem’s supervisor, sent e-mails in May 2007 urging traders to offer prices that will “cause maximum pain” and “have people totally demoralized.”
  • Deutsche Bank(DB) Sold Mortgage-Linked 'Pigs' as Market Buckled, Lawmakers Say. Deutsche Bank AG (DBK), whose bets against subprime mortgages helped it weather the financial crisis, pressed to sell a $1.1 billion collateralized debt obligation to clients in 2007 as the co-head of its CDO team foresaw a market slump, a U.S. Senate panel found. “Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” Michael Lamont, the group’s co-head, said in a Feb. 8, 2007, e-mail about Deutsche Bank’s Gemstone CDO VII Ltd., according to a report released yesterday by the Permanent Subcommittee on Investigations. The Frankfurt-based firm sold $700 million of the instruments, which lost most of their value within 17 months. The bi-partisan panel, led by Michigan Democrat Carl Levin, placed Germany’s biggest bank in a spotlight alongside Goldman Sachs Group Inc. (GS), saying that the firms’ creation and sales of mortgage-backed investments “illustrate a variety of troubling and sometimes abusive practices.” The “case study” also focuses on Greg Lippmann, Deutsche Bank’s then-top CDO trader, who led its bets against subprime home loans and described some Gemstone VII collateral as “pigs” and “crap.” “The bank sold poor quality assets from its own inventory to the CDO,” according to the report. Then “the bank aggressively marketed the CDO securities to clients despite the negative views of its most senior CDO trader, falling values, and the deteriorating market.” Deutsche Bank underwrote 47 CDOs with a combined value of $32 billion from 2004 to 2008, according to the subcommittee. It made $4.7 million in fees from Gemstone VII, the report said. About $27 million of the CDO’s assets came from the bank’s own inventory, including one bond that Lippmann referred to by asking another trader in an instant message, “DOESNT THIS DEAL BLOW,” according to the report.
  • Libyan Rebels Seek $2 Billion From Allies, Tarhouni Says. Libya’s opposition said it is discussing with allies the possibility of borrowing $2 billion in order to import food, medicine, fuel and possibly weapons to combat Muammar Qaddafi’s forces. “The short term loans is an option on the table that we discussed with our friends” at a conference today in Qatar, Ali Tarhouni, the National Transitional Council’s finance minister said in an interview today in Benghazi. The borrowing may have a term of as long as two years and would be backed by Libyan assets frozen abroad, which could be used to reimburse the lenders once unlocked, he said. “We immediately are trying to access $2 billion and this number could rise,” he said. “We should be able to access these funds to import medicine, food, fuel, even armaments, but we are concentrating on the first ones.” The council needs reserves of commodities and medicine to help areas “liberated from Qaddafi,” Tarhouni said. The rebels’ transitional government is pressing the international coalition, led by the U.S., that has joined its struggle against Qaddafi to step up support.
  • BRICs Leaders Say Increasing Commodity Prices Pose Threat to Global Growth. The leaders of Brazil, Russia, India, China and South Africa, meeting at a summit in China, said rising prices for commodities pose a threat to global growth. “Excessive volatility in commodity prices, particularly those for food and energy, poses new risks for the ongoing recovery of the world economy,” the leaders said, according to a draft copy of the communique that was given to Bloomberg. “The international community should work together to increase production capacity.” Chinese President Hu Jintao and the other BRICS leaders also called for “more attention to the risks of massive cross- border capital flows,” and said the International Monetary Fund should continue to look to overhaul the role of Special Drawing Rights as an international reserve currency system.
  • AIG(AIG) Hires Juhas From Morgan Stanley(MS) to Head Insurer's Strategic Planning. American International Group Inc. (AIG) hired Morgan Stanley’s Peter Juhas, a banker who spent the past three years advising the U.S. government on its $182.3 billion bailout of the insurance company. Juhas worked on the Morgan Stanley team that advised the U.S. Treasury Department on its bailouts of Freddie Mac and Fannie Mae beginning in 2008. When the Federal Reserve Bank of New York bailed out AIG later that year, it hired Morgan Stanley (MS) as its adviser on a restructuring of the insurer. As the Fed’s adviser, Morgan Stanley worked on AIG divestitures including the $16.2 billion sale of the American Life Insurance Co. unit to MetLife Inc. The role also positioned Morgan Stanley to be one of four lead bookrunners for the $20.5 billion initial public offering of AIG’s biggest Asian unit. The Treasury, which took part in the AIG bailout, plans to dispose of its 92 percent stake of AIG stock through public offerings to recover its investment. Juhas has also been advising the Treasury, AIG said.
  • NYSE(NYX) Said to Consider Special Dividend to Boost Support for Deal. NYSE Euronext is considering the payment of a special dividend to shareholders to help persuade them to back a takeover by Deutsche Boerse AG, according to a person familiar with the matter. The payment would be made prior to the merger, according to the person, who declined to be identified because the discussions are private. A stock buyback is another option being considered to convince owners to back the Deutsche Boerse deal instead of the unsolicited offer from Nasdaq OMX Group Inc.(NDAQ) and IntercontinentalExchange Inc.(ICE), the person said.
  • JPMorgan(JPM) Credit Swaps Show Bank's Record Profits Fail to Impress. Record earnings from JPMorgan Chase & Co. (JPM) failed to improve its creditworthiness in the eyes of swaps traders, as reduced provisions for bad mortgages accounted for almost half of its profit. Credit-default swaps on the second-biggest U.S. bank by assets, which investors use to hedge against losses or to speculate on creditworthiness, climbed 0.2 basis point to 71.7 basis points, according to CMA. “One of the reasons they did very well is they released a lot of reserves,” said Jason Brady, a managing director at Thornburg Investment Management Inc. in Santa Fe, New Mexico. The firm oversees $73 billion of assets, including stocks and bonds from both companies. “That doesn’t mean they’re making tons of money, it just means they’re not losing it,” Brady said. Contracts protecting the debt of Bank of America Corp., the largest U.S. lender, climbed 0.5 basis point to 129.8 and those on Morgan Stanley increased 0.5 basis point to 137, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swaps on Citigroup Inc. added 0.1 basis point to 119.4 and contracts on debt issued by Goldman Sachs Group Inc. gained 1.1 basis points to 111.3.
  • Apple(AAPL) is Said to Ready Sale of White iPhone After 10-Month Wait. Apple Inc. (AAPL) will begin selling a white model of the iPhone 4 in the next few weeks after a 10- month delay, according to three people familiar with the plans. The new version will be available from AT&T Inc. and Verizon Wireless by the end of April, said one of the people, who asked not to be identified because the plans aren’t public. Adding a white model to the black-only lineup may help spur demand before Apple can release the next generation of its top- selling product. Apple, the world’s largest technology company by market capitalization, isn’t planning to unveil a new iPhone at its June developers’ conference, the occasion for previous launches, two people familiar with the matter said. It may instead introduce the next iPhone in September, according to Mike Abramsky, an analyst at RBC Capital Markets in Toronto.
  • Glencore Seeks $11 Billion IPO as Goldman(GS) Says Flee Commodities. Glencore International AG is poised to start this year’s largest initial public offering as Goldman Sachs Group Inc. urges a retreat from commodities and IPO investors shun the U.K. market. The Swiss commodities trader may announce its IPO in London today, said three people with knowledge of the sale, who declined to be identified because the plan is private. Glencore’s London offer will account for about 75 percent of the IPO as it seeks to raise $9 billion to $11 billion to list in the city and Hong Kong, one of the people said. Goldman said this week the risks of investing in commodities outweigh potential gains, dropping its recommendation to buy a basket of raw materials including crude oil, copper, cotton and platinum. Three companies have shelved plans for a London IPO this month as Europe’s debt woes and a nuclear crisis in Japan sap investor demand.
  • Computer Network Used in 'Massive' Crime Scheme Targeted by U.S. Agencies. More than 2 million computers worldwide were infected with malicious software in a “massive fraud scheme” that the U.S. disabled as part of a criminal investigation, the Justice Department said. The department filed a civil complaint, criminal seizure warrants and issued a temporary restraining order in coordinated action with Microsoft Corp. (MSFT), which issued a software patch yesterday to correct a vulnerability in its Windows operating system. The vulnerability allowed the software to spread from one computer to another creating a so-called botnet. The action was aimed at software called Coreflood, which collects passwords and financial information that was used by criminals, the Justice Department said in a statement today. The group of computers infected with Coreflood, known as the Coreflood botnet, is suspected by the U.S. of operating for almost a decade and infecting more than 1.8 million computers in the U.S. alone. “The scale of the botnet is huge,” said Don Jackson, the director of intelligence at Dell Secureworks, a cyber security firm that said it first discovered Coreflood.
  • Euro Nearing 20% Overvalued May Weaken to Below $1.40: Chart of the Day. The euro may fall below $1.40 after recent gains made it close to 20 percent overvalued in terms of purchasing power, according to Mizuho Corporate Bank Ltd. The CHART OF THE DAY shows how much euro-dollar exchange rates have deviated from purchasing power parity, a measure of the cost of goods relative to other countries, in the past 10 years. The euro reached $1.4520 on April 12, the highest since Jan. 14 last year and widening the difference from purchasing power to about 18 percent. “The euro reached its peak in the past 10 years when it was roughly 20 percent overvalued relative to PPP,” said Daisuke Karakama, a market economist at the unit of Japan’s second-largest financial group. “The euro will no longer remain the sole winner of the euro-dollar currency pair.” The U.S. is rapidly approaching an exit from quantitative easing, Tokyo-based Karakama said, and the euro may drop below the $1.40 level. The shared currency traded at $1.4449 as of 8:24 a.m. in Tokyo. The European Central Bank raised interest rates for the first time in almost three years on April 7. Another rate increase seems inevitable by the middle of this year, Karakama said, though demands for lower borrowing costs by indebted nations in the currency union may forestall increases in the second half.
  • Copper tube usage in China may grow at a slower pace this year as government incentives end and high prices cut demand, according to Golden Dragon Precise Copper Tube Group Inc., China's biggest maker. Consumption of copper tubes, used mainly in air conditioners, is expected to expand by less than 10%, compared with more than 30% growth in each of the past two years, said Liu Xinyu, a manager at the trading unit of the company in Shanghai. "Demand is stable but we're definitely not going to see the explosive growth of 2009 and 2010, when there were many subsidies in place to boost consumption," Liu said. "By now, those who wanted a new air conditioner would have already bought one and the replacement cycle isn't so quick," said Liu. "Higher prices are also hurting demand." China's appliance makers may raise product prices because of inflation, GF Securities Co. said.
Wall Street Journal:
  • U.S. Says Iran Helps Crackdown in Syria. Iran is secretly helping Syrian President Bashar al-Assad put down pro-democracy demonstrations, according to U.S. officials, who say Tehran is providing gear to suppress crowds and assistance blocking and monitoring protesters' use of the Internet, cellphones and text-messaging. At the same time, communications intercepted by U.S. spy agencies show Tehran is actively exploring ways to aid some Shiite hardliners in Bahrain and Yemen and destabilize longstanding U.S. allies there, say U.S. officials familiar with the intelligence. Such moves could challenge interests of the U.S. and Saudi Arabia and inflame sectarian tensions across the Middle East, they say. "We believe that Iran is materially assisting the Syrian government in its efforts to suppress their own people," said an Obama administration official.
  • U.S. Asks if Banks Colluded on Libor. U.S. investigators are examining whether some of the world's biggest banks colluded to manipulate a key interest rate before and during the financial crisis, affecting trillions of dollars in loans and derivatives, say people familiar with the situation.
  • RIM PlayBook: A Tablet With a Case of Codependency by Walt Mossberg.
  • Remembering the Real Ayn Rand by Don Luskin. The author of "Atlas Shrugged" was an individualist, not a conservative, and she knew big business was as much a threat to capitalism as government bureaucrats.
  • The Presidential Divider. Did someone move the 2012 election to June 1? We ask because President Obama's extraordinary response to Paul Ryan's budget yesterday—with its blistering partisanship and multiple distortions—was the kind Presidents usually outsource to some junior lieutenant. Mr. Obama's fundamentally political document would have been unusual even for a Vice President in the fervor of a campaign.
  • Teenage Wasteland: Jobless Rate for Young Is 25% - And Rising. A quarter of teenagers were jobless in March, representing a surprising increase from February, even as the unemployment rate for the rest of the population decreased. This figure may only get worse if budget-strapped states raise the minimum wage, and it could also be a sign of greater structural damage underlying our economy, analysts said.
Business Insider:
Zero Hedge:
New York Times:
Washington Post:
  • US Mac Sales Grow 9.6% in Q1 2011 as Rest of Market Drops 10.7%. Apple's line of Mac computers saw great success in the U.S. in the first quarter of calendar 2011, growing 9.6 percent from 2010, while the rest of the American market fell 10.7 percent and netbook maker Acer tumbled 42.1 percent. Apple earned an 8.5 percent total share of the U.S. PC market, selling an estimated 1.375 million units in the first quarter of 2011, according to research group IDC. Apple's market share was well up from the 7 percent it saw in the first quarter of 2010. Sales for the top company, HP, slid 2.4 percent from 2010, while Dell sunk 11.8 percent. HP represented 27 percent of sales, while Dell took 23.1 percent. Coming in at fifth, Acer tumbled a whopping 42.1 percent, garnering an 8.3 percent share of the market with 1.331 million units sold. Acer and its line of low-cost, low-power netbooks have struggled since Apple introduced the iPad last year. Worldwide, PC sales were down 3.2 percent year over year. HP and Dell were No. 1 and No. 2, respectively as well, though both saw their total sales dip from a year ago. HP commanded 18.9 percent of the market, while Dell took 12.8 percent in the first quarter of calendar 2011. "The U.S. and worldwide PC market continues to work through a difficult era that we expect will continue into next quarter, but will start to improve in the second half of the year," said Bob O'Donnell, program vice president with Clients and Displays at IDC. "Slower than expected commercial growth in the first quarter failed to offset the ongoing challenges in the consumer market. While it's tempting to blame the decline completely on the growth of media tablets, we believe other factors, including extended PC lifetimes and the lack of compelling new PC experiences, played equally significant roles."
Rasmussen Reports:
  • 23% Say U.S. Heading in Right Direction. Twenty-three percent (23%) of Likely U.S. Voters say the country is heading in the right direction, according to a new Rasmussen Reports national telephone survey taken the week ending Sunday, April 10. That's down one point from last week. Since President Obama assumed office in January 2009, confidence in the nation’s current course has ranged from a low of 22%, reached a month ago, to a high of 35% measured in early April 2009. Sixty-nine percent (69%) of voters now say the country is heading down the wrong track. Since January 2009, pessimism about the country's direction has ranged from 57% to 72%. Most Republicans (86%) and voters not affiliated with either major political party (71%) believe the United States is heading down the wrong track. Among Democrats, 38% say the country is heading in the right direction, while 51% say it's heading down the wrong track.
USA Today:
  • More Americans Leaving Workforce. The share of the population that is working fell to its lowest level last year since women started entering the workforce in large numbers three decades ago, a USA TODAY analysis finds. Only 45.4% of Americans had jobs in 2010, the lowest rate since 1983 and down from a peak of 49.3% in 2000. Last year, just 66.8% of men had jobs, the lowest on record. The bad economy, an aging population and a plateau in women working are contributing to changes that pose serious challenges for financing the nation’s social programs. “What’s wrong with the economy may be speeding up trends that are already happening,” says Marc Goldwein, policy director of the Committee for a Responsible Federal Budget, a non-partisan group favoring smaller deficits.
  • China Inflation Threat Underestimated. China is poised to become an "exporter of inflation to the rest of world", according to Legal & General Investment Management (LGIM), which warned that the threat from rising prices in the world's second-biggest economy is underestimated. While many commentators suggest Chinese price rises are peaking, Mr Coulton believes that Beijing is not on top of inflation – expected to come in at 5.5pc for March – which threatens a more painful tightening process to rein in prices than many expect. "This means rising risk to the country's macroeconomic stability and of growth falling from the current 10pc a year to 4pc or 5pc," Mr Coulton said. If China's economic growth does halve as feared, it could have serious implications for the global recovery. Lending has been expanding rapidly, while wage inflation is rising as cities find the pool of cheap labour from the countryside is not infinite. In addition, measures from Beijing to rein in prices are running into difficulties, LGIM believes. Banks are "getting around" lending quotas with off-balance sheet transactions, which see loans repackaged as investment products. Mr Coulton also argued that China's 3pc increase in banks' reserve ratio requirement over recent months – upping the amount of money they must sit on in proportion to deposits – should not be viewed as monetary tightening. He believes the strategy is only just managing to offset the impact of China's interventions to keep its currency weak to support its exporters.
  • Banks Facing $3.6 Trillion 'Wall of Maturing Debt', IMF Global Financial Stability Report Says. Many European banks need bigger capital cushions to restore market confidence and help reduce the risk of another financial crisis, according to the IMF's report, published on Wednesday. Banks around the world are facing a $3.6 trillion "wall of maturing debt" coming due in the next two years, and the rollover requirements are most acute for Irish and German banks, the report said. "These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources," the IMF said. Government debt was generally high and on a worryingly upward path in many advanced economies, the IMF said. It repeated its warning that the United States and Japan faced particularly dangerous debt dynamics. Advanced economies were "living dangerously" with high debt burdens, and faced the difficult task of trying to pare deficits without choking off the economic recovery. The most pressing challenges in the coming months will be funding of banks and sovereigns, particularly in vulnerable euro area countries, it said. US banks built up capital buffers in 2009, when regulators completed a set of stress tests that revealed some large holes. But European banks still need to raise a "significant amount of capital" to regain access to funding markets, the fund said. European banks won't be able to obtain all the necessary capital from markets, and public money may have to fill some of the gaps, it added. Banks could also cut dividend payouts and retain a larger portion of earnings. The IMF said banks' exposure to troubled sovereign debt is "uncertain," which adds to the funding strains.
Yonhap News:
  • North Korea has been holding a Korean-American man, in his 60's, since November for being involved in missionary work in the country, citing people in Orange County, California, where the man is from.
Korea Economic Daily:
  • North Korea plans to develop an oil field with China, citing a personal familiar with the plan.
21st Century Business Herald:
  • The southern Chinese city of Shenzhen may announce new measures to curb home prices, citing a real estate developer. The local government may fix price caps on new homes without presale permits and may stop presale of luxury homes. The move would like reduce average prices for homes in the government presale database.
China Securities Journal:
  • China is likely to raise banks' reserve requirement ratios in the "near future," the China Securities Journal said in a front-page commentary. More interest rate increases this year will be needed to curb inflation, the commentary said.
Evening Recommendations
  • Rated (PMT) Buy, target $21.
Night Trading
  • Asian equity indices are -.50% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 107.0 unch.
  • Asia Pacific Sovereign CDS Index 114.0 unch.
  • S&P 500 futures -.02%.
  • NASDAQ 100 futures -.08%.
Morning Preview Links

Earnings of Note
  • (SVU)/.34
  • (FCS)/.36
  • (HAS)/.17
  • (CBK)/-.41
  • (VMI)/.95
  • (GOOG)/8.12
  • (IGTE)/.27
  • (PGR)/.43
Economic Releases
8:30 am EST
  • Initial Jobless Claims for last week are estimated to fall to 380K versus 382K the prior week.
  • Continuing Claims are estimated to fall to 3705K versus 3723K prior.
  • The Producer Price Index for March is estimated to rise +1.0% versus a +1.6% gain in February.
  • The PPI Ex Food & Energy for March is estimated to rise +.2% versus a +.2% gain in February.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Duke speaking, Fed's Kocherlakota speaking, Fed's Plosser speaking, Fed's Tarullo speaking, Fed's Lacker speaking, $13 Billion 30-Year Treasury Bond Auction, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, (BBY) analyst day, (TLVT) investor day, (HGSI) analyst meeting and the (ACN) analyst conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

No comments: