Financial Teasers 19 March 2008

Top Stories

Fed's interest rate cut spurs fear of inflation
The Federal Reserve's interest rate cut has heightened fear of inflation. If the Fed miscalculates and pumps too much cash into the system, demand could rise and drive up prices, many economists say. "The good news is that this will take pressure off of housing prices," said Kenneth Rogoff, a Harvard economics professor. "The bad news is that it will be very painful to squeeze the inflation out of the system when this mess is all over." ClipSyndicate/Bloomberg (19 Mar.) , The Washington Post (19 Mar.)

Price of insuring debt soars for some Wall Street banks
Traders say that some Wall Street investment banks are being priced as riskier than the debt of developing nations like Turkey and Nigeria, or banks in troubled regions of the world. The cost of insuring Bear Stearns' debt last week was higher than for Kazakh banks, one trader said. Reuters (18 Mar.)

Wachovia says Merrill Lynch is riskiest broker after Bear
Merrill Lynch is the riskiest major broker after Bear Stearns, says Wachovia Capital Markets analyst Douglas Sipkin. He cites Merrill's $30.4 billion exposure to subprime collateralized debt obligations, a liquidity ratio of 52 and the industry's highest leverage. Reuters (18 Mar.)

Analysts: High CDS spreads tempt even cautious investors
Conservative investors are entering the stressed credit default swap market, showing just how high the spread levels are, analysts say. Pension funds, insurance companies and other "real money" investors have shied away from the market in recent months, but a brave few have decided that the potential gains outweigh the risk of short-term losses. Financial Times (18 Mar.)

Regulators may reduce Fannie, Freddie's capital requirements
The Office of Federal Housing Enterprise Oversight may ease the capital requirements imposed on Freddie Mac and Fannie Mae so that they can invest more in the mortgage market, sources say. The mortgage companies have agreed raise more capital as part of the deal. Bloomberg (19 Mar.)

Gold falls as dollar rises on lower-than-expected rate cut
The dollar gained after the Federal Reserve cut interests rates less than expected, forcing gold below $1,000 an ounce. "Investors saw the very, very strong dollar movement, which made them think that maybe we are heading towards a recovery," said Mark Hansen, director of trading CPM group. CNNMoney.com (18 Mar.)

Analysts say Yahoo trying to get Microsoft to boost offer
Yahoo, in a recent report to its board, predicted its operating cash flow will nearly double in the next three years to $3.7 billion. Analysts say the presentation is an effort to press Microsoft into increasing its $44.6 billion takeover bid. Red Herring (18 Mar.)

U.K. judge decides against Exxon Mobil
Ruling against Exxon Mobil Corp., British Judge Paul Walker tossed out a court order to freeze $12 billion in Petroleos de Venezuela SA's assets. Walker said that type of order is used only in cases of international fraud. "In the present case there is no suggestion whatever of fraud on the part of (Petroleos de Venezuela) or any entity or person associated with it," Walker said. Associated Press (19 Mar.)

Water may offer discerning investors long-term returns
Growing populations, dietary changes and increased living standards are increasing the demand for water, while pollution and climate change threaten the supply. Water, some analysts say, may emerge as an asset class that offers investors long-term gains. Reuters (18 Mar.)

Airlines try to offset soaring fuel prices
Airlines are considering job cuts and grounding planes to cope with soaring jet fuel prices. Delta Air Lines said it has discussed voluntary layoff packages with 30,000 employees, hoping at least 2,000 will accept.
MarketWatch (18 Mar.)

Market Activity

Led by Australia, Asian markets up on Fed move, good news
Australia finished today's trading session with a 4% increase. That led a rally in Asian markets that was fueled by investor relief over the Federal Reserve's interest rate cut. Japan and South Korea jumped more than 2%, while Hong Kong and Singapore were both up before trading closed. Better-than-expected results from
Lehman Brothers and Goldman Sachs also helped lift markets. CNBC (18 Mar.)

Lehman, Goldman post better-than-expected earnings: Profits at Lehman Brothers and Goldman Sachs were down more than 50%, but both firms beat quarterly estimates and touted that they had plenty of liquidity. The results, combined with the Federal Reserve's latest rate cut, boosted shares of investment banks Tuesday. "The earnings themselves were not material, but they did provide confidence that the financial standing of these companies is not impaired," said Richard Bove, a Punk Ziegel analyst. CNNMoney.com/Investor's Business Daily (18 Mar.)

Investors flock to Visa's IPO, raising $17.9 billion
Visa Inc. raised $17.9 billion in the largest ever initial public offering in the U.S. Investors pounced on the IPO because the company does not have direct exposure to the credit crisis and its potential for growth is expected to be huge. Visa sold more than 400 million class A common stock at $44 per share. ClipSyndicate/Bloomberg (18 Mar.) , Reuters (19 Mar.) , The New York Times (registration required) (19 Mar.)

Market bets JPMorgan will be forced to increase Bear bid
Investors appear to be betting that JPMorgan Chase, which agreed to buy Bear Stearns at a bargain-basement price on Sunday, will have to either boost its offer or give way to another bidder. Some industry observers, however, question whether holders of Bear bonds are actually driving up the price by buying the stock so they can vote for the JPMorgan bid. FinancialWeek (18 Mar.)

Economics

ECB boosts liquidity in banking system by €25 billion
The European Central Bank allocated €202 billion in liquidity -- €25 billion above estimated liquidity needs -- to the banking system Tuesday to ease anxiety in the money markets. The amount suggests the central bank isn't troubled by this week's higher money market rates. International Herald Tribune/Associated Press (18 Mar.)

Paulson acknowledges "sharp decline" in U.S. economy
Treasury Secretary Henry Paulson, while not conceding that the U.S. had entered a recession, did acknowledge that the economy is in "sharp decline." "There's no doubt that the American people know that the economy has turned down sharply ... . Much more important is what we do about it," Paulson said.
Reuters (18 Mar.)

Corporate liquidity down for first time in nine years
Corporate liquidity dropped by $250 billion in the second half of 2007, according to Treasury Strategies. It was the first time cash and short-term investments of non-financial companies dropped in the nine years Treasury Strategies has been tracking the data. "As companies have tightened up, they're shrinking balance sheets just a little bit by borrowing less," said Anthony J. Carfang, co-founder of the firm. FinancialWeek (19 Mar.)

Geopolitical/Regulatory

Japanese politicians fight over BoJ post
The Bank of Japan will have no governor after Toshihiko Fukui steps down today. The House of Councillors rejected the government's first nominee, and the same fate is expected for the second, Koji Tanami, governor of the Japan Bank for International Co-operation. ClipSyndicate/Bloomberg (18 Mar.) , The Daily Yomiuri (Japan) (19 Mar.) , Agence France-Presse (18 Mar.)

FSA warns banks to take care with regulatory valuations
The Financial Services Authority is warning banks that the "fair" values of their assets could differ for regulatory and accounting purposes. The UK watchdog has met with banks and auditors to scrutinise the valuation techniques but has not altered its rules. Financial Times (18 Mar.)

Obama urges Americans to move beyond racial prejudices
Democratic presidential hopeful Barack Obama, striving to distance himself from his former pastor, spoke in Philadelphia about transcending racial prejudices. Tuesday's speech drew comparisons to John F. Kennedy's 1960 address in Houston to Protestant ministers. ClipSyndicate/Bloomberg (19 Mar.) , Bloomberg (19 Mar.)

Financial Products

S&P rolls out first real-time indexes for renminbi, rupee
Standard & Poor's currency indexes, the Indian Rupee index and the Chinese Renminbi index, replicate the performance of the rupee and the renminbi against the U.S. dollar. The indexes were created to offer exposure to emerging countries that are currently without a liquid currency futures market. Structured Products (18 Mar.)

Ethics

Quattrone bets on comeback in California's tech corridor
Frank Quattrone is launching a new tech-savvy investment bank called Qatalyst Group that will focus on mergers and acquisitions and new business investing. But can the man who helped spur the Silicon Valley boom replicate his success under a cloud of "ethically questionable" business practices?
BusinessWeek (18 Mar.)