Financial Teasers 11 April 08

Top Stories

Subprime barometer shows shortcomings
Dealers and investors trying to find a price for mortgage securities have drifted toward the imperfect ABX derivative index. The index tracks a portfolio of U.S. subprime mortgage bonds, which are infrequently traded compared with elements of other cash and derivative benchmarks. Investors have seen the index move far and fast on little fundamental news. Financial Times (10 Apr.)

Paulson to discuss creating stronger mortgage regulator
Treasury Secretary Henry Paulson plans to meet next week with the leaders of Fannie Mae, Freddie Mac and the Senate Banking Committee to hammer out legislation creating a stronger regulator for the mortgage sector. Paulson has helped expand the mortgage giants' investment holdings to ease the housing crisis, but has so far failed to work out a deal for a new regulator. Reuters (10 Apr.)

Expecting losses, Citigroup investors want to know plans
Citigroup is expected to report another major quarterly loss next week, but that news may be secondary. The banking giant is looking to shed businesses, reduce costs and tighten up business as investors press for reassurance that bank has the losses under control. "They're moving in the right direction, by divesting non-core assets, right-sizing the company and freeing up liquidity," said Chris Armbruster, an analyst at Al Frank Asset Management. CNBC/Reuters (10 Apr.)

Food price spikes help, hurt farming countries
High grain prices are making Latin American farmers rich and restoring the treasuries of many countries in the region, but consumers are hurting. Some governments have banned exports of staple foods or imposed price caps. Peru is promoting potato flour as an alternative to wheat. Argentines are encouraged to eat pork or chicken instead of grain-fed beef. Reuters (10 Apr.)

Philippines seeks wheat after China rejects sale
The Philippines finds itself searching for stocks of wheat in addition to rice after an overture to China was turned down. The episode highlights the growing problems food-importing nations face at a time of thinning grain supplies and rising prices. Bloomberg (11 Apr.)

Iceland buckles under global financial crisis
Iceland has been hard hit by the global financial crisis, and its government is searching for ways to fight off creditors. The country, once a symbol of economic prosperity, has seen its currency take an unprecedented plunge. The krona has dropped 20% against the euro so far this year. Spiegel Online (10 Apr.)

Market Activity

Asian markets mostly gain; GE stuns with 6% profit drop
Japanese, Indian and Chinese shares advanced on Friday on news that the subprime woes may be nearing an end. However, shares in Australia dropped for a fourth consecutive day. Meanwhile, General Electric shocked the market with a 6% decline to $4.3 billion in profits in the first quarter. MarketWatch (11 Apr.) , MarketWatch (11 Apr.)

Auction-rate securities market down by 15%
The market for auction-rate securities that used to be so appealing to U.S. municipal borrowers is shrinking by at least 15%, or $51 billion. Higher rates and a stalled market have led borrowers to convert or plan to replace at least $43.1 billion of the debt. Bloomberg (11 Apr.)

Economics

Bank of England cuts rate, with little immediate effect
The Bank of England cut a key interest rate by a quarter point to 5%, but it brought little immediate result. The central bank's statement didn't focus on recession threats but on inflation. Three-month interbank lending rate futures failed to drop and two mortgage lenders increased their fixed rate deals. Telegraph (London) (11 Apr.) , Financial Times (10 Apr.)

ECB holds rate at 4%
European Central Bank President Jean-Claude Trichet kept interest rates unchanged Thursday, as he has throughout the credit crunch, despite demands for action. Trichet has focused on battling inflation, now at a record 3.5% in the region. "We have one needle in our compass. We have to deliver price stability," he said. Critics say Trichet and the ECB have their heads in the sand and can't see the coming tidal wave. Telegraph (London) (11 Apr.)

Growing U.S. trade deficit surprises economists
The U.S. trade deficit grew from a revised estimate of $59 billion in January to $62.3 billion in February, the Commerce Department reported. The increase surprised economists because the economic slowdown was expected to suppress demand for foreign goods. Instead, import sales had their biggest jump in nearly a year. The New York Times (registration required) (11 Apr.)

China's trade surplus down 10.8% in first quarter
China's trade surplus dropped to $41.42 billion in the first quarter, a 10.8% decline year over year, according to China Customs. Total trade volume was $570.4 billion, a 24.6% increase, with exports at $305.9 billion and imports reaching $264.5 billion. China Daily (Beijing) (11 Apr.)

Geopolitical/Regulatory

G7 finance chiefs differ on how to respond to crisis
Group of Seven finance chiefs, meeting in Washington today, will probably disagree on how to address the global financial crisis. The officials plan to discuss market regulation to prevent a future crisis, but some analysts worry they won't broach the current market distress. The finance chiefs are expected to urge the private sector to ramp up efforts to ease the turmoil.
ClipSyndicate/Bloomberg (11 Apr.) , Bloomberg (11 Apr.) , Reuters (11 Apr.)

Bernanke says financial reforms needed quickly
Federal Reserve Chairman Ben Bernanke said that although the ongoing market turmoil is complicating efforts, overseers of the global financial system need to quickly take action to boost market confidence. "We do not have the luxury of waiting for markets to stabilize before we think about the future," he said. ClipSyndicate/Bloomberg (10 Apr.) , Reuters (10 Apr.)

IMF chief says U.S. rejected oversight program
Dominique Strauss-Kahn, head of the International Monetary Fund, said the U.S. refused to implement the fund's suggestions for supervising the financial markets. Most European countries implemented the IMF's Financial Sector Assessment Program, which requires assessments of the financial sector by an expert team, Strauss-Kahn said. The IMF can not be held responsible for "lack of supervision," he said. Reuters (10 Apr.)

Countries line up for Chinese free trade agreements
China secured its first free trade pact with a developed nation, closing a pact with New Zealand on Monday. The pact is seen as a means for China to acquire dairy products, food and raw materials -- products crucial to its economic expansion. Other countries are scrambling to secure similar deals with China. Forbes (09 Apr.)

Analysis: Chavez resumes nationalizations, socialist strategy
In the past week, Venezuelan President Hugo Chavez has moved to nationalize steelmaker Ternium Sidor, which is controlled by Techint of Argentina, as well as the Venezuelan operations of Mexico's Cemex. This comes over objections from Argentina and Mexico and shows Chavez is pursuing his strategy of developing a socialist state. International Herald Tribune/Reuters (10 Apr.)

Financial Products

Barclays launches FX volatility indexes
Barclays Capital launched BetaVol, Smart BetaVol and AlphaVol. The three FX volatility indexes are aimed at providing portfolio diversification and protection against sudden market downturns. "The FX volatility market has grown dramatically," said Andy Kaufmann, co-head of FX structuring at Barclays Capital. Structured Products (10 Apr.)

Blue Sky launches third tranche of Protected Income Plan
Blue Sky's third tranche of its Protected Income Plan offers a fixed growth rate of 10% per year over six years. PIP III's income payments are fixed and are not linked to the portfolio's performance. The plan requires a £10,000 minimum investment and closes on May 23. Investment Week (10 Apr.)

Ethics

Broker pleads guilty to participating in insider trading
Samuel Childs, 35, pleaded guilty to participating in an insider-trading ring in a case that involved former employees from UBS, Morgan Stanley, Bear Stearns and Bank of America. Childs, the last of more than a dozen defendants to plead guilty, said he accepted money in exchange for not reporting suspicious trading activity at Assent, the securities broker-dealer where he was employed. Reuters (10 Apr.)