Financial Teasers 24 April 2008

Top Stories

Defaults of subprime-related credit vehicles mount
Defaults of credit vehicles based on subprime mortgages have risen from $54 billion at the beginning of this year to a current total of $170 billion, according to Total Securitization. The mounting defaults in the U.S. housing market have hindered the collateralized debt obligation market. Ambac recently reported more than $3 billion of mortgage-related charges. Financial Times (23 Apr.)

Fitch sees some defaulted bonds recouping 10 cents on dollar
The expected tide of corporate bankruptcies is expected to leave unsecured bondholders with much less than the historical average recovery of 42 cents on the dollar. Owners of a third of high-yield, high-risk bonds rated B+ or lower may get no more than 10 cents, New York-based Fitch Ratings said. About 22% are likely to get 11 cents to 30 cents. ClipSyndicate/Bloomberg (23 Apr.) , Bloomberg (23 Apr.)

Sam's Club limits rice sales
Wal-Mart's U.S. warehouse unit, Sam's Club, has restricted purchases of some types of rice. The price of this food staple has more than doubled in the past year as China, Vietnam and India curbed exports to protect local supplies. Sam's Club limited customers to four bags of jasmine, basmati and long-grain white rice per visit. The U.S. warehouse clubs are trying to protect their business customers, like smaller restaurants and caterers, said food industry consultant Jim Degen. Bloomberg (24 Apr.)

Brazil, too, holds back on rice exports
Brazil has joined several Asian rice exporters in temporarily halting foreign sales to ensure domestic supply amid rising world prices. Brazil will not meet requests by African and Latin American countries for shipments totaling nearly 500,000 tons of rice, Agriculture Minister Reinhold Stephanes said. Brazil has 1.6 million tons of rice in government warehouses. CNBC (23 Apr.)

Steel prices climb on overseas demand, fewer imports
Steel prices have hit record highs in the U.S. this year, despite a slump in the auto and construction sector. Analysts say the factors driving prices higher include strong global demand, fewer imports from overseas mills, continued appetite from parts of the construction industry, and a jump in input costs. MarketWatch (23 Apr.)

Many oppose housing bailout by Congress
Talk in Congress of bailing out distressed homebuyers is sparking a backlash on new Internet sites created to oppose the plan. Los Angeles attorney and blogger Morgan Ward Doran created Nationalbubble.com because "I just got really angry." Doran argues that lenders, brokers and homebuilders made huge profits by overbuilding and pushing poorly underwritten loans. Now they want taxpayers to cushion their fall, Doran said. CNNMoney.com (23 Apr.)

Report: Gazprom to take over TNK-BP with majority stake
Russia's gas export giant Gazprom will buy majority control of oil major TNK-BP by the end of the year, the Vedomosti daily newspapers reports, citing unnamed sources close to the management of both companies. BP is a 50% owner of TNK-BP, and the other half is held by a group of Russian billionaires. Analysts had predicted a forced sale to a state firm with close ties to the Kremlin such as Gazprom. Reuters (24 Apr.)


Speculators seen as helping drive up world food prices
Biofuel demand and weather disruptions have been blamed for shortages driving up the price of food. But blame is spreading to hedge funds, index funds, pension funds and investment banks. Analyst Greg Warner of the Chicago grain wholesaler AgResource says the current wheat market is unprecedented. He estimates that financial investors now hold the rights to two complete annual harvests of one type of grain, soft red winter wheat. Spiegel Online (23 Apr.)

Market Activity

Asian markets mixed, Chinese shares up on tax cut
Asian stock markets posted mixed results Thursday, although Chinese markets soared after Beijing slashed a tax on share transactions. The tax cut reverses the increase Beijing imposed last year to slow surging stock prices. The Shanghai Composite index climbed as much as 9.6% Thursday before slipping back. Shenzhen's All Share index jumped 8.5%. MarketWatch (24 Apr.)

Apple beats Wall Street, quarterly profits over $1 billion
Apple reported profits of $1.1 billion in its second quarter, or $1.16 per share, to outdistance Wall Street expectations. Macintosh computers continued to sell strongly, with shipments of 2.3 million units, up 51%. ClipSyndicate/Bloomberg (23 Apr.) , CNET (23 Apr.)

Boeing Q1 profits up 38%, CEO predicts strong year
Boeing's first-quarter profits rose 38% to $1.2 billion, with earnings per share up 43%, thanks to strong results in commercial plane, military aviation and space businesses. Boeing expects another strong year, Chairman and CEO Jim McNerney said, despite its well-publicized loss of a massive Air Force tanker contract and long delays in its premium 787 airplane project. AviationWeek.com (23 Apr.)

China's listed companies see combined profits up 55%
Combined profits on the more than 400 listed Chinese companies climbed 55% in the first quarter, thanks largely to Beijing reducing the corporate income tax. Real estate companies saw their combined profits rise nearly fourfold. Other sectors with a growth rate of 200% or more were agricultural, forestry, animal husbandry and fisheries, and information equipment. China Daily (Beijing) (24 Apr.)

Economics

Interest-rate derivatives indicate Libor may rise more
Interest-rate derivatives point to possible continued increases in the London Interbank Offered Rate for dollars as banks remain reluctant to lend to each other. After a high of 90 basis points earlier this week, the Libor-OIS spread is now 88 basis points. Market insiders speculate that lenders have manipulated the Libor to keep their borrowing costs from increasing. Bloomberg (24 Apr.)

Geopolitical/Regulatory

China may recall ship carrying arms to Zimbabwe
China says it may recall a ship carrying weapons bound for Zimbabwe. South African port workers refused to unload it. Mozambique and Angola refused it access to their ports. Zambia, which chairs the Southern African Development Community, said the weapons could deepen Zimbabwe's election crisis. A Chinese Foreign Ministry spokeswoman said the arms contract was signed last year and was "unrelated to recent developments" in Zimbabwe. Reuters (22 Apr.)

China bans funds from buying certain corporate debt
The China Securities Regulatory Commission has ordered the country's funds to avoid buying unsecured medium-term corporate debt. Although The People's Bank of China said earlier this month that it would allow the sales, the regulator said it needs additional time to determine whether the trading volumes will be active enough. The commission didn't mention whether the order applies to banks, insurers and other companies. Bloomberg (24 Apr.)

Futures industry asks Indian PM to scrap tax
The U.S.-based Future Industry Association has asked India's prime minister to end plans to tax commodities futures trading. India's commodities markets were created five years ago and already have entered the ranks of the top 10 exchanges in the world. The growth is due to India's growing economy, vast agricultural sector, and the traditional demand of its people for gold and silver. Financial Times (23 Apr.)

Financial Products

UBS derivatives fund to focus on shipping futures
UBS plans to introduce a derivatives index for institutional investors that tracks coal and iron ore prices and the Chinese economy. The UBS Blue Sea index will be built on shipping futures, specifically dry-bulk forward freight agreements. UBS aims to create the alternative asset for banks and hedge funds hunting for a market not affected by the credit crunch or U.S. economic slowdown. Financial Times (23 Apr.)

Ethics

Samsung saga shows how families rule South Korean economy
The resignation in disgrace of Samsung Group's chairman underlines a paradox of South Korea: the fast-growing, modern economy is still dominated by a handful of family fiefdoms. The 30 largest family groups, known as chaebol, control almost 40% of the economy, the Bank of Korea estimates. The New York Times (24 Apr.)