Financial Teasers 22 May 08

Top Stories

Moody's retains law firm to review CPDO ratings process
In response to a recent Financial Times article, Moody's has retained law firm Sullivan & Cromwell to do an external review of the agency's process for rating European constant proportion debt obligations. Moody's had rated complex debt products higher than warranted because of a glitch in its computer models but did not fix the error for nearly a year, despite senior staff knowledge. Meanwhile, U.S. Sen. Charles Schumer, D-N.Y., has called on the SEC to investigate the situation. Financial Times (21 May.)

Dark pools work to prevent "gaming," catch perpetrators
Both broker-dealer-owned and independent dark pools are getting tough on "gaming," or the use of trade information by another party for financial gain. The potential problem intensifies as more liquidity flows into the dark pools. Tabb Group estimated that at least 10% of daily volume is running through dark pools. A Tabb report from last year found that 60% of buy-side participants surveyed said the gaming threat affected their decision on whether to interact with the pools. Financial News Online (22 May.)

Canadian court ruling could derail buyout of BCE
The Quebec Court of Appeal ruled that bond holders of BCE were unfairly treated when the company's board of directors approved a $52 billion buyout offer from the Ontario Teachers' Pension Plan and its partners. BCE and its proposed buyers said they plan to appeal the lower-court ruling to the Supreme Court of Canada. Attorney John Finnigan, who is representing the bond holders, said if BCE and the buyout group want the deal to be completed, they will have to start over. Canada.com (CanWest News Service) (22 May.)

Group warns about liquidity battle in energy contracts
The Futures and Options Association warns that if the looming fight between IntercontinentalExchange and the New York Mercantile Exchange regarding control of liquidity in energy contracts heats up, London's energy market could get burned. The exchanges, along with LCH.Clearnet, are battling over competing clearing services. The FOA is concerned that the liquidity will be split between clearinghouses, raising regulatory issues. Financial Times (21 May.)

Auction-rate securities leave investors in a bind
Investors of auction-rate securities are facing the dilemma of either waiting for the market to get back on track or find a way to get their money back. Individuals' financial situation plays a large part in the decision. Those who can afford to leave the money might be rewarded with higher yields, while those who need the money now will likely have to pay either interest on a loan from their brokerage or take a discount and allow their adviser to buy the securities.
Bloomberg (22 May.)

Oil price hits more than $135 a barrel in Asia

In Asia, oil reached a record high price of more than $135 a barrel today and then retreated. Concerns about supply, increasing global demand and a declining dollar are keeping crude futures moving up. Analysts are starting to question what will stop oil prices from increasing as they continue to set new records almost daily. Although there are technical indications in the futures market that crude might drop, few analysts are ready to call an end to the rally. ClipSyndicate/Bloomberg (22 May.)

, Associated Press (22 May.)

Asian governments deal with record oil prices differently: While some Asian governments are subsidizing fuel costs for consumers to keep inflation in check, others are raising energy prices to reduce the impact on their budgets. "We see fiscal positions deteriorating in countries that subsidize the local cost of oil," said Robert Subbaraman, chief economist at Lehman Brothers Asia. "If oil prices stay persistently high at these levels, these kinds of measures can do more damage than good." Bloomberg (22 May.)

NRG Energy makes $11.3 billion bid for struggling rival
Calpine, a troubled power wholesaler with dual headquarters in Houston and San Jose, Calif., has revealed that its rival NRG Energy made an unsolicited bid of roughly $11.3 billion in stock. NRG, which confirmed the offer, is attempting the takeover only months after Calpine emerged from operating under bankruptcy protection. Associated Press (22 May.)

Market Activity

Japanese, Australian shares up despite oil concerns
Shares in Tokyo and Sydney, Australia, shrugged off a global slump in equity markets to reverse earlier losses and finish the day with gains. Tokyo's Nikkei increased 0.4% and Sydney's S&P/ASX 200 edged up 0.1%. Meanwhile, South Korea's Kospi and China's Shanghai Composite both slid 0.7%, Hong Kong's Hang Seng Index dropped 2% and Taiwan's Weighted Price index fell 0.4%. Singapore's Straits Times Index and Indonesia's Jakarta Composite both fell as well, 1.1% and 1.4%, respectively. MarketWatch (22 May.)

Credit crisis spurs derivatives market's rapid expansion
The Bank for International Settlements said in a report that the market for derivatives expanded 44% to $596 trillion from 2006 to 2007, the fastest expansion in at least a decade. The market, which includes derivatives on debt, commodities, currencies, interest rates and stocks, was spurred by the global credit crisis as many used the contracts to hedge against losses. ClipSyndicate/Bloomberg (22 May.) , Bloomberg (22 May.)

Most Brazilian companies cancel, postpone IPOs
With nearly two-thirds of last year's new stocks in Brazil losing money, most of the country's companies planning initial public offerings have either canceled or postponed their plans. Banco Fibra, PST Eletronica, Norse Energy do Brasil and more than a dozen other companies in Brazil, which has the best-performing equity market in the world, have delayed or withdrawn IPOs this year. Bloomberg (21 May.)

Economics

Experian: U.K. better positioned to weather storm than U.S.
Experian, the biggest credit information agency in the world, said U.K. banks started tightening lending standards two years ago, putting Britain in a better position to ride out the financial crisis than the U.S. Experian CEO Don Robert said the quality of credit portfolios in the U.K. is holding up, while the company has seen the housing market woes spread to credit cards and other areas of the market, resulting in "real evidence of the weakening consumer in the U.S." Telegraph (London) (22 May.)

Japan's trade surplus drops by more-than-expected 46.3%
Falling exports to the U.S. combined with the rising cost of energy imports caused the trading surplus in Japan to plunge 46.3% in April. The figure underscores the pressure that Japan is facing caused by the global economic downturn, analysts said. Increased shipments to rapidly expanding emerging markets are helping. Channel NewsAsia/Agence France-Presse (22 May.)

Iceland's central bank expected to boost or hold interest rate
Nine economists surveyed by Bloomberg expect the Central Bank of Iceland to either raise its benchmark interest rate today or hold it steady. The bank is struggling to reverse significant decline in the country's currency, the krona, and curb inflation, which is accelerating at its fastest pace in 18 years. Last week, central banks from three other Nordic countries offered to provide emergency funding to prop up Iceland's currency and financial system. Bloomberg (22 May.)

Geopolitical/Regulatory

Influential group calls for pan-EU "super regulator"
A group of former European premiers and finance ministers has sent an open letter to the European Commission and European Union president criticizing the financial industry and calling for an EU-wide regulator to prevent future crises. The letter takes aim at bankers' compensation, risk taking by financial institutions, lack of transparency in the markets and loss of business ethics. Telegraph (London) (22 May.)

Financial Products

Study predicts issuance of CDOs will likely disappear
A report by Aite Group predicts that the market for collateralized debt obligations is headed for oblivion. Data show that $226 billion worth of CDOs backed by asset-backed securities were issued two years ago. So far in 2008, only $1.5 billion worth of the CDOs have been issued. "As capital has become more dear, credit rationing, particularly applied to mortgages, has become de rigueur at lending institutions," said John Jay, the report's author. "With less collateral to securitize into CDOs and no ready buyers in sight, ABS CDO issuance has virtually disappeared." FinancialWeek (21 May.)

PowerShares launches first ETFs of ETFs
The PowerShares Autonomic Global Asset Portfolios are the first exchange-trade funds of ETFs. The three funds track indexes of ETFs developed by New Frontier Advisors, a Boston advisory firm. They were launched this week on the American Stock Exchange. The funds represent different risk levels and asset allocation strategies. Index Universe (20 May.)

Ethics

Judge: SEC lacks authority to fine advisers who aid, abet fraud
A ruling by the District Court in Washington might make it more difficult for the SEC to fine financial advisers found guilty of aiding and abetting fraud. After finding Robert Radano guilty for the illegal activity, District Judge Colleen Kollar-Kotelly said under the Investment Advisers Act of 1940, the SEC does not have the authority to fine Radano. "What the judge is saying is that the statutory language to fine adviser aiders and abettors is not in the Advisers Act," said Jane Stafford, managing member of Stafford & Associates. InvestmentNews (19 May.)

Financial Teasers 20 May 08

Top Stories

U.S. cuts use of imported oil for first time since '70s

The U.S. has seen its dependency on imported oil dip for the first time since 1977. Imports comprised 57.9% of oil consumption in the first three months of the year, down from 58.2% last year. Americans are using less because of high prices and because more ethanol is in use, said Guy Caruso, head of the U.S. Energy Information Administration. Financial Times (19 May.)

Microsoft targets Yahoo's search advertising operation

In its renewed romance of Yahoo, Microsoft has proposed several ideas for a pairing, including a revenue-sharing partnership and Yahoo selling its search advertising operation. Yahoo is under pressure to negotiate some kind of partnership or deal after resisting Microsoft's earlier buyout offer. Yahoo's future might depend on reaching a decision to sell or outsource some of its advertising business, Stifel Nicolaus analyst George Askew said. Microsoft has made it clear that it plans to build its search advertising business one way or another. San Jose Mercury News (Calif.) (19 May.)

Buffett keeps eyes on Europe for takeover targets

Investor Warren Buffett said he's concentrating on Europe, not emerging markets, for companies that his Berkshire Hathaway might be interested in buying. "You want to fish in a pond where the fish are, and Europe is a much better pond," he said. Buffett is on a four-city European tour designed to form relationships that might identify purchase targets for his investment and holding company. Bloomberg (19 May.)

Study: Quantitative fund managers must reassess models

These are tough days for quantitative fund managers. A study by the CFA Institute released last week found that a reliance on similar market factors has made it hard for many quant managers to generate returns. "If your model uses only public information, then everyone else has the same insights," said Michael O'Brien, head of European distribution at Barclays Global Investors. "Quant managers have traditionally taken their insights from the world of academia, but in the future they will have to rely less on this." The study found a need for managers to "update models continuously." FinancialWeek (20 May.)

Big consumer predicts platinum price will keep rising

One of the world's biggest users of platinum foresees a further 15% price increase in the next six months. Metals and chemicals group Johnson Matthey said global platinum output fell 4.1% in 2007, creating a shortage. That is likely to worsen this year as South African mines suffer disruptions because of the country's severe electricity disruptions. Financial Times (19 May.)

Alternative energy projects large and abundant

Forbes.com has identified the biggest and boldest projects that the world has seen so far. They include a geothermal project tapping into the volcanic heat below Indonesia; solar arrays in Australia and California's Mojave Desert; and wind farms in the Texas panhandle and off the coasts of England and Norway. Financial Post (Canada) (16 May.)

Japan expects to come out victorious in credit crisis

While other developed countries cope with the troubling ripples of the credit crisis, domestic and overseas markets should drive a recovery in Japan by the end of this year. Most Japanese financial institutions avoided exposure to subprime loans and dodged the worst of the fallout. Japan will also benefit as the falling dollar forces exporters to diversify their markets away from the U.S. China became Japan's largest export partner last year, and sales to Russia and oil-producing countries in the Middle East are strong. Telegraph (London) (20 May.)

Market Activity

Lack of news lowers Asian markets

Asian stock markets sank Tuesday as investors turned cautious in the absence of market-moving news. Hong Kong led the declines, with the Hang Seng Index down 1.8% after China Mobile reported lower-than-expected growth in telephone subscribers. MarketingWeek (subscription required) (20 May.)

U.K.'s gap in bond yields creates doubt about inflation fight

Investors appeared skeptical of the Bank of England's ability to fight inflation rising at its fastest rate in more than a decade. The gap has widened in recent months between the yields on index-linked U.K. government bonds and conventional bonds. The broader gap shows that bond investors want to pay increasingly higher prices for inflation protection. ClipSyndicate/Bloomberg (20 May.) , Financial Times (19 May.)

Economics

In unanimous decision, Bank of Japan holds interest rates

After dropping its growth outlook, the Bank of Japan decided Tuesday to keep interest rates steady. The overnight lending rate in Japan, at 0.5%, is the lowest among the world's major economies. "There are no options for the Bank of Japan other than to adopt a policy status quo," said Yasunari Ueno, chief market economist at Mizuho Securities. "It won't raise rates until around July next year at the earliest. At the same time, we don't expect a cut." ClipSyndicate/Bloomberg (19 May.) , International Herald Tribune/Bloomberg (20 May.)

Aussie dollar peaks on possible interest rate hike

The Australian dollar punched to a 24-year high Tuesday against the U.S. currency when traders priced in expectations of a coming interest rate hike by the Reserve Bank of Australia. Records of the RBA's May meeting showed that central bank policymakers discussed raising a key cash rate to fight inflation that is at a 17-year high. The Sydney Morning Herald (20 May.)

Brazilian president vows to fight rising inflation

Brazilian President Luiz Inacio Lula da Silva said the government will fight accelerating inflation. Economists predicted that consumer prices will jump to 5.12% this year, a central bank survey shows. Brazil's central bank is expected to raise its key interest rate by a half percentage point to 12.25% at its meeting June 3-4. Bloomberg (19 May.)

Geopolitical/Regulatory

U.S. change to global accounting standards could jolt

The widely expected U.S. adoption of international financial reporting standards could lead companies to dress up their bottom line. Of about 130 companies reconciling accounts from foreign filers using IFRS in 2006, 63% increased their earnings over GAAP reporting by a median 11.1%, according to a study by accounting analyst Jack Ciesielski. The most frequent differences were in the accounting for pensions, share-based compensation and derivatives, his analysis found. FinancialWeek (19 May.)

Nigeria to reform state oil company into private firm

Nigeria's president said the country's dominant and corrupt state oil company will be turned into an efficient private business once a reform process finishes sometime next year. President Umaru Yar'Adua heads a committee whose proposals on restructuring Nigerian National Petroleum Co. are expected in a couple of weeks. Nigeria is the world's eighth-largest oil producer, and the product is the country's main foreign currency earner. Agence France-Presse (18 May.)

Egypt says no tax is coming to reassure investors

Egyptian officials said they have no plans to impose a capital gains tax, hoping the reassurance will stop a slide in stock markets of more than 10% since the start of last week. The plunge came after President Hosni Mubarak announced new tax measures to raise US$2.6 billion for a 30% pay raise for public employees. Investors said the government failed to communicate its intentions, creating fear that more steps were coming and the sell-off of Egyptian shares. Financial Times (20 May.)

Financial Products

Gold in high demand despite decreased production

At the same time that gold production has dropped to its lowest in five years, demand by investors is booming. Demand for gold exchange-traded funds doubled from the first quarter of 2007, the World Gold Council said. MarketWatch (20 May.)

S&P starts new agribusiness composite index

Standard & Poor's has created a composite index that tracks both global agribusiness companies and farm commodities. S&P's Global Agribusiness Composite Index meshes subindexes based on crops and livestock with its agribusiness equities tracker. The new model will be less volatile, the company said. Structured Products (19 May.)

Ethics

SEC sues former AOL execs over inflated ad revenue

Eight former AOL executives overstated online advertising revenue by $1 billion, the Securities and Exchange Commission said in a lawsuit against them. The allegedly inflated revenue increased AOL's stock price, allowing it to buy Time Warner in 2000 for $184 billion to form the world's largest media company. The merged company's market capitalization has now fallen to about $56 billion. Four of the executives agreed to settle with the SEC without admitting or denying the allegations and to disgorge a total of $8 million. Forbes (19 May.)