Overhauling China’s Success

If those reforms succeed, they would also transform China’s model of state-sponsored capitalism in ways that could level the playing field with trading partners like the U.S….”

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“Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates,J.P. Morgan Chase JPM -1.70% & Co. and Morgan Stanley MS -1.46%bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.

Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.

While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.

During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world.

Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.

Some details of the deals being worked on at J.P. Morgan and Morgan Stanley aren’t clear, including the size of the CDOs and which investment firms have expressed an interest in buying slices of them….”

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“The Securities and Exchange Commission voted in favor of overhauling the $2.6 trillion money-market mutual fund industry, targeting the types of funds seen as most prone to investor runs during the financial crisis.

The SEC’s proposal would require “prime” funds catering to large institutional investors to abandon their fixed $1 share price, allowing the funds’ prices to float like other mutual funds, according to a fact sheet distributed ahead of the vote. Prime funds invest in short-term corporate debt; less-risky funds buy only government securities.

The SEC’s five commissioners supported the proposal unanimously.

Resolving long-standing concerns about money funds is a priority for Mary Jo White, the SEC’s new chairman, who is under pressure from U.S. and global regulators to address risks in the cash-like investments. An overhaul proposal favored by former SEC Chairman Mary Schapiro faltered last year.

In targeting prime institutional funds, the SEC believes it is targeting the part of the industry most likely to lead to trouble. Institutional investors’ concerns about prime funds’ exposure to Lehman Brothers debt caused them to withdraw about $300 billion from the funds in the week after the firm collapsed in September 2008.

Supporters say switching to a floating share price would make prime funds less susceptible to runs because investors would know the current share price and wouldn’t race to sell in anticipation that it could fall below $1, as happened during the crisis.

The industry is divided on the issue, however, with many firms warning a floating share price will turn off investors. Some former regulators who back additional rules worry the SEC’s proposal may leave retail investors unprotected. Retail funds would be allowed to maintain a stable share price.

Under Wednesday’s proposal, funds also would have to release immediately the detailed information about their portfolio holdings that they provide to the SEC each month. Currently, such data is subject to a 60-day delay before it is made public….”

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“The Shiller P/E ratio, or the cyclically-adjusted price-earnings ratio, is one of the most popular yet most misused measures of stock market value.

It’s calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings.  If the ratio is above the long-term average of around 16, the stock market is considered expensive.

Currently, the Shiller P/E is at 24.

While this certainly looks expensive, it would be a mistake to assume that stocks are doomed to crash until the ratio rights itself….”

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“It’s no secret that since 2008, most hedge funds have lagged the S&P 500. Because of that, now the world’s richest families are starting to wonder if hedge funds are really worth their incredibly expensive price tag.

And they’re starting to ask hedge fund managers some tough questions about it.

Yesterday, Bloomberg hosted a conference called “The Hedge Funds Summit” for (you guessed it) hedge funds and the people that invest in them. Many of the attendees were from Family Offices — investment houses where the fortunes of the world’s wealthy are put to work.

As you can imagine, hedge funds want a piece of that action. That’s why a solid portion of the afternoon was spent discussing Family Offices, though hedge funds probably didn’t like what these juicy potential clients had to say.

“We’re quite skeptical in general… of the hedge fund industry,” said Andrew K. Tsai, Co-Founder and managing principal, Chalkstream Capital Group.

Sixty-one percent of all hedge fund money is concentrated in the hands of the top 100 hedge funds, and Tsai went on to say that that concentration makes for some wacky correlations his office would stay rather away from.

However, Tsai did say that his office is willing to seed smart hedge fund managers that have solid strategies for specific sectors.

“We don’t think of hedge funds as an asset class, we think of them as a way to get exposure to something,” said John O’Hara, Senior Advisor and Managing Director, Rockefeller & Co…..”

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“Here’s the latest analyst to double down on bullishness, with stocks remaining near all-time highs.

Paul Murphy at FT Alphaville flags the latest call from Credit Suisse’s Andrew Garthwaite, who predicts the S&P will surge to 1900 in 2014 (it’s currently at 1631)….”

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“As America’s population ages, the hard sell is on for reverse mortgages. Promising happier days ahead, the former “Fonz,” actor Henry Winkler, is giving the hard sell in relentless television ads. But the housing crash and the fiscal state of today’s seniors are causing many of these loans to backfire.

Reverse mortgages were originally designed for seniors who wanted to take out their home equity to spend during retirement. Unlike a regular mortgage, they require no monthly payments, and the borrower can take out a lump sum or receive regular payments.

“The wealth in the home is, in most cases, wealth that is sitting idly when people have a hard time making ends meet on a day-to- day basis, so having access to that allows people to basically tap that cash to pay needs or to do more comprehensive financial planning,” said Peter Bell, of the National Reverse Mortgage Association….”

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“The U.S. Federal Reserve is poised to evaluate and potentially make changes to its massive monetary stimulus, a top Fed official who is critical of the Fed’s bond-buying program said on Tuesday.

“The plot now thickens,” Richard Fisher, president of the Dallas Federal Reserve Bank, said. He likened developments in the Fed’s monetary policy to a Shakespearean play starring a “daring captain,” Fed Chairman Ben Bernanke, steering the ship of the U.S. economy.

“Act IV, just beginning, will involve the drama of introspection, with the FOMC evaluating the utility of its navigational tactics, and, perhaps, fine-tuning them, if not altering the course,” Fisher said, referring to the Fed’s policy-setting Federal Open Market Committee, in remarks prepared for delivery to the C.D. Howe Institute Directors’ Dinner in Toronto. Fisher is not a voting member of the committee this year.

Asked if he was concerned about the impact of rising bond yields on the economy, he said it should be monitored but that policymakers could not let markets dictate policy.

“We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,” he said…..”

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“WASHINGTON (AP) — The Treasury Department says it will sell an additional 30 million shares ofGeneral Motors stock this month in its on-going effort to dispose of all of its remaining shares of the giant automaker acquired as part of the government’s bailout of GM.

Treasury said Wednesday that it would sell its shares in conjunction with the sale of 20 million shares of GM stock held by the UAW Retiree Medical Benefits Trust, bringing the total size of the sale to 50 million shares.

In December, Treasury sold 200 million shares of GM stock…”

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“TOKYO (Reuters) – Toyota Motor Corp is recalling about 242,000gas-electric hybrid vehicles worldwide, including the bestselling Prius model, due to a brake design flaw, the automaker said on Wednesday.

Toyota is recalling the Prius produced between March and October 2009, and the Lexus HS 250hmade between June and October 2009, spokeswoman Shino Yamada said.

The recalled vehicles could experience greater stopping distances when braking because of amechanical design flaw in a brake part, Yamada said.

That part, the brake pressure accumulator, could crack with fatigue and release nitrogen gas into the brake fluid, she said, adding that no accidents, injuries or deaths have been reported as a result of the defect….”

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“Apple Inc. (AAPL)’s first loss against Samsung Electronics Co. (005930) in a U.S. patent case could mean a ban on imports of some older devices including the iPhone 4 while lessening prospects of the largest smartphone makers ending their legal battles.

The U.S. International Trade Commission’s decision, posted in a notice on its website yesterday, covers the iPhone 4 and iPad 2 3G sold for use on networks operated by AT&T Inc. (T), T-Mobile US Inc. (TMUS) and two regional carriers, General Communication Inc. (GNCMA) in Alaska and CT Cube LP inTexas.

With dozens of lawsuits spread across four continents in their battle for a greater share of the $293.9 billion market for smartphones, each side can now claim a victory in the U.S. With plenty of litigation remaining, Samsung’s victory probably won’t bring the two sides closer to settling, said Will Stofega, a program director at Framingham, Massachusetts-based researcher IDC.

“There’s too much skin in the game now,” he said. “It’s almost so ugly I don’t think they’ll come to any agreement. Both companies have a lot of cash and are generating a lot of money. It’s not like they have to worry about paying the legal bills.”

Obama Review…”

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“Gold rebounded to trade above $1,400 an ounce as equities retreated and the dollar’s rally halted, boosting demand for the metal as a store of value. Silver, platinum and palladium increased.

Spot gold rose as much as 0.7 percent to $1,408.50 an ounce, and traded at $1,405.06 at 2:12 p.m. in Singapore. Prices decreased 0.9 percent yesterday. Cash silver advanced 0.4 percent to $22.6295 an ounce.

Gold dropped 16 percent this year as investors sold the metal from exchange-traded products at a record pace and the MSCI All-Country World Index rallied 7.8 percent. Asian stocks fell for the fourth time in five days, while the Dollar Index lost 0.2 percent. Assets in the SPDR Gold Trust declined to 1,010.45 metric tons, shrinking for the first time in a week….”

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“West Texas Intermediate traded near its highest intraday level in four days amid signs of a reduction in U.S. crude inventories.

Futures gained as much as 0.7 percent in New York. A government report today will show supplies declined by 800,000 barrels, according to a Bloomberg News survey. The American Petroleum Institute said yesterday that crude stockpiles shrank 7.8 million barrels last week, the most since Dec. 28. The U.S. will today extend waivers from sanctions for nine nations that import Iranian oil, a U.S. official said.

“The big drop in crude inventories in the API report is supporting things,” said Andy Sommer, a senior oil analyst at Axpo Trading AG in Dietikon, Switzerland, who predicts that Brent, the European benchmark, will trade from $100 to $105 a barrel this month. “The market is going to tighten going into the third quarter.”

WTI for July delivery climbed as much as 68 cents to $93.99 a barrel in electronic trading on theNew York Mercantile Exchange and was at $93.80 as of 12:51 p.m. London time. The volume of all futures traded was 28 percent below the 100-day average.

Brent for July settlement was 18 cents higher at $103.42 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade was at a premium of $9.64 to WTI. The spread was $9.93 yesterday, the widest based on closing prices since April.

Fuel Supplies…”

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“Germany’s 10-year bonds advanced, snapping two days of declines, as economic reports added to signs the recession in the 17-nation region is deepening.

French, Dutch and Austrian securities also gained as European stocks declined, boosting demand for the region’s safer fixed-income assets. Gross domestic product in the euro area fell 0.2 percent in the first quarter, while separate reports showed retail sales in the region fell in April and services shrank last month. The European Central Bank will keep its main interest rateat a record-low 0.5 percent tomorrow, a Bloomberg News survey of economists shows.

“The data today looked dreadful,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S (DANSKE) in Copenhagen. “The ECB will probably not move tomorrow, but I would not be surprised if its rhetoric would turn a bit more dovish than last time. Europe has no growth. Stock losses also helped bunds.”

The 10-year bund yield dropped three basis points, or 0.03 percentage point, to 1.51 percent at 1:28 p.m. London time after climbing to 1.57 percent on June 3, the highest since Feb. 25. The 1.5 percent security maturing in May 2023 rose 0.28, or 2.80 euros per 1,000-euro ($1,309) face amount, to 99.89.

Euro-area GDP (EUGNEMUQ) fell 0.2 percent, the European Union’s statistics office in Luxembourg said today, confirming an estimate on May 15. A composite index based on a survey of purchasing managers in services and manufacturing industries in the region was at 47.7 last month, in line with an initial estimate on May 23, London-based Markit Economics said.

Yields Fall…”

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Unit labor cost rise much more than expected ……expectations were for 0.6%, Actual -4.3%

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“U.K. services growth accelerated more than economists forecast last month as signs mount that the recovery may strengthen, adding to the case for Bank of England policy makers to refrain from further stimulus.

A gauge of activity rose to 54.9, the highest in 14 months, from 52.9 in April, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. Economists had forecast 53.1, according to the median of 33 estimates in a Bloomberg News survey. Readings above 50 indicate expansion. The pound advanced.

Britain’s economy may be gaining traction after Markit’s reports this week on manufacturing and construction both showed growth. Bank of England officials start their two-day policy meeting today, and economists predict that they will probably keep their quantitative-easing target on hold. The meeting is the last for Governor Mervyn King before he retires and is succeeded by Mark Carney of the Bank of Canada.

The industry surveys “bode well for economic activity in the months ahead,” said James Knightley, an economist at ING Bank in London. “As such, there is little prospect of any BOE action tomorrow and it diminishes the likelihood of any shift in policy under Mark Carney in the next few months.”

The pound extended its advance against the dollar after the index. It was trading at $1.5351 as of 11.23 a.m. London time, up 0.3 percent from yesterday. Sterling strengthened to a two-week high against the euro.

Growth Accelerating…”

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“Goldman Sachs Group Inc. will lend $500 million to Alibaba Group Holding Ltd. as the company seeks $8 billion of loans, two people familiar with the matter said.

The pledge by the New York-based bank forms part of a facility that will cut debt costs forChina’s biggest e-commerce company, the people said yesterday, asking not to be identified because the details are private. Edward Naylor, a spokesman for Goldman Sachs in Hong Kong, declined to comment….”

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“The European Union imposed tariffs as high as 67.9 percent on solar panels from China in the largest EU commercial dispute of its kind, seeking to help revive a withering industry in Europe.

The duties punish Chinese manufacturers of solar panels for allegedly selling them in the 27-nation EU below cost, a practice known as dumping. Yingli Green Energy Holding Co., Wuxi Suntech Power Co. and Changzhou Trina Solar Energy Co. are among the more than 100 companies targeted.

EU producers such as Solarworld AG (SWV), Germany’s No. 1 maker of the renewable-energy technology, have suffered “material injury” as a result of dumped imports from China, the European Commission, the bloc’s trade authority in Brussels, said today in the Official Journal. The commission said 25,000 jobs in EU solar production would likely be lost without theimport taxes.

The EU’s action “is an emergency measure to give life-saving oxygen to a business sector in Europe that is suffering badly from this dumping,” European Trade Commissioner Karel De Gucht told reporters. The levies, due to take effect tomorrow at an initial lower rate of 11.8 percent, will be for six months and may be prolonged for five years.

The trade protection covers EU imports of crystalline silicon photovoltaic modules or panels, and cells and wafers used in them — shipments valued at 21 billion euros ($27.4 billion) in 2011. European companies including Solarworld have demanded punitive levies to counter growing competition fromChina following similar U.S. trade protection.

Broader Crackdown…”

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