Nobel Prize winner: dollar reserve system is falling apart The Daily Crux

The calm before the financial storm The Daily Reckoning

How China is stealing our future Energy Tribune

The lie about high frequency trading liquidity The Market Ticker

Federal Reserve loses big lawsuit Zero Hedge

Insight: Do not fear falling bond prices FT

How big Swiss bank is protecting its clients against inflation Bloomberg

The prices are so cheap they’re stupid DailyWealth

Government claims that Goldman has stock manipulation software The American Prospect

• Crude oil for July delivery rose $4.33 to $133.38 a barrel yesterday (Wednesday) after U.S. stockpiles showed an unexpected decline. Supplies fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, according to the Energy Department.

• Time Warner Inc. (TWC) announced yesterday (Wednesday) that it plans to spin off its cable-television unit and receive a $9.25 billion windfall in the transaction, Bloomberg reported. The move will let the company focus on its cable network, entertainment, and publishing operations rather than distribution – something investors have been clamoring for.

• The Boeing Co. (BA) said yesterday (Wednesday) that it would lay off 750 Southern California employees after losing a lucrative military satellite contract and seeing a dip in demand for the technology, the Associated Press reported. The cuts involve engineering staff at plants in El Segundo and Seal Beach.

• Swiss bank UBS AG (UBS) yesterday (Wednesday) sold subprime and other mortgage-based securities to a newly created investment fund run by U.S. asset manager BlackRock Inc. (BLK) for $15 billion, the Associated Press reported. The securities had a nominal value of $22 billion but have been listed with a book value of $15 billion as of March, according to UBS.

• American Airlines, a subsidiary of AMR Corp. (AMR), announced yesterday (Wednesday) that it was taking drastic measures in the face of escalating oil and fuel prices, Reuters reported. The world’s largest airline will cut thousands of jobs, reducing capacity by 12%. American will also charge $15 for passengers’ first checked bag. AMR stock dropped 25% with a $1.98 decline to close at $6.22.

• Shares of corporate debt rating agency Moody’s Corp. (MCO) dropped over 15% yesterday (Wednesday) after a computer glitch mistakenly issued “Aaa” ratings for Constant Proportion Debt Obligations, commonly referred to as CPDOs, Reuters reported. Moody’s stock lost $6.99 to close at $36.91 yesterday (Wednesday).

• The U.S. House of Representatives passed legislation yesterday (Wednesday) that would allow the Department of Justice to sue the Organization of Petroleum Exporting Countries (OPEC) for limiting oil supply and price-fixing, Reuters reported. The measure still needs to be approved by the Senate, but President Bush has already threatened to veto the bill.

• Inflation fears were blamed for the Bank of England’s 8-to-1 decision to hold interest rates steady yesterday (Wednesday), MarketWatch reported. “For most members, a reduction in Bank Rate this month would make it more difficult to keep inflation expectations in line with the target,” the minutes said. For April, consumer inflation clocked in at 3%, above the BOE’s preferred 2% target.

Source: Global Investing Roundups:Thursday, May 22nd, 2008

Though it currently holds third place behind London and New York, Hong Kong’s presence as a world financial center is growing by the day. Credit Suisse Group (CS) is the latest financial firm to move a top executive to the Asian city.

Vikram Gandhi, the Swiss bank’s head of global financial institutions group, will relocate to Hong Kong from New York this summer to tap growth in Asia, Bloomberg News reported.

“As part of our ongoing commitment to transfer talented bankers to other regions, Asia Pacific will benefit greatly from having a banker on the ground with Vikram’s experience and client relationships,” Jim Amine and Marc Granetz, co-heads of global investment banking at Credit Suisse, wrote in an internal memo. “We are going to continue to align our best bankers with areas of highest potential growth.”

This move follows similar relocations to Hong Kong by top brass at Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup Inc. (C) as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven’t been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

“Investment bankers follow the money,” Scott Moeller, a Professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

“With sovereign wealth funds having a lot of money, with Asia having escaped the worst of the credit crunch and with the crunch having hit the U.S. and Europe the hardest, it is not surprising at all,” Moeller said. “Once you get critical mass in a location, it begins to snowball and that is what is happening in Asia.”

But despite the growing number of deals happening in Asia, competition between Hong Kong and Shanghai is likely to keep the former city from overtaking London or New York as the new global financial capital.

“I would be more worried if I was in a third tier financial center like Paris or Frankfurt than in London or New York,” Moeller said. “I don’t think London or New York will be losing their crowns as leading financial centers any time soon.”

Source: Hong Kong Gaining Prominence as Leading Global Financial Center

Speaking before 4,200 shareholders in Basel, Switzerland, Chief Executive Officer Marcel Rohner said the bank would look to reduce expenses, particularly in its investment banking division.

First created in 1998, the bank’s securities division has earned $32.48 billion (32.5 billion francs) since its inception. That figure has now been completely offset by the $37.5 billion (38 billion) in losses the unit has incurred since the subprime crisis began to unfold last summer.

UBS will “no longer aim to offer everything to everyone in investment banking,” Rohner said. The bank would announce job cuts at the unit next month in order to make expenses more compatible with the securities unit’s “new positioning,” he said.

In addition to cost-cutting measures, shareholders approved another capital infusion of $15 billion. That’s on top of the $13 billion already raised from sovereign wealth funds in Singapore and the Middle East.

Ospel Ousted

UBS shareholders booed the selection of General Counsel Peter Kurer as the replacement for former Chairman of the Board Marcel Ospel.

Ospel, 58, who started his financial career in securities trading at Merrill Lynch & Co. Inc. (MER) has been lambasted in the Swiss press for overexposing UBS to the U.S. subprime crisis. UBS losses are the largest of any foreign bank.

And while most were pleased to see Ospel replaced, many objected to the selection of Kurer, 58, as his replacement.

“We have heard no justification as to why a credible search for an external chairman has not been undertaken,” former UBS President Luqman Arnold, whose London-based investment group currently holds 1.1% of UBS shares outstanding, said in an e-mailed statement, Bloomberg News reported. “We are skeptical whether a supervisory board led by legacy insiders will be the agent of change that UBS needs.”

There had been some speculation that Germany-based Deutsche Bank AG (DB) Chief Executive Officer Josef Ackermann might be tapped for the role, as he is a Switzerland native and is seen as having the experience needed to helm a large banking operation facing the type of risk management issues that UBS is confronting.

“At least half of the board should be made up of banking experts,” Dominique Biedermann, director of Geneva-based Ethos, who has been very critical of UBS management, said yesterday.

In an attempt to reassure discontent shareholders, Kurer affirmed that UBS is not for sale while acknowledging the monumental task before him.

“I am not here to defend the choice” of the board, Kurer told shareholders. “It is an honor for me to stand in front of you today, but I do so fully aware of the magnitude of the tasks ahead of us, of the work that is required to bring UBS back to the premier ranks of banking.”

UBS shares traded on the New York Stock Exchange dropped 2.6% for the day, with a decline of $0.92 to close at $34.46. Shares have traded in a range from $22.19 to $66.26 in the past 52 weeks.

Long time members of The Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts – and that was not only because of its monster size and impersonal service. What concerned us is the UBS anti-privacy policy.

The merger of Swiss Bank Corp and Union Bank of Switzerland creating UBS AG was approved by the U.S. Federal Reserve Board in 1999. But that was only after UBS agreed to provide the U.S. government with all information “necessary to determine and enforce compliance with . . . [U.S.] federal laws.”

This surrender went far beyond the normal financial information that Swiss banks must exchange with the U.S., under the current U.S.-Swiss Tax Treaty. This agreement also nullified Swiss bank secrecy laws that usually require a court order to release private banking information.

UBS caved in after the U.S. government threatened to shut down the bank’s extensive American financial operations. The UBS sell-out was bad news for financial privacy seekers -and it blew a large hole in the much vaunted concept of Swiss “bank secrecy.”

Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere “representative office.” (A similar privacy killing deal was made between the Fed and Credit Suisse when that leading Swiss bank merged with First Boston.)

Historically, there has long been a widespread belief that Switzerland is the place to safeguard cash and personal assets, especially in times of trouble. We think that still holds true.

Notwithstanding UBS, it is estimated that currently Swiss banks manage at least one third of all assets held offshore by the worlds wealthy. Total cash assets of the Swiss banking system are estimated at nearly US$2 trillion, while the value of total securities deposits are well over US$3 trillion. Assets under Swiss management have risen significantly in recent years, reaching a high of nearly US$4 trillion in 2007, according to the Swiss National Bank and the Swiss Bankers Association.

But the country’s political, financial and economic stability and strength are of far greater importance. Many of the world’s leading companies and hundreds of thousands of non-Swiss persons bank with the Swiss. Even the international intermediary banking institution for all other banks in the world, the Bank for International Settlements, is located in Basle, Switzerland.

Switzerland still is home to several hundred banks, including many small private and regional banks and more prudent large banks such as Bank Julius Baer, with branch offices in most of the world’s financial centers, from New York and Panama to Singapore and Hong Kong.

If nothing else, the UBS debacle is a stark warning to other Swiss bankers to stay with their traditional principles and, by all means, avoid Americanization.

BOB BAUMAN, Legal Counsel

P.S. To find banks around the world that have vigorously avoided Americanization and this sub-prime nonsense, consider joining us in Panama this May 14-17 for our Total Wealth Symposium. We’ve invited bankers from all over the world who can assist you with setting up your own bank account in some of the world’s strongest banking havens that vigorously guard your privacy, offshore investments and even your retirement account. Click here to learn more.

That’s what happened to Swiss bank UBS yesterday. “So this is good news?”, asks a bemused Lex in the FT. Also, Deutsche Bank writes down $3.9bn and its stock goes up nearly 4%. American investment bank Lehman Bros, a suspected Bear Stearns Mark II only a few short days ago, announces an additional $1bn capital raising. Its shares leap 18%.

But then stocks everywhere had a positive day yesterday with the rally continuing into a second day this morning. “Stocks rise in spite of fresh bank woes,” reads the FT headline headline. Reuters calls it the “Write-down relief rally”. The S&P 500 was up more than 3.5% on Tuesday, the FTSE 100, 2.6%. The Nikkei rose 1% on Tuesday and another 4% today.

Why is Mr. Market now laughing in the face of adversity? Are we seeing a dead cat bounce? The FT considers the possible impact of short sellers scrambling to buy back positions when the market goes against them so intensifying the buying. The possibility too, is that investors are beginning to think the eye of the storm has now past. The banks are coming clean, maybe, though we’ve yet to hear from subprime gorgers Citigroup and Merrill Lynch. Kevin Gardner, head of global equity strategy at HSBC tells the FT it’s too early to call a turning point for stock markets. Though after a credit crunch, a US investment bank failure and a mortgage bank failure here at home a “heck of a lot” of bad news is in the price.

Continues below …

Recommended

Make an easy £77 – £119 per hour on the financial markets…

Discover the secret to earning an extra £77 – £119 on the financial markets. This is incredibly straight forward. In fact whatever your education, knowledge or experience – this will work for you…

Former sales representative Janet Fry made £38,000 pure profits. How much will you make?

Click here to find out more

Well the bad news may or may not be all in the price. But this one-time financial sector problem is more and more showing up as everyone’s problem, as it ripples out into the high street. The rate at which banks lend to one another is still a lofty 6%, and daily there is less money available for funding debt-driven lifestyles – mortgages, personal loans, credit cards.

Lending rates are being hiked wholesale and mortgage offers withdrawn, sometimes with brutal haste: this seems counter-intuitive against a backdrop of interest rates trending down. Nationwide building society, Halifax, NatWest and its parent RBS are just some of the major names that have increased their lending rates. Those left standing with a good deals are being inundated. Yesterday First Direct, part of banking giant HSBC, suspended new mortgage lending after it was “swamped” with mortgage applications for its highly competitive two-year fixed deal at 4.95%.

From a highly competitive mortgage market place where lenders – pre credit crunch – were prepared to lend below their cost of funding to maintain market share, we are now in a market where lenders don’t want to lend whatever the central banks do with interest rates. George Soros explains to the BBC’s Robert Peston:

“You can’t rekindle the willingness to borrow and the willingness to lend because the balance sheets of the banks are now over-burdened and there are all kinds of risks that have become apparent. And they haven’t yet fully worked themselves out, so there’s a great deal of unknown credit risk in the system. And as a result, the banks are husbanding their resources because they’ve actually lost a lot of money…”

As for the UK’s interest rate outlook it remains murky, in spite of anticipation of a further 0.25% cut this month or next to take us down to 5%. Factory gate inflation hit a new high as manufacturers passed on higher energy costs with higher prices. And, ominously, problems appear to be brewing in public sector pay. The National Union of Teachers has voted to strike for the first time in more than 20 years – a one day strike on April 24th for more money. They want a 2.45% pay rise increased to at least inflation. CPI is currently 2.5% but RPI is 4.1%. They want to see their pay, at least in real terms, maintained. Understandable but it adds to the difficulties facing Mervyn King and the Bank of England Monetary Policy Committee in balancing the need for lower interest rates with the inflation fight.

As more liquidity gurgles out of the system, and mortgage rates go up talk of a house price crash comes to the fore. “London House Prices: Slump Starts”, screams the London Evening Standard from its front page last night after Land Registry figures recorded a 0.4% fall in February. My thinking we’re looking at a stagnant housing market over a slumpy one is taking a lot of heat these days. 6% LIBOR…vanishing credit…dearer credit…few buyers (even fewer first timers)…plenty of stock…possibly even more after April 6 if buy-to-let investors decide to cash in under the new capital gains tax regime. I have to admit, it’s not looking pretty…

*** More on the food crunch. “Countries rush to restrict trade in basic foods”, reads the FT headline. Tariffs on food imports are being scrapped and tariffs on exports hiked as the developing world responds with alarm to the urgent and potentially acute problem of food shortages.

“World food stocks have never been lower,” India’s trade minister Kamal Nath tells the FT. Saudi Arabia announced they would cut import taxes on a range of foods yesterday as did Egypt. India did much the same on Monday and banned the export of some rice.

Regards,

Rob Mackrill
The Daily Reckoning

Be the first to comment on this article! Now you can post your thoughts, reactions and views on the topics we talk about.
To comment, click here.
P.S. Each month we ask your views on a current talking point.
This months question is: Which out of these precious metals will be the star player in April and have the highest price rise?

Gold, Silver, Platinum or Palladium.

Click here if you would like to have your say

The rally comes despite heavy writedowns from Swiss banking giant UBS.

The uncertainty about the markets’ direction reflected the fact that stocks rose after another round of bank writedowns and capital-raisings – developments that might have been expected to send prices lower.

However, UBS added to the previous session’s 12 per cent advance sparked by news of the departure of its chairman. The Swiss bank said Marcel Ospel was standing down in the wake of $19bn of new writedowns and plans for a SFr15bn ($15bn) rights issue. Its shares rose a further 0.4 per cent to SFr32.9 on Wednesday.

In New York, Lehman Brothers, the US investment bank locked in a battle with short-sellers betting on its demise, surged 18 per cent after it said it was increasing Monday’s $3bn capital-raising by $1bn.

Forget the big bank, says Steve Sjuggerud. Small banks are where the profits are at.

“The good part about the small banks is, they generally stick to their knitting – taking deposits and then making loans. They simply earn a spread… They charge more interest on the loans they make than they pay out as interest on their deposits.

“Small banks are generally not like the big banks. Big banks do try to get fancy, with derivatives trading, massive leverage, and such.”

In 1957, the BBC’s usually serious current affairs programme Panorama ran a feature on spaghetti trees being harvested by the Swiss. The really good news for the spaghetti farmers they said was the malevolent and highly destructive spaghetti weevil had been eradicated. Afterwards, the Beeb was bombarded by viewers interested in cultivating their own spaghetti trees.

In the absence of any obvious spoofs today the news throws up a few candidates:

UBS – many more billions destroyed for the Swiss bank on the broken porches of America’s derelict neighbourhoods – surely the investment equivalent of trying to cultivate spaghetti trees. Bank chairman Marcel Ospel is stepping down and a rights issue is in the works. Mr Market appears relieved at the news. The shares were up 6% this morning, though less than half the price of one year ago.

Max Mosley – President of the Formula 1 motor racing governing body Federation Internationale de l’Automobile (FIA) and son of one-time notorious English fascist Sir Oswald Mosley. According to a Times report Mr Mosley “…spent five hours with five prostitutes in an underground torture chamber in Chelsea last Friday indulging in sado-masochistic sex.” Ouch. More on the offspring of notorious fascists, including Hitler’s nephew, used car salesman Paddy Hitler, can be found in The Times.

Robert Mugabe. Could it be Zimbabwe manage to dump the old tyrant who has brought this once prosperous country to its knees? A nation remarkable now for all the wrong reasons – hyper inflation, the lowest life expectancy and one of the highest rates of AIDS infection.

Ex-Diana butler Paul Burrell, paparazzo James Andanson and Harrods department store boss Mohamed al-Fayed’s head of security John Mcnamara. All branded liars by Lord Justice Scott Baker in the never-ending inquest into the death of Princess Diana which found “no evidence” to support claims of an Establishment plot. Its reported cost to us, the taxpayer, is £6m. All that to get to the point most reasonable-minded folk had reached a decade ago.

Okay, enough fooling. But just to be out of the first quarter of the year feels like a relief. Anyone chancing their money in the stock market has had a rough ride. The FTSE 100 notched up its worst performance in more than five years, says ODL Securities in a note – down 11.7% since January. The sharp sell-off presents a buying opportunity argues Charles Stanley. The prospective PE is now a modest 10.7x against a historical average of 14x with many juicy yields to be had (assuming they don’t cut!) that exceed the 10 year gilt yield of 4.4%.

But then when recession comes earnings fall and those slippery PE numbers can start making fools out of us. The trick to smart investing, as Mark Slater (son of Jim, and a chip off the old block) once commented, was finding those companies where earnings were going up so fast that at some point the company would be re-rated by the market thereby boosting the share price. But then the reverse is also true – we can find the anticipated re-rating soon becomes a depressing de-rating, crushing the stock and exciting only the short-sellers.

In the US, estimates for earnings have been falling as the economic outlook got worse. At the start of the year analysts forecast 4.7% earnings growth for the S&P 500 companies in the first quarter. This was reduced to a fall of 5.5% forecast last week and a fall of 8.1% forecast this week says a Reuters report. Quite a rehash in a short time. Charles Stanley notes that in the course of a typical recession earnings decline 30% but current estimates are for 13% growth. This looks “optimistic” it says with admirable understatement.

Falls of up to 20% in Europe over the past quarter have been led by banking fools UBS and SocGen. Japanese stocks (this editor’s least favourite stock market) continue to go nowhere though appear to have escaped little direct exposure to subprime, circa $5bn. It faces its own housing slump and recession too, say Charles Stanley.

Emerging market stocks in bubble markets such as China and India have been flattened. As colleague Manraaj Singh, editor of Profit Hunter, noted: “the benchmark Chinese Shanghai Composite Index fell three per cent yesterday – that puts it 43 per cent below its record high last October and down 34 per cent since the beginning of the year.” China’s 300 leading stocks now trade on a less bloated 19.5x, says Manraaj, against over 30x previously.

China is not without her problems. Charles Stanley notes its inflation rate is now near 9%. Any readers who caught last night’s Channel 4 Dispatches programme on what the Dalai Lama calls the ‘cultural genocide’ of Tibet will wonder how this summer’s Beijing Olympic Games are going to pan out. Economically Tibet itself is undergoing a boom as money and miners flood in to exploit its natural resources. Tibet boasts half the world’s lithium and large copper and chromium deposits, says The Week. There’s gold and oil there too.

“Is the UK going into a recession in the next year?” That was the question posed on our website last month and this is the response:

14% said “no”
21% said “yes, within 3 months”
29% said “yes, within 6 months”
34% said “yes, within 12 months”

Lehman Bros recently upped the probability of a UK recession to a 1 in 3 chance. Fellow Reckoners think that’s way too optimistic. It’s a 1 in 2 within six months and a near racing certainty within a year.

The new poll for this month asks: Which out of these precious metals will be the star player in April and have the highest price rise?

Gold, Silver, Platinum or Palladium

Visit the website to vote, it only takes a second.

Read on at Dow Jones MarketWatch.

“No matter what you think, now is the time to buy,” says value investor Chris Mayer.

“At the beginning of recessions, investors tend to continue buying the stocks that were acting well when the economy was growing. That means momentum stocks, or stocks that have gone up. But as you get into the recession, people start to think about valuation again. Momentum stuff starts to not make sense.”

Swiss bank UBS makes front-page news on The Wall Street Journal for its thumping quarterly loss of more than $12 billion on write-downs of $19 billion. The losses have claimed chairman Marc Ospel.

– USA 2008: The Great Depression

Brit newspaper The Independent leads with “dismal projections” that in the fiscal year starting in October, 28 million people in the US will rely on government food stamps to survive, the highest level since the food assistance programme was introduced in the 1960s.

– Paulson plan will be DOA

Paulson plan will be “dead on arrival”, according to The New York Times, as “lawmakers and lobbyists from an array of industries” oppose to the plan to create a new financial regulatory system in the US.

– London stocks lift despite UBS writedowns

Shares in UBS and British banks Barclays, Royal Bank of Scotland and Alliance & Leicester rise in London, despite heavy writedowns for the Swiss banking giant.

– Worst month for hedge funds since LTCM collapse

Figures from Chicago-based Hedge Fund Research show that the average fund tracked by its HFRX index was down 2.4% in March, its worst month since the collapse of Long Term Capital Management in 1998.

– Gas prices at record high

High crude oil prices are being passed on to US consumers. From Rueters: “The U.S. retail price for gasoline set a new high of $3.29 a gallon after rising 3.1 cents over the last week, the federal Energy Information Administration said on Monday.”

– Oil slides, dollar climbs

Oil is back at $101 a barrel as the euro fell to a six-day low against the greenback.

– Gold falls for fourth day

The yellow metal fell for the fourth consecutive day to $896.75 a troy ounce.