Bond Market Open July 30 2009


This post is by John Jansen from Across the Curve


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Prices of Treasury coupon securities slumped in overnight trading as stock market gains and uncertainty regarding demand for the Treasury seven year note auction (later today)pushed prices lower.

The yield on the 2 year note increased 2 basis points to 1.18 percent. The yield on the 3 year note climbed 3 basis points to 1.71 percent. The yield on the new 5 year note is 3 basis points higherat 2.69 percent. The yield on the 7 year note surged 4 basis points (not exactly a surge) to 3.34 percent. The yield on the 10 year note climbed 3 basis points to 3.69 percent and the yield on the Long Bond increased 2 basis points to 4.53 percent.

The 2year/10 year spread is 251 basis points which is 2 basis points wider than it was when I wrote my closing post.

The 10 year/30 year spread has remained nchanged at 84 basis points.

The 2year/5year/30 year spread is opening the New York session at 33 basis points.

In spite of the excitement and light bidding interest the Treasury market is mired in a narrow but volatile range. Early in the week the 10 year note traded briefly at 3.75 percent. That level attracted buying and since then we have been swinging back and forth between 3.70 and 3.63 percent.

It will be instructive to observe todays auction and see if the apathy which has reigned the last several days continues. Given the results of the last two days I suspect the street will busy itself by shooting the taxpayer in the big toe by cheapening the 7 year note.

At the moment the vitality exhibited by the stock market is aiding that process. I think that participants will temper bid hitting until they have a chance to digest the weekly claims data. That data had fallen sharply because of some faulty seasonal factors. Today’s report should give a cleaner picture of the labor market  and will be closely studied. The consensus foresees a jump to 575K from 554K last week.


Primus Gets Partner for AIG Taiwan Unit Bid


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HONG KONG/TAIPEI (Reuters) – Primus Financial Holdings, founded by former top Citi (C.N) Asia banker Robert Morse, plans to team up with a Hong Kong-listed battery maker to bid for AIG’s (AIG.N) Taiwan unit Nan Shan Life, sources with direct knowledge of the matter said on Thursday.

American International Group, bailed out by the U.S. government in the financial crisis, is selling its Asian assets to shore up its capital base, and the sale of Nan Shan could fetch over $2 billion, sources have told Reuters.

Little-known China Strategic Holdings Ltd (0235.HK), whose major businesses include battery production and securities investments, issued a statement on Wednesday saying it had entered into a non-legally binding agreement with Primus to jointly bid for a controlling stake in an insurance firm.

China Strategic also said it planned to raise about HK$7.8 billion ($1.01 billion)to fund the possible joint acquisition, although it did not name the deal target.

Primus declined to comment, while a representative for China Strategic could not be immediately reached for comment.

The sources declined to be identified as the bidding process is confidential.

Morse, a long-time Citi banker, launched Primus in April after raising $1 billion, aiming to compete with major banks through acquisitions. 

Rival bidders included U.S. buyout funds the Carlyle Group [CYL.UL] and Bain Capital, which had been cleared for the second round of bidding, said the sources.

TAIWAN PARTNER

Taiwan regulators have made choosing a domestic partner a pre-condition for the second round of bidding for Nan Shan Life, expected in late August, said the sources.

“Since neither Primus or China Strategic has experience in running insurance firms, it’s necessary to have a Taiwan insurer participate in order to meet the criteria set by Taiwan’s government,” said a source in Taipei.

Primus is in talks with small Taiwan life insurer Hontai to form a joint bid, according to Taiwan media reports, but industry sources have said the alliance would have little chance of winning as Hontai lacks size and market share.

“We hope whoever wins the final bid will be committed to running Nan Shan for the long term,” said a Taiwan Financial Supervisory Commission official in response to a Reuters inquiry on the Primus-China Strategic bid.

The official declined to be named as he was not authorised to speak to the media. Bain Capital is in talks with Taiwan’s top credit card issuer Chinatrust Financial Holding Co Ltd (2891.TW) for a possible joint bid for Nan Shan, [ID:nHKG107252], while sources said Carlyle may team up with Fubon Financial Holding Co Ltd (2881.TW).

By George Chen and Faith Hung

(Additional reporting by Rachel Lee in Taipei and Fion Li in Hong Kong; Editing by Jonathan Hopfner and Chris Lewis)

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Report: Cablevision To Spin Off Madison Square Assets


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NEW YORK, July 29 (Reuters) – Cablevision Systems Corp (CVC.N) is preparing to spin off its Madison Square Garden assets, Bloomberg News reported on Wednesday, citing a person familiar with the matter.

Those assets include the New York Knicks basketball team and Radio City Music Hall, it said, and stockholders would receive one share of the new company, to be called Madison Square Garden, for every share of Cablevision they own.

Cablevision was not immediately available for comment. (Editing by Carol Bishopric)

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Economists React: More Evidence U.K. Housing Has Bottomed


This post is by WSJ.com: Real Time Economics from WSJ.com: Real Time Economics


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House prices have a “reasonable chance” of ending 2009 up for the year, the Nationwide Building Society said, as data showed U.K. prices rose for a third straight month. Nationwide said the average price rose increased 1.3% to £158,871 (about $260,000) following a revised 1.0% gain in June. Below, economists react.

Once again the report has attributed the increase in prices to lack of stocks of property for sale, consistent with reports from other housing indicators. Overall, [it is] yet further evidence that the housing market has bottomed, helping to remove some of the downside risks facing consumer spending. – Alan Clarke, BNP Paribas

While it looks increasingly likely that February marked the trough in house prices, we suspect that they will be prone to relapses over the coming months and we certainly do not think that a sharp sustained upward trend in house prices is in the process of developing. The average 7.5% rise in house prices since February means that affordability pressures are increasing anew at a time when the economic climate of recession, sharply rising unemployment and slowing wage growth is largely negative for the housing market. — Howard Archer, IHS Global Insight

It is fair to argue that the improvement in the level of prices recorded here partly reflects a low turnover market with a significant number of potential purchasers being rationed out of the ability to buy. Even so, it is impressive that prices have managed to generate some upward momentum despite that constraint on demand. As we wrote up in a [recent] note …, we have viewed the upswing in prices as in part payback for the sharp declines seen in the late part of next year, while expecting monthly prices to move back into modest declines over the rest of 2009. This first report of the July data challenges that view. — J.P. Morgan

We have changed our view on [Bank of England’s quantitative easing] on the back of this morning’s Nationwide house price index…. This is the fourth rise in five months and according to this index, house prices are now 4.4% higher than they were at the trough in February. This does not necessarily mean that house prices are now on the way up in the medium term … . However from the point of view of short-term monetary policy decisions we feel that the run of better housing market data may well have an impact on the [monetary policy committee’s] collective thoughts. Accordingly we are now forecasting that the committee will leave the asset purchase target at £125bn at next Thursday’s meeting. – Philip Shaw, Investec Securities


Morning Briefing for July 30th: Testing the Highs


This post is by Brett Steenbarger, Ph.D. from TraderFeed


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One of the themes I touched upon several times yesterday was the resilience of the stock market in the face of themes that would normally be bearish for equities: falling commodities and the drop in share prices in China. When markets fail to do what they normally do, that is often an excellent sentiment tell. Underlying demand for stocks has been sufficiently high that even normally bearish developments could not push us below the overnight lows yesterday.

That has emboldened the bulls and this morning before the open we’re looking at a healthy rally. Those intermarket themes are once again in gear, with stocks higher overseas, U.S. dollar weakness vs. euro, and rises in commodities and Treasury rates. As we can see from the chart above, we’re now testing the bull highs, having traversed the multiday range overnight.

Whenever we see an early strong rise following several days of consolidation, we have to be alert to the possibility of a breakout and an upside trend day. I will be tracking the market via blog and Twitter updates (follow here) to see if such a scenario materializes. Should we prove unable to sustain such a breakout move, we could develop an interesting move back into the multiday range. Either way, there should be some trading opportunity here.
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Gross v Bond, or Pimco v BarCap: The debate flares


This post is by FT Alphaville from FT Alphaville


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Much debate in the blogosphere on Thursday about “Pimco versus Barclays” – or rather, “Bill Gross v Tim Bond” following the FT’s publication of a distinctly bullish piece by Tim Bond, head of asset allocation at Barclays Capital, and Pimco’s release this week of managing director Bill Gross’s latest investment outlook….

Markets live transcript 30 Jul 2009


This post is by FT Alphaville from FT Alphaville


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Markets live chat transcript for the chat ending at 12:06 on 30 Jul 2009. Participants in this chat were: Neil Hume, FT (NH) Paul Murphy (PM)   NH:Good morning.NH:and welcomeNH:This is MLNH:AV’s daily markets chat.PM:It’s ThursdayPM:And it’s a blurPM:Don’t know where to startNH:Well, we…

Barclays and the monoline minuet


This post is by FT Alphaville from FT Alphaville


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Remember Barclays’ monoline exposure?

Here’s an update, in a very indirect way, courtesy of Standard & Poor’s.

The below chart is the rating agency’s repossession rate forecasts for the UK, published on Monday.

The numbers are something of a problem for UK banks — and as, we’ll see, for some of the monolines which insure their mortgages….

Statistical arbitrage and the big retail ETF con-fusion


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Here’s a funny thing about algorithmic trading. Most of it depends on statistical arbitrage, which in turn depends on volatility to detect price variations to benefit from.

In which case the following abstract from a paper by Andrew Pole, a Managing Director at TIG Advisors, should be noted with interest:…

Sanofi’s $4bn Merial acquisition


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Deal making is heating up in the world of big pharma, with French drugs group Sanofi-Aventis on Thursday confirming that it is paying Merck $4bn to take control of their animal health joint venture Merial.

The deal values Merial on the basis of three times 2008 sales and 10.2 times 2008 EBIT, Sanofi said….

Light at the end of D-Ram tunnel?


This post is by Robin Kwong from Tech Blog


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Is there finally light at the end of the tunnel for embattled D-Ram memory chipmakers?  Research consultancy iSuppli seems to think so, and this week changed its near-term outlook rating for D-Ram suppliers to “positive” for the first time since last September.

In fact, D-Ram’s troubles had begun long before last September, with the market “stuck in a state of oversupply for nearly three years,” according to iSuppli chief analyst Nam Hyung Kim.

Some $15bn in losses later, drastic capacity cuts, bankruptcies, and state-led restructuring has taken supply back down to more reasonable levels. But what is finally helping D-Ram makers turn the table is rising demand for DDR3, a more advanced type of D-Ram chip that has higher performance and uses less power than DDR2, the current industry standard.

A DDR3 shortage has already helped overall D-Ram revenue rise by 37.9 per cent in the second quarter compared with the first, according to iSuppli. Third and fourth quarter revenues are expected to continue to rise by more than 20 per cent on a quarter-to-quarter basis.

“With rising demand and limited supply for DDR3, the global D-Ram industry is set for a sustainable recovery that will extend into the fourth quarter and pave the way for a robust annual increase in 2010,” Mr Kim says.

Underpinning this migration to DDR3 is consumer demand for longer battery life. The second quarter bump could also be partly explained by major PC brands introducing new netbook models. Taiwan’s government research institute, the Market Intelligence & Consulting Institute, says the netbook segment has brought in more than $1.19bn in revenue for Taiwanese manufacturers in the second quarter, the first time it has broken the $1bn mark.

But a D-Ram recovery is not good news for everybody.  Mr Kim notes that “prices are rising in the third quarter, a time when D-Ram buyers typically begin to make purchases for the holiday season … the increase in D-Ram prices will result in lower profitability for the PC makers in the second half of the year.”

Callers, tossers and the odds of the flip


This post is by FT Alphaville from FT Alphaville


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Okay, this is what we consider to be a research talking-point.  From two Stanford academics, Persi Diaconis and Susan Holmes, and Richard Montgomery from Santa Cruz, University of California…

Abstract:

We analyze the natural process of flipping a coin which is caught in the hand. We prove that vigorously-flipped coins are biased to come up the same way they started….