The BRIC countries are down collectively this year (Brazil -11%, Russia -13%, India - 40%, China-26%). On the other hand, Pakistan, Peru, and Chile are up 9.5%, 7.1%, and 6.6%, respectively YTD. It looks like new "emerging markets" are emerging.

Google may be interested in buying Skype from Ebay. Ebay initially purchased Skype as an effort to allow buyers and sellers to hook up by voice, but things never really took off. A deal would make sense given that Skype never really produced for Ebay, and Google still wants to expand into the voice space. Skype would give Google another avenue. Not sure the selling price will come close to the $3.1 billion Ebay paid back in 2005.

Tickers: GOOG, EBAY

Reports from the PV Technology Conference in Munich, Germany are discussing how the cost to currently produce electricity with solar power (now about 3 times more expensive then natural gas) could approach 1-1 as early as 2009 as natural gas becomes more expensive, and solar cells become more efficient and less expensive. Many of the solar plays, including the chip makers supplying the industry, are seeing the benefits of continued interest in solar.

At the same time gold prices fall below $900 (off 10% in a few weeks), Newmont Mining is reporting that it plans to spend nearly $250 million on exploration this year - and the increase is not just because gold is commanding a high price. Apparently there has been a shrinking number of gold finds above five million ounces, a key number to make a mine worth the trouble, or at least produce better margins. About 4 percent of reserves meet this benchmark. Apparently Newmont is depleting its reserves at 10 ounces a minute, but needs a replacement of 14 ounces a minute (I assume to keep up with supply and maintain reserve capacity). Currently, Newmont has about 86 million ounces of gold in reserve. In comparison, Barrick Gold Corp held about 124 million ounces in reserve, as of last year. Like other industries, commodity prices (i.e., energy), are increasing the cost of production.

Tickers: NEM, ABX

It appears that Apple stores do not have any iPhones in stock. Gene Munster at Piper Jaffray apparently called 20 Apple stores and found that none had iPhones. Paul Kedrosky over at seekingalpha.com called 6, with the same result. Munster is giving an 80% chance that the 3-G version is coming out sooner than expected, with a 20% chance that there are production problems. Apple is trading down slightly at the open.

Ticker: AAPL

From prepared statements, Fed Chairman Bernanke plans to tell Congress today that the U.S. economy is unlikely to grow much, if at all over the first half of the 2008, and could even contract slightly. He expects strengthening in second half. Futures dropped on the news. At least the "strengthening in the second half" is a nice carrot for the market.

The ADP employment report showed an 8,000 job increase in private hiring during March. While not a reason to throw a party, it was better than the expected 70,000 job decrease. ADP has been hit and miss over the last year - sometimes right on, other times wildly different from the Friday employment numbers. Futures traded up slightly on the news.

Natural-gas producers, many from Oklahoma and Texas, are converging on a thick wedge of natural gas-bearing rock called the Marcellus Shale, located from West Virginia to Pennsylvania. Chesapeake Energy, Anadarko Petroleum, and EOG Resources are either already drilling, or planning to drill. The find could be significant, with estimates from 1.9 trillion cubic feet to 168 trillion cubic feet. As comparison, the U.S. consumed a little over 23 trillion cubic feet last year. The locals, while not happy about the gold rush invasion from outside companies, are excited about the leasing prices they are receiving, with acre leases increasing from $5 to $2,000 in the last four years.

Tickers: CHK, APC, EOG

Lehman Brothers is offering 3 million convertible preferred shares in an effort to sure up their balance sheet, even though, as stated by their CFO: "We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets." The convertible preferred shares being offered have a 7-7.5% coupon. The terms of deal also include a conversion premium of 30-35% above the current stock price. Demand was oversubscribed three times greater than the amount on sale. Probably not a bad return in the current market - as long as you can handle and quantify the market and credit risk.

Ticker: LEH

The U.S. Department of Agriculture is estimating that U.S. farmers will plant 8% fewer acres of corn this year. Farmers are shifting to higher-priced soybeans (us 18%) and wheat (up 6%). The journal is reporting that "A smaller corn crop is good news for farmers who could reap $6 a bushel this season, up from around $2 a couple years ago, if prospective corn acreage remains at the forecasted level and if a soggy spring keeps farmers in the Corn Belt out of the fields until later in the season."

In a previous post we mention how rain could caused soybeans to be planned instead of corn since they can be planted later. As such, the long corn, short wheat spread is still in play. As expected in the market, the seed and fertilizer companies are doing well, while those that need corn, such as the food producers, are taking a hit. Ironically, the ethanol companies are also finding margins squeezed as their feed-stock cost increase. Maybe Washington will final see the current folly of putting corn in our tanks, and not in our stomachs.

Agriculture Tickers: MON, POT, MOS, AGU

The WSJ is reporting how small banks and credit unions are attacking the Paulson plan. This was to be expected, as the proposal was probably a surprise to them - with the move from state to federal regulation that is being proposed. Given that each district has numerous banks and credit unions, many with donors, it is likely that Congress will need to address these concerns. With other issues on the table, not to mention election year politics, it is doubtful that Paulson will see approval during his tenure.

We recently mention Yahoo!'s roll out of its Shine website for women, but apparently this is not affecting Microsoft. Given the market downturn, and Yahoo!'s recent roadshow that failed to impress, Microsoft does not feel the need to bid against itself. Given the decline in Microsoft stock, the once $44.6 billion dollar deal is now worth about $42 billion. Given that Yahoo shares are still under the bid price (now around $29.25), it also does not appear that the market is expecting a higher bid - or at least not putting their money where their mouth is. Nonetheless, I would not be surprised if the deal closed slightly higher, allowing both sides to claim victory. Both sides really have no other choice (options, or bidders).

Tickers: MSFT, YHOO

Shares of UBS were up in Switzerland. The move is being attributed to investor relief over the Chairman's (Marcel Ospel) departure. The company is also asking shareholders to approve approximately $15.07 billion US dollars in additional funds to support its shrinking capital base. S&P cut its rating on UBS from AA to AA-.

Apparently, the Q1 loss is driven by $19 billion in write-downs in illiquid real-estate assets. This brings their total to around $33 billion in total write-downs. Of interest is how UBS plans to place these losses in a separate unit, initially funding the unit, while exploring the option of a spin-off or outright sell.

US futures are rising this morning (up close to 1%), apparently on the belief that the recent write-downs from Deutsche Bank at $3.9 billion (and UBS today) would be the last of the major credit-related problems.

Update: Of interest was a report that the Swiss Exchange is not allowing short sales of UBS today. The move today - a 10% pop instead of an expected 10% drop. Probably not the entire reason for the move, but I am sure it didn't hurt.

Ticker: UBS

Bloomberg is reporting that M&A Advisory fees have fallen about $8.7 billion in Q1 2008 from $13.4 billion during Q1 2007. Goldman Sachs, the leader in M&A, has reported a 47% decline in fees from Q4 2007 to Q1 2008. Given potential lower trading returns (due to the market and less hedging/shorting of subprime as with last year), Goldman could have a more challenging year, even without the exposure and write downs some other banks are taking. Nonetheless, it may still be better position. The stock itself is testing support (double bottom), so we should get some clarity shortly.

Ticker: GS

Yahoo! is rolling out its new website (http://shine.yahoo.com/) focusing on women's issues. Probably a smart move, given the demographic, and the increased number of women surfing the net. Not sure it will have an impact the Microsoft deal, especially given the market reaction.

Tickers: MSFT, YHOO

Investment bank fees from private equity firms have fallen from 22% in the first quarter one year ago, to only 9.1% in the first quarter of 2008. The WSJ is reporting that "Total fees paid by private-equity firms globally fell 79% to $1 billion in the first quarter, led by Apollo Management, which paid out $74 million." Even big players, such as the Blackstone Group and Goldman Sachs Capital Partners, paid less than $5 million in fees in the first quarter, compared to $198 million and $208 million, respectively, in the first quarter of last year. "Crunch" may be an understatement.

The exchanges have long been considered to be printing presses for money. As volume has increased in recent years, the presses have been rolling along. Today the Wall Street Journal discusses the impact that the recent Treasury proposal (see previous post) may have on their ability to continue printing money. Paulson was apparently not happy when dealing with multiple regulatory bodies while at Goldman, so it makes sense that he would want to "streamline" things. Of course, as mentioned in a previous post, the best laid plans, especially with regard to regulation ........... well, you get the point.

Some exchanges, such as the NYSE that are involved in a number of products, could possibly see some benefit. Others, like the futures exchanges (such as the CME Group), may not, and will now have to deal with a larger regulator. The existing relationship the futures exchanges have with the CFTC will not be as strong. This may be good for the markets, but not necessarily good for a futures exchange that has enjoyed quick approval of new products. Of real concern for the futures exchanges is the impact on their clearing operations, another large profit center. Opening up the clearing operations may allow for more competition and lower prices. This is certainly not something these exchanges, or their investors, would welcome. On the other hand, the NYSE, which is involved in numerous products and is increasing its international expansion, should find working with one agency a potential benefit.

It will be interesting today to see if the CME group and NYMEX trade down on the news, and for how long. Given the amount of approval needed, any move may be short-lived. (Update Noon Central: Looks like both CME and NMX are down about 1.5-2%. Time will tell if the moves are short-lived. Paulson is already saying it will take a few years.)

Tickers: CME, NYX, NMX

DealBook at the NY Times is reporting that despite news of problems with hedge funds, the industry publication Absolute Return is suggesting a slow pace for fund shutdowns. The data could nonetheless be skewed given that Absolute Return does not include hedge funds with less than $25 million in assets under management. Of course, when you have a few Amaranth Advisors going down (in 2006) with $9 billion assets under management at its peak, it tends to skew the data as well.

The Barrons cover story this week tries to uncover the reasons for the current commodity boom. Immediately mention is how index funds account for approximately 40% of all bullish bets on commodities, with cash commitments running about $211 billion on the buy side. Given the growth in ETFs and funds in the area (growing but still a small percentage overall), they have no doubt added to the buying pressure on commodities as they build a sufficient position. We certainly saw some of this with gold ETFs.

On the other hand, commercial players (those that sell the actual commodity grown/extracted/mined, and buy the actual commodity for use ...... imagine that), are "heading for the exits," with "net short positions .... running more then 30% higher than their previous net-short record, in March 2004."

A regulatory anomaly may also be fueling the bullishness. How so? Much of the index money is not traded on the exchanges, but goes through dealers that belong to the International Swaps and Derivatives Association (you know where this is going). The swap dealers lay off their risk by buying futures while operating as market makers for the index funds. Since the swap dealers are theoretically hedged, they are currently exempt from position limits. An ISDA letter to the CFTC highlighted that the top four swap dealers account for over 70% of trading, with only one dominate trader in some lower-volume markets. With this level of concentration, it may be difficult for these dealers to make margin calls given a sudden sell off or correction.

What could trigger a sell off? Possible catalysis include lower international demand (China and India), a US recession, or a turnaround in the dollar. The market itself could also be the trigger. A rally in the market may produced a shift from commodities to stocks. A further drop could cause margin calls, forcing commodity selling.

Steve Briese sees a possible 30% drop from current levels, with up to a 50% swing as commodity prices overshoot while correcting. On his website (CommitmentsOfTraders.org), Briese further points out that small investor trading in commodity index funds may a minor part of the problem. He is estimating that less than $40 billion is in these index funds, leaving $300 billion unaccounted for. Pension funds, endowments, and the like may be making up some of the rest.

Briese also makes and interesting analogy on his site: "The total open interest (market cap) of US commodity markets peaked out recently at less than Microsoft stock reached during the tech boom ($600b). What would happen to Microsoft stock today if you tried to accumulate $200b in stock on the open market. It would go through the roof, just as commodities have done. These markets are just too small to absorb the “investment” they have attracted."

Unfortunately, commodities may not be the whole problem. Derivative trading is concentrated among a few US investment banks. The Comptroller of the Currency noted:
“Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 97% of the total industry notional amount, 78% of total trading revenues and 87% of industry net current credit exposure (http://www.occ.treas.gov/deriv/deriv.htm)." Briese estimates the derivative holdings of these banks aggregate to more than 30 times capital. Since most of it is OTC, it is hard to accurately price (just ask the sub-prime players). Briese estimates that "exchange traded futures ..... is $16 trillion notional value, for which they [banks] typically put up 5% or less margin deposit."

Commodities may just be the start.

The NY Times and Wall Street Journal are reporting that the Treasury Department will propose giving the Federal Reserve broad new authority to oversee the financial markets and insure their stability.

As one step, the plan would merge the SEC with the CFTC (Commodity Futures Trading Commission). This will no doubt raise some objections. As a carrot, these agencies would also be given greater flexibility to regulate themselves and streamline the approval of new products. I can just see all the new ETFs. EFTs of ETFs anyone ....... but I digress.

The Fed would also be granted greater power, allowing it to examine the practices and bookkeeping of brokerage firms, hedge funds, the commodity exchanges, or for that matter, any institution that might pose a risk to the system (Does this include Congress? Just a thought.). There is also interest in allowing the Fed to have additional access to information from those securities firms and investment banks that might borrow money from the central bank. Maybe this will make it easier in the future to tell whether Bear Stearns is worth $2 or $10 dollars ...... but I digress again.

The proposal also calls for a Mortgage Origination Commission to evaluate state governments in regulating mortgage brokers. It would also eliminate the distinction between banks and thrift institutions, close the Office of Thrift Supervision (which regulates federal thrifts), and merge it with the Office of the Comptroller of the Currency (which regulates national banks). Given that the lines between these two are close already, this change may offer less debate.

But we are not done yet. The proposal would also create a national regulator for insurance companies, something currently done at the state level. Like with mortgages, there is a trend in the proposal to move regulatory authority from the states to the federal level. Somewhat of an unusual move for the current administration, but given the current mess, probably not totally unexpected.

It is believed that the proposal will take years to implement, given the depth of change and debate that is likely to ensue, so who knows what will become of it. There is already an expectation that some in Congress will want investment banks to fall under some of the same oversight currently placed on commercial banks. I imagine this debate will begin/continue in earnest.

Finally, most of the proposals are pitched as being geared toward streamlining regulation, but as we know, just because you take two or three existing agencies and create one larger one, you don't always get more efficiency. Unlike companies, which hope to cut waste after mergers (not always successfully), government agencies rarely do. Since they cannot typically layoff the employees, where would they go anyway? You often just get bloated agencies with even more layers of approval. I hope I am wrong, but I am certainly not optimistic.