Morning Call 6/21/2010

Stone Street Advisors

ChiBondKing laszlochi@gmail.com

Morning Focus
Interesting news over the weekend, with the Chinese deciding to let the Yuan float, thus removing the dollar peg that had been
in place for a long time. Initial reaction from around the world seems to be positive and that is evident in the global bond markets
where longer dated maturities have sold off quite heavily. Its interesting to note that the short end has not reacted as much to
the China news; which partially explains why global curves are a bit wider this morning. My view from the SSA bunker is that
actions speak louder than words: if the Chinese really want to allow the Yuan to float thus giving the markets the ability to make
a relative value decision on the currency vs. others, they will remove the trading bands altogether. Thats not exactly clear in the
flurry of headlines coming across the tape over the weekend and the recent move makes me a bit skeptical of the long term
prospects of this action. Overnight, the Asian markets all ended higher, with Australia up 1.33pct to 4612, Nikkei up 2.43pct to
10238, Hang Seng up 3.08pct to 20912 (almost 625pts) and Shanghai up 2.90pct to 2586. That bullish sentiment has spread to
Europe, which has its own set of problems regarding bank stability and the stubbornness of the Germans to engage in US-style
quantitative easing. History does repeat itself; much like the US bank stress tests in early 2009, the Europeans need to get out in
front of this. Again, my view from the SSA bunker is that they are not doing this rather there are visible signs of dissension
among the EU member countries. It reminds me a lot of the ongoing debate here in the US with the haves and the have nots
when it comes to employment. The Germans are the haves, coming through this crisis relatively unscathed, while the rest of
southern Europe are clearly the have nots. Bond auctions return to the US this week, with the short/midcurve seeing some new
issuance you can find out more on page 4. Have a good day.

Notable Overnight Headlines

Asia
China Agrees To Float the Yuan to a basket of currencies
o China vows yuan flexibility ahead of G20
o Taiwan Central Bank: To Pay Attention To Asian Currencies After China Move (DJ)
o $/Yuan 1y offshore forwards in a volatile market: Initially started out with the biggest one day fall since Mar 09,
then edge up to 6.757 after yuan midpt. unchanged (Reuters)
o China keeps dollar-yuan band unchanged (MW)
o Singapore says yuan moves won't affect its policy (Reuters)
o LME Zinc up 5pct to $1812/T, Shanghai Zinc Limit Up (Reuters)
South Korea Bond Sale
o S.Korea bonds off, central bank chief renews inflation warning (Reuters)
o S.Korea sells 10-year treasury bonds at 5.00 pct, 91-day MSB at 2.12 pct (Reuters)
Japan PM: Substantial tax hikes needed to cut jobless rate to 3 percent (Reuters)
China sees wage hikes impacting exports: report (MW)
Citic Bank to sell subordinated 10-yr bond (Reuters), Source indicates pricing of TSY+375bps
Hong Kong March Manufacturing Sector Employment Down 2.5% On Year
S.Korea spotted buying dlrs to check won dealers (Reuters)
Australian new vehicle sales dip 3.2 pct in May (Reuters)
Fitch on BOJ: Could do more to fight deflation, such as more aggressive QE (Reuters)
Moody's raises Indonesia rating outlook to positive (Reuters)
UBS co-head of Asia equity derivatives trading dies (Reuters)
Afghanistan estimates has 1.6 bln barrels of oil (Reuters)
Macau May CPI Up 2.76% On Year, +0.37pct m/m

Europe
Fin min: UK to dodge Greek fate with tough budget (Reuters)
iTraxx Crossover Below 500 Bps For First Time Since May (DJ), Europe CDS tightens on China yuan shift (Reuters)

See Important Disclosures on page 5

 ECB: Deposit Facility Use Fri EUR232.045 Bln, Up EUR18.96B (DJ)
France GDP f'cast, debt rating to stay unchanged-min
Euribor market interest rates higher: 3M 0.733 +0.001, 6M 1.019 +0.004, 1Y 1.289 +0.004
France planning new deficit measures-Sarkozy advisor (Reuters)
Germany likely closer to 2 pct 2010 growth- FinMin
ECB Speakers
o ECB's Provopoulos-Greek banks have adequate capital (Reuters)
o Noyer:ECB's Covered Bond Purchases Fairly Successful In Reviving Mkt (DJ)
o ECB's Noyer says some banks facing funding problems (Reuters)
Swiss May M3 Money Supply Up 7.1% On Year Vs. 5.4% In April
Iceland govt may fall on next referendum minister (Reuters)
Italy May Non-E.U. Exports Up 15.8% On Year, Imports Rise 35.5%
Portugal May PPI Up 0.4% On Month
UK gilts steady, outperform Bunds ahead of budget (Reuters)
WSJ: Trichet To Push For New Fiscal Surveillance (DJ)

United States
Economic News

Monday stocks to watch: Sonic, Luby's, Apple (MW)

NYC unemployment rate eases to 9.6 pct in May
Unemployment seen ticking lower, NV now has highest U/E rate, surpassing MI

Equities

BP - T2 Partners sees value in BP shares-Barron's, estimates oil spill up to 100,000 bpd in document (Reuters), BP: 65,000
claims submitted, 32,000 payments made, spill costs reach $2 billion (MW)
MET - MetLife shares could rise above $50-Barron's
NFLX - Time for profit-taking in Netflix-Barrons
LNY Takeover chatter, WSJ: Pershing Square Capital Management Expected To Make Announcement Monday
BVF - Valeant and Biovail to merge (MW)

Interesting Morning Reading

China's Yuan Revaluation Is `Bearish' for Treasuries, Morgan Stanley Says http://www.bloomberg.com/news/2010-06-21/china-s-
yuan-revaluation-is-bearish-for-treasuries-morgan-stanley-says.html

Professor Pinch: How Do You Say Negative Basis In Mandarin? We Might Need To Learn It:
http://professorpinch.wordpress.com/2010/06/21/how-do-you-say-negative-basis-in-mandarin-we-might-need-to-learn-it/

David Kotok: BP Oil Spill Will Cause 1 Million Permanent Lost Jobs (The Business Insider): http://www.businessinsider.com/david-
kotok-bp-oil-spill-will-cause-1-million-permanent-lost-jobs-2010-6#comment-4c1e19807f8b9aa323550000

Cost of Fannie And Freddie Keeps Rising NY Times: http://www.nytimes.com/2010/06/20/business/20foreclose.html?src=busln

Paul Krugman: Op-Ed Columnist - That 30s Feeling NY Times:

http://www.nytimes.com/2010/06/18/opinion/18krugman.html?src=twt&twt=NytimesKrugman

A Wide Racial Divide For Foreclosures 24/7 Wall Street, Doug MacIntyre: http://247wallst.com/2010/06/21/a-wide-racial-divide-
for-foreclosures/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+typepad/RyNm+(24/7+Wall+St.)

See Important Disclosures on page 5

Notable Bond Market/Economic Events
Bond Auctions (1PM ET)
o 13 & 26 Week Bill
Upcoming Bond Auctions (This Week)
o Tuesday 6/22: 2Y Note, 4wk Bill
o Wed. 6/23: 5Y
o Thur. 6/24: 7Y
Economic Releases For Today
o No US Data Today
o 10:30AM: ECBs Trichet speaking
o 11PM: NZ Credit Card Spending

Market Summary 6AM

Futures Currencies Fixed Income

Symbol Last Chg Symbol Last Chg Symbol Last Symbol Last
DOW 10506 133 EURUSD 1.2395 0.0005 2s5s 134.00 US2Y .75
SP500 1127 16.75 GBPUSD 1.4875 0.0053 2s10s 255.00 US5Y 2.09
NSDQ 1938.75 29.25 EURJPY 113.18 0.85 2s30s 348.00 US7Y 2.77
ZB 122'26 -1'04 USDCAD 1.0173 -0.0045 5s10s 121.00 US10Y 3.30
ZN 119'260 -0'200 USDJPY 91.36 0.63 5s30s 214.00 US30Y 4.23
ZF 116'247 -0'122 NZDUSD 0.7136 0.0066 10s30s 93.00 UK5Y 2.24
ZT 109'025 -0'027 UK10Y 3.52
CLN0 78.5 1.32 UK30Y 4.26
US Curve BPS UK Curve BPS X Ctry BPS
Spreads Spreads Spreads

2s5s 134.00 2s5s 138.00 USUK2 11.00

2s10s 255.00 2s10s 266.00 USUK5 15.00

2s30s 348.00 2s30s 340.00 USUK7 16.00

5s10s 121.00 5s10s 128.00 USUK10 22.00

5s30s 214.00 5s30s 202.00 USUK20 44.71

10s30s 93.00 10s30s 74.00 USUK30 3.00

US Model Est.
Spreads
2s5s 129.43
2s10s 249.86
2s30s 345.57
5s10s 120.43
5s30s 216.14
10s30s 95.70
Model Curve Spread Estimates, Source: Stone Street Advisors FI

See Important Disclosures on page 5

 Morning Call 6/21/2010
Stone Street Advisors
ChiBondKing laszlochi@gmail.com

Chart of the Day

Gold, Currency Adjusted. Last Price As Of 5:45AM 6/21, Data: Oanda

See Important Disclosures on page 5

 Morning Call 6/21/2010
Stone Street Advisors
ChiBondKing laszlochi@gmail.com

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