Monday Watch

Weekend Headlines
Bloomberg:

- For all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.

- The cost of protecting Asia-Pacific corporate and government bonds from default decreases, according to traders of credit default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 7 basis points to 183 as of 8:29 am in Singapore, according to Royal Bank of Scotland Group Plc prices. The Markit iTraxx Japan fell 5 basis points to 180 at 9:39 am in Tokyo, Credit Suisse Group AG prices show. The Markit iTraxx Australia index was quoted 6 basis points lower at 195 as of 10:31 am in Sydney, Westpac Banking Corp data show.

- China, the world’s second-biggest energy consumer, will raise fuel prices tomorrow, allowing the nation’s refiners to pass on higher crude oil costs and offset potential losses in processing. The statement said that the retail ceiling prices for gasoline and diesel will increase by 400 yuan a metric ton effective tomorrow.

- AstraZeneca Plc’s Zactima, the experimental lung cancer drug that failed in two small studies, helped slow the advance of tumors in a bigger test the drugmaker will use to seek U.S. marketing approval. Adding Zactima to treatment with chemotherapy shrank tumors and reduced disease symptoms, the research found. It also lengthened the time before the cancer progressed to 17.3 weeks, compared with 14 weeks for those on chemotherapy only.

- French President Nicolas Sarkozy and German Chancellor Angela Merkel said they favor business people and employees over financial speculators, in a joint commentary they wrote for a French newspaper and a German newspaper.

- Fortress Investment Group LLC, Crestview Partners LP and Lightyear Capital LLC agreed to inject as much as $150 million each into First Southern Bancorp, part of the Boca Raton, Florida-based bank’s plan to increase assets.

- Australia’s oil and gas producers propose projects valued in excess of A$200 billion ($160 billion) that may help lead the country out of its first recession since 1991, the industry’s biggest lobby group says.

- Bristol-Myers Squibb Co.(BMY) is negotiating to buy a share of Elan Corp.(ELN), the Irish drugmaker seeking financing to repay debt and develop its experimental Alzheimer’s drug, a person familiar with the deal said.

- Total SA, Europe’s third-largest oil company, is calculating investment in North Sea fields will make it the U.K.’s biggest oil and gas operator within three years, challenging top-ranked BP Plc on its home turf. “Our strategy is more aggressive than other companies,” Roland Festor, managing director of Total E&P U.K. Ltd., said in an interview May 28 in Aberdeen, Scotland. “We don’t have a strategy to grow by acquisitions but by exploration in our hubs.”

- China suspended exchanges with North Korea after Kim Jong Il’s regime tested its second nuclear weapon and test-fired short-range missiles, Yonhap News reported, citing diplomatic sources in Beijing it didn’t identify. China has halted plans to send officials on visits to North Korea and won’t accept visits from North Korean officials either, the Korean-language news agency said today.

Wall Street Journal:

- General Motors Corp. will file for Chapter 11 bankruptcy early Monday, marking the humbling of an American icon that once dominated the global car industry and setting up a high-stakes gamble for U.S. taxpayers.

- Lawmakers Bill Taxpayers For TVs, Cameras, Lexus. Florida Rep. Alcee Hastings spent $24,730 in taxpayer money last year to lease a 2008 luxury Lexus hybrid sedan. Ohio Rep. Michael Turner expensed a $1,435 digital camera. Eni Faleomavaega, the House delegate from American Samoa, bought two 46-inch Sony TVs. The expenditures were legal, properly accounted for and drawn from allowances the U.S. government grants to lawmakers. Equipment purchased with office expense accounts must be returned to the House or the federal General Services Administration when a lawmaker leaves office. But as British politicians come under widening scorn for spending public money on everything from candy bars to moat-dredging, an examination of U.S. lawmakers' expense claims shows Washington's elected officials have also used public funds for eye-catching purchases.

- Senior Obama administration officials said Friday that policy adjustments necessary to contain soaring budget deficits would be made once an economic recovery takes hold, in response to growing concerns about a run-up in long-term interest rates. Treasury Secretary Timothy Geithner, National Economic Council chief Lawrence Summers and Office of Management and Budget director Peter Orszag said in separate interviews that the administration was acutely aware that rising interest rates pose a threat to the improving U.S. economy.

- In a move that could shake up the clubby business of exchange-traded funds, bond giant Pacific Investment Management Co. is poised to launch its first ETF early this week. The move by Pimco, a unit of Allianz SE co-founded by bond guru Bill Gross, marks the first time in years such a high-profile mutual-fund company has tried to muscle its way into the ETF business, long dominated by a handful of large-but-lesser-known asset managers that specialize in indexing, such as Barclays PLC and State Street Corp.

- The fast money is proving slow to jump on the market's bandwagon. Hedge funds, decried by many as quick traders, have played catch-up during the market rally since March. The average fund was 45% "net long" as of May 19, or had investment holdings valued at 45% more than its bearish "short" positions, according to Hedge Fund Research. That figure is up from 33% earlier this year, but still is far below its 55% level a year ago. Funds are less bullish now than they were just before the market crumbled last fall. Hedge-fund managers, and their investors, said many remain in a neutral position. If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift.

- The expected bankruptcy filing by General Motors Corp. (GM) will trigger the settlement of around $3 billion in credit-default swaps written against the auto maker.

- Private-equity firm Carlyle Group and a group of investors are discussing an agreement to acquire Silverton Bank, the failed Atlanta "bank of banks" that serves small financial institutions throughout the U.S., according to people familiar with the situation. A deal for Silverton would be Carlyle's second major bank transaction with the federal government in two weeks, giving the large, politically connected buyout shop a banking beachhead in both Florida and Georgia.

- Potential Conflicts Abound in Government Role. Even after nine months of extraordinary government intervention, the scope and complexity of the General Motors Corp. rescue present a thicket of conflicts unlike any seen before in Washington. The federal government is likely within weeks to emerge as the principal owner of a storied U.S. corporation whose factories and products touch the lives of tens of millions of Americans. It will simultaneously serve as the company's regulator, tax collector, customer, pension backstop and lender.

- A bond default by a Chinese timber company is the latest example of trouble emerging from complex debt deals that foreign investors rushed to strike in China during the past few years. Investors and debt watchers say other defaults are likely to follow among Chinese companies that issued foreign debt, many of which are privately held ventures with ties to local government officials. Foreign creditors fear China's restructuring process will place the interests of equity holders, workers and Chinese lenders ahead of their own. Such problematic debt illustrates the potential pitfalls facing Western investors and bankers eager to profit from China's growth.

- A new class of drugs under development at several pharmaceutical companies showed promise in early studies against two types of especially tough-to-treat breast cancer.

- A homemade bomb found aboard an Iranian plane Sunday follows a string of incidents in Iran that are raising concerns about rising sectarian violence between Sunnis and Shiites ahead of the June 12th presidential election. The recent violence, scattered along Iran's borders with Iraq and Pakistan, has revived longstanding fears among Iranian officials that sectarian violence within those countries could spill over into Shiite-majority Iran, which hasn't had a recent history of such strife.

- Back in December, in an economy far, far away, then-CEO Rick Wagoner tossed out the scary cost to taxpayers of $100 billion if General Motors wasn't saved by the government. Well, GM was saved in December and again in March, and as early as today the feds will rescue it a third time in a prepackaged bankruptcy that is already costing at least $50 billion, and that's for starters. Welcome to Obama Motors, and what is likely to be a long, expensive and unhappy exercise in political car making. Taxpayers have so far put up nearly $20 billion, which was supposed to be a loan at market rates but under Treasury's forced restructuring will mostly be converted into equity in the new GM. The feds are also putting up $30.1 billion in "debtor in possession" financing and will effectively nationalize the once-mighty auto maker by taking roughly 60% ownership. (That's not counting $12.5 billion to save GMAC, the company's financing arm.) The Canadian government will go along for the ride for 12% of the new GM, the UAW will get about 17.5%, and the hapless bond holders have to settle for 10%.

MarketWatch.com:

- While the U.S. government and electricity producers get ready to spend hundreds of billions to upgrade the nation's power lines and electricity infrastructure, the so-called smart grid may not be clever enough to escape economic uncertainty. After Congress OK'd $30 billion for the electric grid, advanced battery manufacturing and energy efficiency projects, much of the money included in the $787 billion economic stimulus bill signed into law on Feb. 18 remains unused.

CNBC.com:
- If you think crude is marching higher, think again. Option investors are betting that it doesn't!

NY Times:

- It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism. But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry. Nor, for that matter, had he given much thought to what ailed an industry that had been in decline ever since he was born. A bit laconic and looking every bit the just-out-of-graduate-school student adjusting to life in the West Wing — “he’s got this beard that appears and disappears,” says Steven Rattner, one of the leaders of President Obama’s automotive task force — Mr. Deese was thrown into the auto industry’s maelstrom as soon the election-night parties ended.

- When a new crop of future business leaders graduates from the Harvard Business School next week, many of them will be taking a new oath that says, in effect, greed is not good. Nearly 20 percent of the graduating class have signed “The M.B.A. Oath,” a voluntary student-led pledge that the goal of a business manager is to “serve the greater good.” It promises that Harvard M.B.A.’s will act responsibly, ethically and refrain from advancing their “own narrow ambitions” at the expense of others.

- The Obama administration is supporting efforts by the Saudi royal family to defeat a long-running lawsuit seeking to hold it liable for the Sept. 11, 2001, attacks. The Justice Department, in a brief filed Friday before the Supreme Court, said it did not believe the Saudis could be sued in American court over accusations brought by families of the Sept. 11 victims that the royal family had helped finance Al Qaeda. The department said it saw no need for the court to review lower court rulings that found in the Saudis’ favor in throwing out the lawsuit. The government’s position comes less than a week before President Obama is scheduled to meet in Saudi Arabia with King Abdullah as part of a trip to the Middle East and Europe intended to reach out to the Muslim world. Lawyers for the Saudi family said that they were heartened by the department’s brief and that it served to strengthen their hand before the court, which has not decided whether to hear the case. But family members of several Sept. 11 victims said they were deeply disappointed and questioned whether the decision was made to appease an important ally in the Middle East. The Saudis have aggressively lobbied both the Bush and Obama administrations to have the lawsuit dismissed, government officials say. “I find this reprehensible,” said Kristen Breitweiser, a leader of the Sept. 11 families, whose husband was killed in the attacks on the World Trade Center. “One would have hoped that the Obama administration would have taken a different stance than the Bush administration, and you wonder what message this sends to victims of terrorism around the world.” Bill Doyle, another leader of the Sept. 11 families whose son was killed in the attacks, said, “All we want is our day in court.”

- From TV to the Web to Your Phone. TECHNOLOGY evangelists and television aficionados want all their TV on the Web, and they are tired of waiting for Internet companies and content owners to make it happen. But such an entertainment nirvana already exists — at least for owners of a silver and black gadget called the Slingbox.

- As the financial crisis entered one of its darkest phases in October, a handful of the nation’s largest banks began holding daily telephone sessions. Murmurs were already emanating from Washington about the need for a wide-ranging regulatory overhaul, and Wall Street executives girded for a fight. Atop the agenda during their calls: how to counter an expected attempt to rein in credit-default swaps and other derivatives — the sophisticated and profitable financial instruments that were intended to limit risk but instead had helped take the economy to the brink of disaster. The nine biggest participants in the derivatives market — including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America — created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.

Business Week:
- Cancer Drugs: News from ASCO.

NY Post:

- With the economy still lagging and corporate bottom lines under pressure, private-equity firms are expected to play an increasingly large role in shaping any recovery -- deciding whether or not to plow more money into their companies that are facing default.

Politico:

- As Republicans continue to hammer Supreme Court nominee Sonia Sotomayor for a 2001 assertion that’s become known as the “wise Latina” remark, her backers are struggling to come up with a single coherent line of defense. In the past few days, supporters confronted with the remark have offered a range of divergent tactics and tones, offering explanations that span from apologetic to defiant to suggesting Sotomayor may have been joking. President Obama himself addressed the bubbling controversy, which is emerging as among the leading GOP lines of attack against Sotomayor, asserting on Friday Sotomayor “would have restated” the comment if given another chance.

- President Barack Obama and Michelle Obama landed in New York Saturday afternoon, and after taking a helicopter from JFK into Manhattan, drove up the West Side Highway, where the northbound lanes were shut down by police for their visit, past Ground Zero, into the Village for dinner at the Village's Blue Hill restaurant. From there, they went north to Times Square, where they went to to see a production of "Joe Turner's Come and Gone" at the Belasco Theater on West 44 Street. Deputy Press Secretary Josh Earnest read a statement from Obama: "I am taking my wife to New York City because I promised her during the campaign that I would take her to a Broadway show after it was all finished." Asked about the cost of the trip, which Republicans have criticized as indulgent, coming just ahead of the expected announcement of GM's bankruptcy filing on Monday, Josh Earnest told pool reporter Dave Michaels of the Dallas Morning News, that he "didn't anticipate being able to provide a cost estimate tonight."

- Since Obama took office, CNN’s prime-time audience has dropped sharply, raising doubts about whether the network’s middle-of-the-road strategy can be effective against more opinionated programming on Fox News and MSNBC.

Chicagtribune.com:

- Senate Democrats late Saturday night approved a plan to raise personal income taxes by 67 percent and broaden the Illinois sales tax to include services such as cable TV, but the measure faces an uncertain future in the House with a late Sunday deadline to fix the state budget. The 31-27 vote shifted Statehouse dynamics after Democrats spent much of the day struggling to find support for a tax increase.

Rasmussen Reports:

- Only 21% of voters nationwide support a plan for the government to bail out General Motors as part of a structured bankruptcy plan to keep the troubled auto giant in business. The latest Rasmussen Reports national telephone survey finds that 67% are opposed to a plan that would provide GM with $50 billion in funding and give the government a 70% ownership interest in the company. Even when presented with the stark choice between providing government funding or letting GM go out of business, only 32% of voters support the bailout. Most voters (56%) say it would be better to let GM go out of business.

Inland Valley Daily Bulletin:

- Home sales across San Bernardino and Riverside counties are rising fast, sending positive vibes through the community. Home prices are still falling, but at a much slower speed than the breakneck pace set over most of the past two years. Is this the bottom? Home sales in San Bernardino County have skyrocketed 88 percent from April 2008 to April 2009, while sales in Riverside County jumped 40 percent over the same period, according to MDA DataQuick, a La Jolla-based real estate data tracker.

Tampa Bay Online:

- Hedge funds take aim at Florida real estate. Some consider them good capitalists. Others see them as opportunists. Still others call them vultures. Whatever the name, hedge fund investors likely will be major players in Florida real estate in the next few years, buying up mortgage notes — troubled or not — for a fraction of their original value.

Crain’s NY Business:

- For years, Dan Loeb was the hedge fund world's hanging judge, firing off blistering letters to hapless chief executives that condemned them for their shortcomings. “Do what you do best,” he hissed in a 2005 letter to a soon-to-be-gone CEO. “Retreat to your waterfront mansion in the Hamptons. ... The matter of repairing the mess you have created should be left to professional management.” How times change. After years of posting average gains of 27%, Mr. Loeb's Third Point hedge fund crashed to earth last year with a shattering 33% loss. In response, many investors grabbed their money and ran, driving assets under management to less than $2 billion from more than $5 billion previously. Now it's Mr. Loeb who's left to clean things up—or face oceanfront exile.

MercuryNews.com:

- 49ers’ Santa Clara stadium plan would cost public $114 million.

AP:

- Iran’s Center for Strategic Research blamed President Mahmoud Ahmadinejad’s refusal to halt uranium enrichment for provoking UN sanctions against the country, citing the center. It also accused Ahmadinejad of “distorting facts” to boost his chances in Iran’s upcoming elections.

- Iraq’s Taq Taq oil field will boost exports of crude from the country’s autonomous Kurdistan region by half by October, citing an official. Flows of crude oil by pipeline to Turkey will rise to 60,000 barrels a day in the fall from 40,000 barrels at the start, citing field manager Okutan Mehmet.

Reuters:

- The central bank chief for the United Arab Emirates said he saw weakness in the dollar as a "temporary situation" and expressed support for the greenback, saying no other money could replace it as a reserve currency. "There is no other currency to replace the dollar, not the euro," Central Bank Governor Sultan Nasser al-Suweidi told reporters on Sunday at a regulatory event. "It is the currency for investment."

Financial Times:

- Microsoft(MSFT) and Sony(SNE) are launching a video-game offensive against Nintendo this week, as the clear leader in console sales shows its first signs of flagging. Industry executives and analysts gathering in Los Angeles for the main show of the year – the Electronic Entertainment Expo (E3) – expect Microsoft to announce a new motion-sensing game controller on Monday, with more sophisticated capabilities than the one that has driven the success of Nintendo’s Wii. Then on Tuesday, Sony plans to show off a new version of its PlayStation Portable – the PSP Go – that does not require an optical disc drive. It is designed to take on the latest Nintendo DS handheld console, as well as tackle emerging competition from Apple’s(AAPL) games platform.

- China’s top steel negotiator has formally rejected iron ore price cuts negotiated between Rio Tinto, the Australian mining giant, and Japanese and South Korean steel mills, signaling a showdown between Beijing and the miners. Individual Chinese steelmakers signaled last week their dissatisfaction with price levels negotiated between Rio Tinto and leading steelmakers in Japan and South Korea, but Cisa’s statement is the first formal rejection of the deal. This indicates that the association, which this year has replaced China’s largest mill Baosteel to lead the price-setting talks for the first time, is taking a hard line. The miners have warned China that they will not settle benchmark prices below spot prices – which would be the result if they agreed to Beijing’s request for a cut of up to 50 per cent in benchmark prices. They had told the Chinese steelmakers that they would rather move iron ore transactions into the spot market, said executives involved in the talks.

- Barclays Capital has revealed that just 17.5 per cent of the 605 investors interviewed for its quarterly FX investor sentiment survey – including central banks, asset managers, hedge funds and international corporate customers – think risky assets have further to rise. The survey revealed that 91 per cent of investors were running positions that were “light” or “average” in terms of their risk limit or capacity. This leaves just 9 per cent whose positions are “large” or “at limit”. “This is consistent with a widely shared view that many investors have missed the rally,” said Mr Woo. “It is conceivable that some of these investors may be pressured to jump on the bandwagon if equities extend their gains.”

- North Korea has started moving a long-range missile towards a launch pad in possible preparation for another missile test, according to US officials. One told the Financial Times that Pyongyang may be gearing up for “additional activity” just days after it defied the world by conducting a nuclear test. American intelligence officials estimate that the Taepodong-2 could theoretically reach the west coast of the US. Mr Gates told the defense forum on Saturday that the US would not “stand idly by as North Korea builds the capability to wreak destruction on any target in Asia”. He added that while North Korea did not yet pose a direct threat to the US, the progress the regime had made on its nuclear and missile programs was a “harbinger of a dark future”.

TimesOnline:
- Hermes is calling for a post-credit-crunch shake-up of the secretive hedge-fund industry. The manager of the BT pension fund, handling more than £30 billion of funds in total, has set up an action committee to pressure hedge funds to hand over more financial information about their funds and better align their fee structures with investors.

Telegraph:

- One of America's biggest fund management groups has tabled a $5bn (£3.1bn) bid for iShares, a division of Barclays' profitable asset management arm. Vanguard, which is headquartered in Pennsylvania and had about $1trillion under management at the end of last year, is understood to have lodged the offer with Barclays in recent weeks. It is being advised by William Blair & Company, a Chicago-based investment banking group.

Xinhua News Agency:

- Guangdong province, a manufacturing hub heavily dependent on exports, reported a drop in foreign trade of 18.1% in April from the same period in 2008, citing the provincial statistics bureau.

Nikkei:
- Nintendo Co. plans to release an updated version of its “Wii Fit” game software this fall. The new version, “Wii Fit Plus,” measures body weight more precisely and has Internet connection so users can compare game data with people at remote locations.

South China Morning Post:

- Semiconductor Manufacturing International Corp., China’s biggest contract maker of chips, predicts sales will rise in the third quarter after July orders swelled. The company is on target to post as much as 62% growth from the previous quarter in the April-June period, management told investors at a conference.

Weekend Recommendations
Barron's:
- Made positive comments on (AAPL), (AMZN), (NKE), (BBBY), (CMG), (JCG), (URBN), (SWY), (TGT), (VAR), (RIMM), (BA), (SCHW) and (TM).

- Made negative comments on (GMCR).

Citigroup:

- Reiterated Buy on (DVA), target $62.

Night Trading
Asian indices are +1.25% to +2.50% on avg.
S&P 500 futures +.73%.
NASDAQ 100 futures +.44%.

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Earnings of Note
Company/Estimate
- (AZPN)/.22

- (AINV)/.34

Upcoming Splits

- None of note

Economic Releases

8:30 am EST

- Personal Income for April is estimated to fall .2% versus a .3% decline in March.

- Personal Spending for April is estimated to fall .2% versus a .2% decline in March.

- The PCE Core for April is estimated to rise .2% versus a .2% gain in March.

10:00 am EST

- ISM Manufacturing for May is estimated to rise to 42.0 versus 40.1 in April.

- ISM Prices Paid for May is estimated to rise to 35.0 versus 32.0 in April.

- Construction Spending for April is estimated to fall 1.5% versus a .3% gain in March.

Other Potential Market Movers
- Geithner’s Visit to China, the ASCO Annual Meeting, the Goldman Lodging/Gaming/Restaurant/Leisure Conference and the RBC Capital Markets Energy/Power Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by gains in financial and mining stocks in the region. I expect US stocks to open modestly higher and to build on gains into the afternoon, finishing higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Monday by MarketWatch.

There are a number of economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Personal Income, Personal Spending, PCE Core, ISM Manufacturing, ISM Prices Paid, Construction Spending

Tues. – Pending Home Sales, Total Vehicle Sales, weekly retail sales reports

Wed. – Weekly EIA energy inventory data, weekly MBA mortgage applications, Challenger Job Cuts, ADP Employment Change, ISM Non-Manufacturing, Factory Orders

Thur. – Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, ICSC Chain Store Sales

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – None of note

Tues. – Verifone(PAY), Hovnanian(HOV), Bob Evans(BOBE), United Natural Foods(UNFI)

Wed. – Joy Global(JOYG), Toll Brothers(TOL), William-Sonoma(WSM), Jos. A. Bank(JOSB)

Thur. – Ciena(CIEN), Teekay Shipping(TK), Cooper Cos(COO), Guess(GES), Sina(SINA)

Fri. – None of note

Other events that have market-moving potential this week include:

Mon. – Geithner Visits China, ASCO Annual Meeting, Goldman Lodging/Gaming/Restaurant/Leisure Conference, RBC Capital Markets Energy/Power Conference

Tue. – Geithner Visits China, Fed’s Fisher speaking, KeyBanc Capital Markets Industrial/Automotive/Transportation Conference, Goldman Lodging/Gaming/Restaurant/Leisure Conference, (CAH) investor day, RBC Capital Markets Energy/Power Conference, (THC) investor day, (MDT) analyst meeting, Cowen Display Conference

Wed. – Bernanke testimony before House Budget Committee, Fed’s Hoenig speaking, BofA-Merrill Tech Conference, Goldman Basic Materials Conference, Keefe/Bruyette/Woods Financial Services Conference, (FE) analyst meeting, Stephens Investment Conference, KeyBanc Industrial/Auto/Transport Conference, (ERTS) analyst meeting, Lazard Alt Energy/Infrastructure Conference

Thur. – Fed’s Pianalto speaking, Fed’s Dudley speaking, Bernanke gives speaks at Fed Conference, Keefe Bruyette Financial Services Conference, CSFB Engineering/Construction Service Conference, (MCO) Investor Day, Goldman Basic Materials Conference, Lazard Alt Energy/Infrastructure Conference, Sandler O’Neil Electronic Trading Conference, Citi Power/Utility Conference, BofA-Merrill Tech Conference, Raymond James Investors Conference

Fri. – Fed’s Rosengren, Yellen and Kohn in Panel Discussion, (WMT) analyst meeting, Sandler O’Neil Electronic Trading Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on less credit market angst, declining economic fear, diminishing financial sector pessimism, lower energy prices, short covering, lower long-term rates, a firmer US dollar and investment manager performance anxiety. My trading indicators are giving bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 919.14 +3.47%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 919.14 +3.47%
DJIA 8,500.33 +2.51%
NASDAQ 1,774.33 +4.67%
Russell 2000 501.58 +4.23%
Wilshire 5000 9,323.47 +3.54%
Russell 1000 Growth 406.15 +3.94%
Russell 1000 Value 469.61 +3.03%
Morgan Stanley Consumer 562.75 +2.76%
Morgan Stanley Cyclical 549.45 +4.37%
Morgan Stanley Technology 439.06 +5.38%
Transports 3,202.45 +6.12%
Utilities 340.99 +4.22%
MSCI Emerging Markets 33.02 +4.44%

Sentiment/Internals
NYSE Cumulative A/D Line 33,532 +10.50%
Bloomberg New Highs-Lows Index +23 +142.59%
Bloomberg Crude Oil % Bulls 32.0 -17.95%
CFTC Oil Large Speculative Longs 185,237 +5.82%
Total Put/Call .77 -20.62%
OEX Put/Call 1.07 -43.39%
ISE Sentiment 175.0 +23.38%
NYSE Arms .95 -25.78%
Volatility(VIX) 28.92 -7.75%
G7 Currency Volatility (VXY) 15.23 +.4%
Smart Money Flow Index 8,153.17 +.80%
AAII % Bulls 40.37 +19.72%
AAII % Bears 48.62 +7.21%

Futures Spot Prices
Crude Oil 66.31 +8.56%
Reformulated Gasoline 189.53 +2.96%
Natural Gas 3.83 +2.82%
Heating Oil 167.76 +8.06%
Gold 980.30 +2.50%
Base Metals 138.62 +3.29%
Copper 219.75 +6.67%
Agriculture 345.88 +3.28%

Economy
10-year US Treasury Yield 3.46% +1 basis point

U.S. Sovereign Debt Credit Default Swap 46.0 +4.54%

10-year TIPS Spread 1.84% +6 basis points
TED Spread 53.0 +4 basis points
N. Amer. Investment Grade Credit Default Swap Index 139.19 -5.31%
Emerging Markets Credit Default Swap Index 385.56 -2.83%
Citi US Economic Surprise Index +59.90 +34.91%
Fed Fund Futures imply 78.0% chance of no change, 22.0% chance of 25 basis point cut on 6/24
Iraqi 2028 Govt Bonds 63.67 +4.09%
4-Wk MA of Jobless Claims 626,800 -.5%
Average 30-year Mortgage Rate 4.91% +9 basis points
Weekly Mortgage Applications 786,000 -14.18%
Weekly Retail Sales -.20%
Nationwide Gas $2.47/gallon +.08/gallon
US Cooling Demand Next 7 Days 13.0% below normal
ECRI Weekly Leading Economic Index 111.90 +.81%
US Dollar Index 80.43 -.16%
Baltic Dry Index 3,494 +25.41%
CRB Index 249.83 +3.08%

Best Performing Style
Small-cap Growth +5.13%

Worst Performing Style
Large-cap Value +3.03%

Leading Sectors
Steel +13.11%
Oil Service +10.72%
Alt Energy +8.97%
Road & Rail +8.49%
Construction +7.18%

Lagging Sectors
Drugs +1.89%
Retail +1.04%
HMOs +.04%
Airlines -3.56%
Education -5.19%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish at Session Highs, Boosted by Transportation, Education, Hospital, Steel, REIT and Homebuilding Shares

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Stocks Rising into Final Hour on Falling Credit Market Angst, Short-Covering, Lower Long-Term Rates

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Financial longs and Biotech Longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is around average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 2.68% and is very high at 30.82. The ISE Sentiment Index is above average at 192.0 and the total put/call is slightly below average at .76. Finally, the NYSE Arms has been running above average most of the day, hitting 1.42 at its intraday peak, and is currently 1.16. The Euro Financial Sector Credit Default Swap Index is falling 4.41% today to 115.67 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling 4.41% to 139.19 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.53% to 53 basis points. The TED spread is now down 410 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 6.47% to 39.75 basis points. The Libor-OIS spread is falling .92% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is down 1 basis point today. The 10-year yield is down 16 basis points today and down 30 basis points from yesterday’s high of 3.75%, which is a huge positive. As well, the US sovereign debt credit default swap is falling 6.1% today to 45.0 basis points, which is a big positive. The Transportation Index, which found support at its 50-day moving average, is jumping 3.2% today and looks poised to head higher over the short-run. I expect US stocks to build on this week’s gains next week. Nikkei futures indicate a -27 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, declining credit market angst and lower long-term rates.

Today's Headlines

Bloomberg:

- Today, yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds declined 0.21 percentage point to 4.36 percent as of 11:30 a.m. in New York, according to data compiled by Bloomberg. That’s still up from 3.94 percent on May 20. Buying jumped today because yields rose high enough to draw demand, said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co. The Federal Reserve has been buying so-called agency mortgage securities to bolster consumers with cheap refinancing and home prices with low borrowing costs; the recent increase undermined that effort. “Mortgage rates are probably going to be down about 35 basis points today, that’s unambiguously good for the homeowner,” Simon, whose Newport Beach, California-based firm is the world’s largest fixed-income manager, said when yields were slightly lower.

- (JCP), (F) and (BLL) were added to US 1 List at BofA/Merrill.

- JPMorgan Chase & Co. and BNP Paribas SA added the most new clients in over-the-counter energy derivatives trading last year, according to a survey by Greenwich Associates. The two are among a group of commercial banks that expanded their commodity businesses via their credit relationships as the counter-party risk of financial institutions led firms to spread trading with more dealers than before, the Stamford, Connecticut-based consultant said. Goldman Sachs Group Inc. and Morgan Stanley had the biggest share of the OTC derivatives client trading relationships, while JPMorgan and Barclays Plc’s investment banking arm Barclays Capital “have emerged as a new tier of tough competitors,” Greenwich said. BNP Paribas, Citigroup Inc., Deutsche Bank AG, and Societe Generale are in the “third tier of up-and-coming dealers,” Greenwich said.

- China’s $586 billion stimulus, which has fueled record imports of iron ore and copper for rail, road and power projects, probably won’t be enough to sustain overseas purchases as demand from consumer- and export-led manufacturers lags, JPMorgan Chase said. Government spending, particularly since late 2008, has stoked demand for infrastructure to stimulate the economy and mitigate unemployment, JPMorgan said in a report. “Private demand continues to be weak, suggesting raw-material imports cannot be sustained at such elevated levels,” wrote analyst Amir Hoosain and Jing Ulrich, managing director for China equities. In April, China had its third-consecutive month of record iron ore imports, “despite elevated stockpiles at major ports and clear sings of serious production surpluses in the country’s steel industry,” the analysts wrote.

- Steel prices in the U.S. dropped 6.7 percent in May to a five-year low as builders and manufacturers withheld orders amid the worst recession in at least half a century. The average price of hot-rolled steel sheet, the benchmark product used in cars and appliances, fell to $392 a ton from $420 in April, Purchasing Magazine said today in a monthly update. That was the lowest since the spot-market price averaged $350 in January 2004, the magazine said. Cold-rolled sheet declined 5 percent to $477 a ton, the lowest since February 2004. Hot-rolled steel prices have plunged by 63 percent from a record $1,068 a ton in July as the slowing global economy reduced demand for automobiles, appliances and homes. “In the current market environment of meager demand and sufficient supply, price slippage in May was evident in all flat-rolled, plate, merchant bar and structural mill products,” the magazine said today. “The steel price index may slip again in June.”

- Crude oil rose, heading for its biggest monthly gain in a decade, as economic indicators from Asia and falling U.S. stockpiles pointed to a global recovery.

- Louis Susman has one thing in common with many of his predecessors nominated to be the U.S. ambassador to the United Kingdom: money. Susman, 71, a retired Citigroup Inc. senior investment banker, raised between $200,000 and $500,000 for President Barack Obama’s presidential campaign and another $300,000 for his inauguration. On Wednesday, Obama nominated Susman to the post formally known as the Court of St. James.

- Harrah’s Entertainment Inc., the world’s biggest casino company, and Leap Wireless International Inc. led companies selling $21.9 billion of speculative-grade bonds in May, the most since June 2007, as the riskiest borrowers raise cash to repay bank loans. Proceeds from about 60 percent of high-yield, high-risk bond sales this year are being used to pay down bank debt, according to Standard & Poor’s LCD.

- Public support for the U.S. is declining in Pakistan because of military strikes there that the U.S. conducts from Afghanistan, according to the top American commander in the Middle East. “Most polling data reflects” an increase in anti-U.S. sentiment, General David Petraeus said, without identifying the source of the polling. Pakistanis are angered by “cross-border operations and reported drone strikes” that they believe “cause unacceptable civilian casualties,” Petraeus wrote.

- Loans to households and companies in Europe grew at the slowest pace on record in April as banks tightened credit standards and demand for debt wilted.

- The euro region’s inflation rate fell to zero for the first time in at least 13 years in May as energy costs retreated and the worst recession in more than six decades prompted companies to cut prices.

- Royal Dutch Shell Plc’s U.S. joint venture with Saudi Aramco cut production at its Norco, Louisiana, refinery after shutting a unit, curbing gasoline output as the summer travel season returns. The 220,000 barrel-a-day refinery run by Motiva Enterprises LLC is operating at “reduced rates” after idling a unit for work, said Kevin Thompson, a spokesman for the plant, in a telephone interview. The company closed a catalytic reforming unit yesterday after a compressor failed, said Eric Zammit, an emergency coordinator for the St. Charles Parish. The refinery accounts for 2.6 percent of Gulf Coast refinery capacity, according to data compiled by Bloomberg.

- Google Inc.(GOOG) said it will allow advertisers in the U.S. and most non-European Union countries to place advertisements on results pages based on searches using competitors’ trademarked terms, reversing a previous policy.

- China is at the forefront of major developing nations that must help reduce greenhouse-gas emissions in a new treaty to stem global warming, U.S. climate envoy Todd Stern said. The Asian nation, the world’s biggest producer of heat- trapping gases, will need to make commitments in the worldwide agreement planned under United Nations leadership this year, Stern said, without naming specific actions.

Wall Street Journal:

- John Paulson, the hedge-fund manager who racked up big profits from betting against U.S. subprime mortgages and recently doubled the minimum amount investors need to buy into his funds, recorded losses on all but one of his products last month. Paulson’s flagship Advantage Plus fund, which held $9.1 billion at the end of last year, fell the most in April, down 5%. News of the April losses follows filings Thursday detailing that investors would now have to stump up $10 million–twice as much as previously–to put money into Paulson’s funds.

- Genetic research is making another big advance in the battle against cancer.

CNBC:

- Everyone should closely read today’s Washington Post story on the value-added tax or VAT. The cat is now out of the bag. For months I have argued that Team Obama and the Democratic Congress were going to be forced to consider a VAT in order to pay for their extravagant spending. Now borrowing almost 50 cents on every new dollar spent, the Democrats will at some point begin to deal with the politics of deficit reduction as a way of countering Republican criticisms about deficit expansion. And the VAT’s part of their answer.

NY Times:

- A group of banks and money managers plan to release a letter to the Federal Reserve Bank of New York and other U.S. and overseas regulators to help fend off some rules proposed by the Obama administration that seek to control trading in the derivatives market, The Wall Street Journal reported.

Yahoo.com:

- Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up? Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.

Washington Post:

- The Obama administration's push to resettle at least 50 Guantanamo Bay prisoners in Europe is meeting fresh resistance as European officials demand that the United States first give asylum to some inmates before they will do the same. Rising opposition in the U.S. Congress to allowing Guantanamo prisoners on American soil has not gone over well in Europe. Officials from countries that previously indicated they were willing to accept inmates now say it may be politically impossible for them to do so if the United States does not reciprocate. "If the U.S. refuses to take these people, why should we?" said Thomas Silberhorn, a member of the German Parliament from Bavaria, where the White House wants to relocate nine Chinese Uighur prisoners.

CNN:

- U.S. satellite imagery has spotted "vehicle activity" at a North Korean ballistic missile site, two Defense Department officials said Friday. This activity is similar to that before a long-range missile launch by North Korea earlier this year. North Korea test-fired a short-range missile Friday off the country's east coast, a South Korean military source said. It would be the sixth such missile test since the country conducted a nuclear test Monday. Also Friday, North Korea upbraided the U.N. Security Council for slamming its nuclear test, calling the members of the body "hypocrites" and warning of "stronger self-defense countermeasures" as the world body considers more sanctions against the country. "There is a limit to our patience," the Foreign Ministry said in a combative statement.

The Detroit Free Press:

- With its membership declining and facing ever more demands for concessions, the UAW may need to consider a merger with another union to remain viable. That's the opinion of labor relations experts who point to the UAW's declining membership as a spur to a possible merger. From a peak of 1.5 million members in the late 1970s, UAW membership dropped to 431,000 at the end of 2008.

- Former President George W. Bush defended on Thursday his decision to allow harsh interrogation of the terrorist who ordered the Sept. 11, 2001, attacks on the United States, saying it was cleared by his lawyers to prevent what his advisers believed was another, imminent attack. "I made a decision within the law to get information so I can say, I've done what it takes to do my duty to protect the American people," he said. "I can tell you, the information gained saved lives." "We should care about poverty overseas, for our own self-interest," he said. "Ideologues can only recruit when they find hopeless people."

USAToday:

- Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows. The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security. The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined. "We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it's not backed up by a house," says David Walker, former U.S. comptroller general, the government's top auditor. Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

FierceFinance:

- It's hard to generalize from single month's performance. For what it's worth, John Paulson, the man in the hedge fund universe, had a rough April.

Financial News:

- New investments in credit funds exceeded money taken out by the “greatest ever margin” in the past three months, with 60% seeing net inflows, citing Bank of America Corp. research.

Reuters:
- Network equipment maker Juniper Networks Inc (JNPR) and IBM (IBM) are in talks to step up their sales partnership, but no agreement is imminent, sources familiar with the situation said on Thursday.

- Advisers to General Motors Corp (GM) bondholders representing $27 billion in the automaker's debt urged investors on Friday to support a debt swap negotiated over the past week with the Obama administration. Bondholders have until Saturday to register their support for the terms of a deal that would give them up to 25 percent of a reorganized GM. That offer is contingent on the U.S. Treasury determining that enough investors have signed on in support.

- UnitedHealth Group Inc's (UNH) chief executive envisions more consolidation in the health insurance sector over the next few years as healthcare reform shifts the competitive landscape.

Financial Times:
- Dow Jones is revamping its enterprise media division with a focus on web-based applications, as the newswire operator seeks to become less dependent on the data terminal business now dominated by Bloomberg and Thomson Reuters, write Kenneth Li and Andrew Edgecliffe-Johnson.