Tuesday Watch

Evening Headlines
Bloomberg:

• Euro Rally May Prove Fleeting as Europe's Economy Lags Behind. The euro’s rally after Greece was offered a rescue package worth as much as 45 billion euros ($61 billion) may prove fleeting as Europe’s economy lags behind the U.S., according to currency strategists at firms from BNP Paribas SA to Morgan Stanley. “The euro’s troubles are far from over,” a team led by Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas in London, said in an e-mailed report. “The likelihood is still that the bailout will be triggered and that the peripheral euro-zone nations will have to undergo a painful process of fiscal and wage readjustment.” “The euro is now undergoing a relief rally, but the financial package does not change the medium-term outlook, which is that the euro zone is likely to underperform other developed economies,” Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a research note. “That is set to keep the euro on a downward trend through the remainder of 2010.” “The key question is whether or not these countries that have pledged fiscal austerity programs are going to be able to execute on that, and part of that means that your economies have to grow enough for you to raise these tax revenues to pay back your debtors,” Sophia Drossos, co-head of global foreign- exchange strategy at Morgan Stanley in New York, said in an interview on Bloomberg Radio with Tom Keene. Currency strategists have steadily reduced their forecasts for the euro, cutting their consensus year-end estimate to $1.33 from $1.45 in at the start of 2010, according to data compiled by Bloomberg.
• CFTC's Gensler Says Regulators Failed to Stop Financial Fraud. Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said regulators failed to prevent the financial crisis in 2008 and arguments of complexity in private derivatives markets are being used to impede reform. Gensler, a former Goldman Sachs Group Inc.(GS) partner, said Wall Street is trying to protect shareholder profit and its own compensation, according to remarks he is set to deliver this evening at Columbia University in New York. “Make no mistake: the financial system failed America. That’s not to say that the regulatory system did not also fail - - it did,” Gensler said. “The complexity of derivatives markets, though, is being used by some opponents of reform to raise all manners of issues - some legitimate - but some just to maintain the status quo.”
• AIG(AIG) Said to Terminate Most of Goldman Sachs's(GS) Remaining Swaps. American International Group Inc., the insurer rescued to prevent losses at bank counterparties, has retired most of its mortgage-linked trades with Goldman Sachs Group Inc., said a person with knowledge of the matter. AIG’s Financial Products unit wound down credit-default swaps protecting about $3 billion of mortgage-linked securities, resulting in $1.5 billion to $2 billion of writedowns last year for the insurer, said the person, who declined to be identified because the specific transactions weren’t disclosed. The swaps were among those excluded from AIG’s $182.3 billion government bailout, which retired $62.1 billion in contracts by fully reimbursing banks including Goldman Sachs and Societe Generale SA.
• Fairholme Discloses 15 Million Share Stake in AIG(AIG). Bruce Berkowitz’s Fairholme Capital Management bought about 15 million shares of American International Group Inc. as the investor bet on a rebound of the bailed-out insurer. The holding is second in size only to the U.S. government’s stake of about 80 percent, according to data compiled by Bloomberg. The investment was disclosed today in a filing listing holdings as of March 31.
• Pimco Says There's a 'Risk of Flipping to Deflation'. Developed economies face the risk of deflation as central banks end programs to revive their financial systems, according to Pacific Investment Management Co., manager of the world’s biggest bond fund. “There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet,” Mihir Worah, who manages the Newport Beach, California-based company’s $18 billion Real Return Fund, wrote on Pimco’s Web site. A slowdown in economic growth is adding to deflation pressures, the report said.
• Candidate With Bank Trouble Wants Senate Banking Slot. Alexi Giannoulias, the Illinois Democratic nominee for the U.S. Senate who has predicted that regulators will close the bank his family owns, said he will ask to be assigned to the Senate Banking Committee if elected. “Yes, I’d love to serve on a banking committee,” he said during an appearance before the City Club of Chicago. The fate of the $1.2 billion-asset Broadway Bank, whose wealth helped finance Giannoulias’s successful 2006 state treasurer bid, may help determine whether Democrats can keep the seat and their Senate majority. A poll by Public Policy Polling released April 6 showed Republican Mark Kirk, a five-term congressman from Chicago’s northern suburbs, leading Giannoulias 37 percent to 33 percent, with 30 percent undecided. Giannoulias said he could bring a “very important perspective” on banking issues and the need for lending to communities. Asked by reporters whether he will step down as his party’s nominee if the bank’s troubles get too bad, he said, “That will never happen. We are going to win this race.” After the speech, the Kirk campaign issued a statement saying Giannoulias is “misleading” voters about the extent of his role at the bank. Giannoulias said he takes responsibility for a small proportion of bad loans at the bank. “I accept responsibility for the less than 9 percent of the current nonperforming assets that were booked while I was there,” he said. Giannoulias declined to answer questions from reporters on whether his fundraising has been hurt by controversy surrounding the bank and the March arrest, on bank fraud charges, of a Chicago restaurateur who gave more than $100,000 to his campaigns. The Democrat said his fundraising lagged behind Kirk’s partly because he had to focus on a more challenging primary. Republicans are trying to take advantage of ethical problems experienced by Illinois Democrats, including a public corruption trial set to begin June 3 for former Governor Rod Blagojevich, who appointed Burris to complete Obama’s term.
• China May Start Monopoly Probe Into Vale, Rio, BHP, Daily Says. The Chinese government is preparing to conduct an anti-monopoly investigation into BHP Billion Ltd., Vale SA and Rio Tinto Group, the Economic Information Daily, which is affiliated with the state-run Xinhua News Agency, said.
• China May Force State Banks to Exit Underperforming Businesses. China may force state-controlled lenders to exit underperforming businesses, as the banking regulator moves to limit financial risks following last year’s surge in credit. The China Banking Regulatory Commissions told the nation’s five biggest lenders to inspect performance at non-bank units set up over the past few years, Vice Chairman Jiang Dingzhi said at a forum in Beijing today.
• Goldman Sachs(GS) Boosts Nashville's Debt 40% for Convention Center. Nashville, home of country-music stars such as Taylor Swift and the Grand Ole Opry, will boost city-backed debt by almost 40 percent to borrow $633 million for a new convention center three times the size of the Tennessee municipality’s current one. Bonds to be sold today by Nashville and Davidson County’s Convention Center Authority through investment banks led by Goldman Sachs Group Inc. pledge general-fund revenue if hotel, airport and rental-car taxes and use of the Music City Center aren’t enough to repay investors. The tourism revenue won’t be adequate, said Councilwoman Emily Evans, a former municipal bond underwriter. “It’s a riverboat gamble with very little upside,” said Evans, who worked for 15 years at J.C. Bradford & Co., the Nashville firm acquired by Paine Webber in 2000. “It just doesn’t seem like a good bet to me.”

Wall Street Journal:

• Banks Deploy Armies of Staff to Mortgage-Default Front. In testimony before the House Financial Services Committee Tuesday, big banks will be competing with one another to show how eager they are to prevent foreclosures.
• Jamie Dimon, Syracuse's Public Enemy Number One? J.P. Morgan Chase CEO James Dimon and others may think he did the right thing for the nation by acquiring Washington Mutual and Bear Stearns, as those financial institutions teetered on the brink of collapse in 2008. But Dimon is no hero in certain corners of Syracuse University campus, where he is scheduled as the commencement speaker. (Hat Tip to Dealbreaker) “He is a figurehead of an industry that has failed the American people in a lot of ways.’’ said Ashley Owens, a Syracuse senior in a phone call from campus. “I personally know students who have had to drop out of school because their parents have lost their jobs in the financial crisis. To have Dimon as our commencement speaker is really insensitive” A journalism and geography major from central Massachusetts, Owens and about 800 other Syracuse students, alumni, parents and “friends of the university” have signed a petition protesting the school’s choice of Dimon as the keynote speaker. They are asking the school to rescind the invitation, and are planning a protest on the campus green for this week.
• U.S. Pushes Iran Sanctions, But China Holds Back. U.S. President Barack Obama and Chinese President Hu Jintao, meeting on the first day of a nuclear security summit, agreed to step up pressure on Iran for its nuclear program, the U.S. said, but the two nations still appear divided on how to apply that pressure. Just weeks before the Obama administration hopes to advance sanctions against Iran at the United Nations, the U.S. said the two presidents had instructed their governments to work together on potential sanctions designed to punish Tehran for its nuclear program. China described the outcome differently, emphasizing diplomacy as usual and avoiding any reference to sanctions.
• Jobless-Benefits Measure Advances in Senate. In a 60-34 vote, Democratic senators on Monday overcame Republican opposition to an extension of unemployment benefits and health-insurance subsidies for jobless people.
• Incentives Not to Work. "The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer." Any guess who wrote that? Milton Friedman, perhaps. Simon Legree? Sorry. Full credit goes to Lawrence H. Summers, the current White House economic adviser, who wrote those sensible words in his chapter on "Unemployment" in the Concise Encyclopedia of Economics, first published in 1999.
• Avon(AVP) Suspends Four Executives Amid Bribery Probe. Avon Products Inc. has suspended four executives amid an internal investigation into alleged bribery that began with the company's China operation and, according to a person familiar with the probe, now involves a dozen or more countries. The New York-based beauty-products company suspended the president, chief financial officer and top government affairs executive at its China unit, people familiar with the matter said. The fourth suspended employee was a senior executive in New York who was Avon's head of internal audit until the middle of last year, these people said.

BusinessWeek.com:

• Yen's 3-Year Rally to End on Support Breaks: Technical Analysis. The yen may snap a three-year rally against the dollar as it drops toward key so-called support levels, signaling Japan’s currency may flip into a long-term cycle of declines, Shinko Research Institute Ltd. said, citing trading patterns. The currency is trading weaker than its 18-month moving average and threatens to slide through the 20-month average, levels that have stood as key support points since 2007, said Norihiro Tsuruta, chief strategist in Tokyo at the unit of Japan’s second-largest banking group Mizuho Financial Group Inc.
• Asia Needs Higher Interest Rates to Avert Bubbles, ADB Says. Asia needs to start raising interest rates to prevent inflation from accelerating and avert the formation of asset bubbles as the region’s economies recover from the global crisis, the Asian Development Bank said. “As recovery takes hold, inflation pressures, particularly in asset prices, may well start to mount in the region,” the ADB said. “Unusually easy monetary policy throughout the region cannot be kept for too long, and there is a need to revert to a normal stance.”
• S&P 500 Backed by Most Momentum Since 1986: Technical Analysis.
• ICBC Says Biggest China Banks Face $70 Billion Capital Hole. China’s four largest publicly traded banks need 480 billion yuan ($70 billion) of capital to comply with regulatory requirements for financial strength, according to Industrial & Commercial Bank of China Ltd.

CNBC:

• China's Hu Says Beijing Will Not be Pressured on Yuan. China will "firmly stick" to its own path for yuan reform, President Hu Jintao said in a meeting with U.S. President Barack Obama, emphasising that Beijing would not be pushed by external pressure. Faced with a chorus of U.S. calls to let the yuan rise, Hu said China would base any decision on its own economic and social needs and stressed that a stronger yuan would not be a panacea for woes afflicting the world's largest economy.
• Alcoa(AA) Profit Hits Forecasts, but Revenue Misses Expectations.
  

NY Times:

• Lehman Channeled Risks Through 'Alter Ego' Firm. It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers. In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books. The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

CNNMoney:

'Earthshaking' Ways to Fix U.S. Debt. If lawmakers opted to reduce the deficit strictly through tax increases, they would need raise more than $500 billion in new revenue, according to a Tax Policy Center study. And they'd have to hike tax rates by a third to pull it off -- the bottom rate would go from 10% to 13.7%, and the top rate would rise from 35% today to 48%. If they just wanted to raise the top three rates, they'd have to jack them up by 88%. So, for example, the top rate would rise from 35% to 66%. To hit the deficit target by only raising rates on the highest-income households would require a far more drastic jump. Rates for individuals making more than $200,000 (or $250,000 for couples) would more than double, with the top rate approaching 77%. All of these estimates don't account for how those taxpayers would behave when faced with higher taxes. If they did, the rate jumps would need to be even higher, said Roberton Williams, a senior fellow at the Tax Policy Center.

Business Insider:

• Why The IMF's Involvement In Greece Is A Real Disaster For Europe And Its Leadership.

St. Petersburg Times:

• Washington Will Spend $31,406 Per Household This Year. Taxpayers filing their 1040s are likely wondering just where all their hard-earned tax dollars are going, anyway. Washington will spend $31,406 per household in 2010 — the highest level in American history (adjusted for inflation). It will collect $18,276 per household in taxes. The remaining $13,130 represents this year's staggering budget deficit per household, which, along with all prior government debt, will be dumped in the laps of our children. Government spending has increased by $5,000 per household since 2008, and nearly $10,000 per household over the past decade. Yet there is no free lunch: If spending is not reined in, then eventually taxes must also rise by $10,000 per household. Washington will spend this $31,406 per household as follows:

Politico:

• SEIU Officials: Stern to Resign. Service Employees International Union President Andrew Stern, one of America's most prominent labor leaders, is set to resign, according to a member of the union's board and another SEIU official. The President of an SEIU local based in Seattle, Diane Sosne, broke the news to her staffers at 11:35 this morning, local time. "Last night I received confirmation that Andy Stern is resigning as President of SEIU. He has not yet made a public announcement; we will share the details as we become aware of them," Sosne wrote in an email obtained by POLITICO.Stern, even without the union presidency, would remain on, among other things, the board of President Obama's deficit commission, to which he was appointed in February.

Reuters:

• Pimco Shuns Greek Debt Despite Rescue Package. Pimco will not be buying new Greek debt as it believes a euro zone rescue package fails to tackle the country's longer-term solvency challenges, the chief executive of the bond fund told Reuters.
  
• Demand for Hedge Funds Heated Up Again in February. Global hedge funds took in $16.6 billion in new money in February as pension funds and wealthy investors raced to capture a piece of the industry's recent strong returns, data released on Monday show. The flood of new money helped raised assets in the loosely regulated industry to $1.5 trillion, the highest level since the financial crisis, researchers at TrimTabs Investment Research and BarclayHedge found. "Money is chasing performance," Sol Waksman, founder and president of BarclayHedge, one of a handful of asset tracking firms in the hedge fund industry, said in a statement. And industry analysts and investors expect more to come.
• NYSE Short Interest Down, Nasdaq Up Late March. Short interest on the New York Stock Exchange fell at the end of March, while bearish bets on the Nasdaq rose in the same period, suggesting investors remain wary of making large bets against the market rally.
• IMF Boosts War Chest Ten-Fold to $550 Billion. The IMF on Monday increased its crisis fund ten-fold to $550 billion and expanded the number of contributors to include major emerging market economies, giving them a say in how the money is spent.
• U.S. Postal Service Risks Taxpayer Bailout - GAO. The U.S. Postal Service could be on its way to a taxpayer bailout unless it takes extreme steps to become financially viable, according to a congressional report released on Monday. The Government Accountability Office (GAO) said the postal service faces "daunting financial losses" of more than $238 billion over the next decade. The GAO said Congress should form a panel of independent experts to make recommendations that could include removing the requirement that mail be delivered within six days, reducing USPS' operations, and allowing it to do business in new, non-mail-related areas. "If no action is taken, the risk of USPS's insolvency and the need for a bailout by taxpayers and the U.S. Treasury increases," the GAO said.
• CF Industries(CF) to Offer 10.8 Mln Shares, Debt.
  

Financial Times:

• Spanish Banks' Price War Could Threaten Cajas. A price war for deposits between Spanish lenders could be the catalyst for mass failure of the country’s savings bank system, according to bankers and analysts. Troubles for the regional savings banks, or cajas, could even trigger sovereign debt problems in the eurozone’s fourth-biggest economy. For the local government-backed cajas, the pressure comes on top of their vast exposure to the collapsing Spanish real estate market. Spain’s 46 cajas account for almost half of the country’s banking market.
• WaMu Risky Loans 'Riddled' With Fraud. Washington Mutual ramped up sales of high-risk mortgages to investors in the years before its collapse even though internal reports showed many of the loans were tainted by fraud, according to a congressional investigation into the bank’s failure. The Senate permanent subcommittee on investigations also found that the bank securitised loans that it knew were likely to fail without disclosing those problems to investors, said Democratic Senator Carl Levin, the panel’s chairman. Mr Levin told reporters that while “disgusting” levels of greed on Wall Street had driven the financial crisis, much of the blame also belonged to WaMu and other “Main Street” firms where risky loans were originated and securitised – that is, bundled into bonds and other instruments sold to investors. The bank – most of which was sold to JPMorgan Chase in 2008 – will be the subject on Tuesday of the first in a series of hearings by Mr Levin’s panel, which is also examining the role of investment banks, regulators, credit rating agencies and complex financial instruments in the crisis. He said one goal of the hearings was to “hold perpetrators accountable”. He said he was “concerned” that “very few people” had been held responsible to date.
• AIG 'Strongly Objects' to Pay Restrictions.
  

TimesOnline:

• Pimco Warns of Pressure on Sterling and Bank of England. The head of European investments at the fund manager Pimco has warned that sterling could come under pressure if the UK fails to tackle its budget deficit after the general election. The warning from Andrew Balls will be seen as all the more significant by the markets because he is the younger brother of Ed Balls, one of Gordon Brown’s key lieutenants in the Cabinet and frequently seen as a future Chancellor of the Exchequer.

Xinhua:

• Chinese President Hu Jintao told U.S. President Barack Obama that a stronger yuan won't solve U.S. unemployment problems. An appreciation of the Chinese currency will also not resolve the trade imbalance between the two nations, Hu told Obama.
• Land Prices Fall in China's Cities Except Beijing in March: Report. The average land prices in 70 key cities fell 31 percent in March over February as the country's measures to curb property prices "start working", a report from the China Land Surveying and Planning Institute (CLSPI) said.

Evening Recommendations
Citigroup:

• Reiterated Buy on (AXP), raised target to $51.
• Reiterated Buy on (CMI), target $72.
• Reiterated Buy on (BEN), raised target to $140.
  

Sterne Agee Leach:

• Rated (WRC) Buy, target $58.

Night Trading

• Asian indices are -.75% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 89.0 unch.
• S&P 500 futures -.34%.
  
• NASDAQ 100 futures -.31%

Morning Preview Links

Earnings of Note
Company/Estimate

• (TLB)/.02
• (FAST)/.33
• (CSX)/.69
• (INTC)/.38
• (LLTC)/.38

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for March is estimated to rise to 89.2 versus 88.0 in February.

8:30 am EST

• The Import Price Index for March is estimated to rise +1.0% versus a -.3% decline in February.

Upcoming Splits

• (AAN) 3-for-2
  

Other Potential Market Movers

• The Fed's Tarullo speaking, Fed Chairman Bernanke speaking, Fed's Lacker speaking, ABC Consumer Confidence reading, weekly retail sales report, IBD/TIPP Economic Optimism Index, (MKC) investor conference and the (LRN) investor day could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.