Tuesday Watch

Evening Headlines
Bloomberg:

• Bank Swaps, Libor Show Doubts on Europe Bailout: Credit Markets. The cost to protect bank bonds from losses and money markets show investors are concerned that the almost $1 trillion rescue package announced by European leaders may not be enough to contain the region’s sovereign debt crisis. A credit-default swaps index linked to European banks is trading 30 basis points higher than an investment-grade benchmark, according to CMA DataVision. While the gap narrowed from 58 basis points before European leaders agreed to the rescue plan, the bank index on average traded 10 basis points tighter than the benchmark for three years. A measure of banks’ reluctance to lend stayed at three times the level from March. “Sovereign risk hasn’t gone away in the slightest,” said Jim Reid, head of fundamental strategy in London for Deutsche Bank AG, Germany’s biggest bank. “What this package has done is massively reduced the tail risk in European markets without necessarily changing the medium- to long-term dynamics of financial markets.”
• IMF's Lipsky Signals Spain, Portugal Must Step Up Deficit Cuts. European countries saddled with debt should focus on cutting deficits in the wake of policy makers’ unprecedented efforts to contain the region’s sovereign-debt crisis, the International Monetary Fund’s No. 2 official indicated. The rescue package “is an important step,” John Lipsky, the first deputy director at the fund, said in an interview with Bloomberg Television. “Now let’s see what happens in other countries that need to undertake adjustment programs.”
• Largest Banks Would Face Stricter Capital Rules in Senate Plan. Bank of America Corp.(BAC), Citigroup Inc.(C) and other large banks would face higher capital standards under a proposed change to the financial-overhaul bill aimed at containing risk-taking at big institutions. Lenders with more than $250 billion in assets would have to meet capital standards that are at least as strict as those that apply to smaller banks, under an amendment offered by Senator Susan Collins, a Maine Republican. “It makes no sense that capital and risk standards for our nation’s largest financial institutions are more lenient than those that apply to small depository banks when the failure of larger institutions is much more likely to have a broad economic impact,” Collins said today on the Senate floor. The Collins amendment is the latest in a series of changes offered to the financial-overhaul bill proposed by Senate Banking Committee Chairman Christopher Dodd to prevent large institutions from taking on so much risk they could threaten U.S. financial stability. The Collins amendment directs federal regulators to impose minimum leverage and risk-based capital requirements on financial firms that the proposed systemic-risk council identifies for Federal Reserve oversight.Banking groups criticized the amendment, saying Congress shouldn’t set capital standards.
• Euro Package Leaves Governments Out of Ammunition: Matthew Lynn. Big problem, big number. The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea. In reality, you can’t stabilize a sinking ship. The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes. Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations.
• Dollar May Extend Rally After Greece Rescue, Deutsche Bank Says. The dollar may extend this year’s 12 percent climb against the euro even after Europe crafted a $1 trillion plan to rescue Greece and other debt-laden governments, said Deutsche Bank AG, the world’s biggest currency trader. “The risk of default has receded for the time being, but emergency measures alone will not be enough to lift the euro,” said Koji Fukaya, a senior currency strategist in Tokyo at Deutsche Bank. Europe needs sustained efforts to rebuild the finances of indebted nations, not just emergency loans, he said. “The euro is still overvalued” based on the gap in bond yields and in the differing degrees of economic recovery between the U.S. and Europe, he said. “It wouldn’t be surprising if the currency fell below $1.25 by the middle of the year.” Purchasing power parity, a measure of the relative cost of goods, shows the euro’s long-term neutral level at $1.15 to $1.20, he said.
• Greece Crisis Has Roots in Indulgent U.S. Policy: Amity Shlaes.
• Biggs Says U.S. Stocks May Surge 20%, Led by Technology Shares. U.S. stocks could jump as much as 20 percent, led by technology companies, as the global economy rebounds from Europe’s debt crisis, said Barton Biggs. “I’m betting the next move in the U.S. market is going to be up 15 to 20 percent,” Biggs, who runs New York-based hedge fund Traxis Partners LP and whose flagship fund returned three times the industry average last year, said in a Bloomberg Television interview today.
• China's April Inflation Accelerates, Lending Surges. China’s inflation accelerated, new lending topped economists’ estimates and property prices rose by a record, highlighting the threat of overheating in the fastest- growing major economy. Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Wall Street Journal:

• Some Think One Big Bet Helped Spur Giant Selloff. Shortly after 2:15 p.m. Eastern time last Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines. On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank BarclaysNYSE Euronext's electronic ARCA exchange started to appear questionable, say traders. In the disarray, some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. The working theory among traders and others involved in the exchange meltdown is that the "Black Swan"-linked fund may have contributed to a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences. "Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market and it was poised to collapse." Barclays Capital declined to comment. As more details of last Thursday's dizzying collapse become clear, there is less evidence to suggest a "fat-finger" data-entry error caused the collapse. Instead, the picture is one of a highly rare confluence PLC—to do their own selling to offset some of the risk. Then, as the market fell, those declines would have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market. The tidal wave appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter. Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the of events, some linked, some unrelated, that exposed structural flaws in the stock market large and small.
• Two Oil Firms Tie Rig Blast to 'Plug'. Executives from BP PLC(BP), Transocean Ltd.(RIG) and Halliburton Co.(HAL) began pointing fingers on Monday over who bears ultimate responsibility for the April 20 oil-rig explosion that took 11 lives and is spilling oil into the Gulf of Mexico. The question will loom large at a Senate hearing Tuesday that will hear from executives of the three companies.
• Fannie Mae Needs $8.4 Billion More. Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust. Fannie's losses reflected continuing weakness in the housing market and would have been worse without accounting changes that reduced its deficit.

Bloomberg Businessweek:

• Former PBOC Adivsor Says Too Early for Stable EU, Daily Reports. It’s still too early to suggest that Europe has stabilized after the European Union approved a bailout for Greece, China Daily reported today, citing former Chinese central bank advisor Yu Yongding. The Greek crisis “fully exposed” the weakness of the global economic recovery, the Beijing-based newspaper cited Yu as saying. The euro will likely remain weak as the dollar strengthens, Yu was cited as saying. The Greek crisis also challenges Chinese policymakers who have wanted to diversify the nation’s overseas holdings away from the dollar, the newspaper cited Yu as saying. China’s exports are also set to suffer, China Daily cited Yu as saying. That shouldn’t stop policymakers from tightening policy, Yu was cited as saying. Tightening will likely result in slower Chinese economic growth this year, the newspaper cited Yu as saying.

Business Insider:

• Suddenly, People Recognizing Real Estate Bubbles Well Beyond China's Big Cities.

Zero Hedge:

• Fed Pretends It Is Preparing to Soak Up Excess Reserves, Even As Currency Swaps Are Sure to Add About $500 Billion to Fed's Assets.

Forbes:

• New College Loan Rules Put Taxpayers at Risk. They'll only exacerbate the tuition bubble and encourage more student debt.

Engadget:

• Confirmed: Apple(AAPL) and AT&T(T) Signed Five-Year iPhone Exclusivity Deal - But Is It Still Valid? The term of Apple and AT&T's iPhone exclusivity deal has long been a mystery -- although USA Today reported a five-year arrangement when the original iPhone came out in 2007, that number has never been independently confirmed, and it's been looking suspect in recent weeks as Verizon iPhone chatter has gotten louder. But we've been doing some digging and we can now confirm that Apple and AT&T entered into a five-year iPhone exclusive in 2007, based on court documents filed by Apple in California.

The Hill:

• Reform Fallout Vexes Small Hedge Funds. There are thousands of small funds that worry they’ll suffer from Washington’s effort to rein in the big players.

Politico:

• Kagan's Scant Writings Spark Concern. The Senate is about to embark on something it hasn’t done in nearly four decades: vet a candidate for the Supreme Court — Solicitor General Elena Kagan — who has no paper trail as a judge. A thin paper trail can be a good thing for a nominee, meaning few past legal writings to untangle at a confirmation hearing. But so far it hasn't shielded Kagan from attack. President Barack Obama’s supporters on the left are questioning whether Kagan is liberal enough — and the shortage of past writings has given conservatives ammunition to attack Kagan’s qualifications for the high court. “She basically has such a scanty academic record, and she hasn’t written anything at all outside the strictly academic context. And she hasn’t been a judge. There’s no public record at all to speak of to evaluate her on, which is really a very strange situation,” said Paul Campos, a liberal law professor at the University of Colorado. Or as liberal blogger Jane Hamsher of Firedoglake put it: “Accepting Kagan just because people like Obama is wrong. That’s appropriate for ‘American Idol,’ not the Supreme Court. Nobody knows what she stands for but him.”
• Wellpoint(WLP) to Obama: Stop 'False' Info. WellPoint CEO Angela F. Braly has fired the latest shot in an escalating battle between the Obama administration and one of America’s largest health insurers. In a letter to President Barack Obama, Braly accused Obama of repeating “false information” about the company cutting off insurance for breast cancer patients and “grossly misrepresent[ing]” the company’s work to treat breast cancer patients. Braly’s letter was prompted by President Barack Obama’s address on Saturday.

Reuters:

• US Audit Urges Controls on Treasury Warrant Deals. The U.S. Treasury has managed to negotiate prices for warrants from bailed out banks at prices largely at or above estimated values, but it needs better controls over its bargaining process, a government watchdog said on Tuesday. The Special Inspector General for the Troubled Asset Relief Program said in a new audit report that Treasury has failed to document decisions of the internal panel that makes decisions on banks' offers to repurchase warrants from Treasury. It also said Treasury does not document the substance of its conversations and negotiations with banks, potentially jeopardizing the return realized by taxpayers.
• Priceline(PCLN) Sees Weaker 2nd Quarter, Shares Fall.
  

Telegraph:

• Shock and Awe May Not Be Enough to Save Europe.

Beijing News:

• Beijing property prices fell 31.4% for the week ending May 9 from the week ending April 11, to a average price of 16,898 yuan per square meter, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

21st Century Business Herald:

• Chinese banks can withstand a 30%-50% decline in home prices, citing bank officials. The nation's banks have completed stress test on their exposure to mortgages. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. can withstand about a 35% decline in home prices. Bank of Communications Co. can withstand a 30% decline in prices and Agricultural Bank of China can take a 20% drop. China Minsheng Banking Corp. can withstand a decline of 40%. China Merchants Bank Co. can withstand a drop of 37%.
  

The Chosun Ilbo:

• Clinton Mulls Seoul Visit Over Cheonan Findings. South Korea and the U.S. are discussing a visit by Secretary of State Hillary Clinton to Seoul once the findings of an investigation into the sinking of the Navy corvette Cheonan are announced late this month. A diplomatic source in Washington on Monday said Clinton is to reaffirm the strong alliance "and send a solemn warning message to the North if findings of the Cheonan's sinking point clearly to North Korea's involvement."

Evening Recommendations
Citigroup:

• Reiterated Buy on (AGU), target $76.

Night Trading

• Asian indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 108.0 -7.0 basis points.
• S&P 500 futures -.67%.
  
• NASDAQ 100 futures -.71%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GBE)/-.41
• (FOSL)/.32
• (DIS)/.46
• (SPWRA)/.11
• (ERTS)/.05
• (ASEI)/1.04
• (CHD)/1.08

Economic Releases
10:00 am EST

• Wholesale Inventories for March are estimated to rise +.5% versus a +.6% gain in February.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lacker speaking, Fed's Lockhart speaking, Fed's Plosser speaking, $38B 3-year Treasury Note Auction, weekly retail sales reports, ABC consumer confidence reading, IDB/TIPP Economic Optimism Index, NFIB Small Business Optimism Index, (PBI) investor meeting, UBS Global Financial Services Conference, Deutsche Bank Alt Energy/Utilities/Power Conference, BofA Merrill Lynch Healthcare Conference, Jeffries Internet/Media/Telecom Conference, BofA Merrill Metals/Mining Conference, (CE) analyst meeting, (FAF) analyst meeting, (WMB) analyst meeting, (WPZ) analyst meeting, (RADS) investor day, (INTC) analyst meeting, (BMR) analyst meeting and the (TDSC) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.