Monday Watch

Weekend Headlines
Bloomberg:

• Trichet Pushes Fiscal Tightening at G-20 as Geithner Wants Demand Growth. European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand. The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialized economies,” he said. The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery. “Stronger domestic demand growth in Japan and in the European surplus countries” is needed, Geithner said at a separate press briefing in Busan. Spending in both areas is “relatively weak,” he said.
  
• G-20 Fail to Agree on Global Bank Tax, Aim for Capital Rules by November. Group of 20 nations failed to agree on a proposal to impose a global tax on banks that was aimed at making the financial industry shoulder the cost of bailouts, settling instead for a common set of guidelines.
• Euro Weakens to Lowest Since 2001 Against the Yen Amid Europe Debt Concern. The euro dropped to its weakest level since November 2001 versus the yen and touched a four-year low against the dollar on concern Europe’s debt crisis will slow global growth. Europe’s shared currency fell for a third day against the greenback as Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said yesterday he isn’t worried about the current level of euro. “Markets have to price for lower growth than what they had previously priced,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia.
• SEC Postpones New S&P 500 Trading Curbs. Circuit breakers to slow trading in Standard & Poor’s 500 Index stocks during periods of volatility will be delayed for at least a week, according to the U.S. Securities and Exchange Commission. Regulators asked exchanges to impose coordinated halts following the May 6 rout that erased $862 billion from U.S. equities in less than 20 minutes.
• Copper Tumbles, Enters Bear Market on Jobs Data; Industrial Metals Plunge. Copper tumbled, sending the metal into a bear market, after a report showed U.S. employers hired fewer workers than expected last month, reviving concern that the global recovery will slow. Zinc and nickel also plunged. Copper has fallen 23 percent since reaching a 20-month high in April on signs that growth is slowing in the U.S., China and Europe. The Reuters/Jefferies CRB Index of 19 commodities fell as much as 2.4 percent today, led by declines in metals. Zinc plunged 15 percent this week, the most since February 2007, and nickel lost 16 percent, the biggest drop since October 2008. “The jobs number was very bad,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “It means that the economy doesn’t have any traction. Markets will struggle from here and people are going to sell base metals.”
• Copper is poised to extend the year's losses as the Chinese government acts to cool residential property prices that rose at a record pace in April, curbing demand for wires and pipes, according to MF Global U.K. Ltd. "There could be further downward pressure on the copper price," MF Global analyst Jeremy Cave wrote in a report. "Over 40% of copper is used in construction, so the relationship with Chinese property is clear."
• Zinc Smelters in China Idle Capacity as Price Slumps, Researcher Gao Says. Zinc smelters in China, the world’s largest producer, have idled as much as 8.8 percent of capacity as prices decline and the nation bids to cool the property market, curbing demand, according to Shanghai Metals Market. About 400,000 to 500,000 metric tons of the country’s 5.7 million tons of annual capacity have been suspended on output cuts and maintenance shutdowns, Monica Gao, an analyst at the researcher and data provider, said by phone from Shanghai. China is the world’s consumer of the metal used to galvanize steel, and Gao’s estimate adds to signs that the government’s drive to prevent a property bubble is hurting demand for commodities used in construction. “Demand hasn’t been good this year,” Gao said on June 4. “Some of the smaller producers have brought forward their planned maintenance to help alleviate cost pressures and reduce the inventories they have on hand.” Zinc on the Shanghai Futures Exchange has lost 35 percent this year, tumbling to as low as 13,900 yuan a ton today, while the London Metal Exchange contract has shed 37 percent to $1,610 a ton, the worst base-metal performer. Stockpiles in warehouses monitored by the Shanghai exchange stood at 295,454 tons last week, the highest level since futures started trading in 2007. “Prices are falling because consumption, which grew more than 10 percent to 4.2 million tons last year, has been weak,” Gao said. Property sales in Beijing, Shanghai and Shenzhen dropped as much as 70 percent in May as developers delayed offerings after government tightening measures, the Shanghai Securities News said June 1. Chinese authorities have boosted banks’ reserve requirements three times this year and introduced real-estate curbs to cool lending and speculation. China’s imports of refined zinc shipments dropped 71 percent in the first four months of this year compared with the same period last year, according to customs data. Shipments last year, buoyed by the country’s $586 billion stimulus program, rose to 670,182 tons, three and a half times more than 2008.
• Oil Tumbles Most in 4 Months on U.S. Jobs Data, Euro. Crude oil tumbled the most in four months after a government report showed that the U.S. added fewer jobs than forecast last month, bolstering concern that the economic recovery will slow.“The oil market didn’t like the employment numbers,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “There’s been a change in the perception of how solid the rebound is.”
• Foxconn to Double China Factory-Worker Salaries by October After Suicides. Foxconn Technology Group, manufacturer of Apple Inc.(AAPL) iPhones and Hewlett-Packard Co. computers, said for the second time in less than a week that it will raise employee wages, more than doubling base salaries at its Shenzhen factories within four months, after being criticized for contributing to worker suicides. Foxconn will boost monthly pay for most plant workers to 2,000 yuan ($293) from 1,200 yuan effective Oct. 1, the Taipei- based company said in an e-mailed statement late yesterday. Foxconn, also known as Hon Hai Group, on June 2 raised base pay from 900 yuan, effective immediately. Foxconn was criticized by labor groups for putting profit ahead of employee welfare after at least 10 workers committed suicide this year, prompting Chairman Terry Gou to open factories to the media and apologize. Apple Chief Executive Steve Jobs last week said the suicides were “very troubling” and said his company is “all over” Foxconn to resolve the issue. “The pay rise is even more than we would have expected, it’s crazy,” said Calvin Huang, who rates Foxconn’s Taipei- listed flagship Hon Hai Precision Industry Co. “buy” at Daiwa Securities Group in Taipei. “Their clients must be required to absorb this too.”
• Agricultural, Communications Share Sales May Miss Target on Market Slump. Agricultural Bank of China Ltd. and Bank of Communications Co. may raise less than estimated in share sales after a slump in stock markets, underscoring the challenges of replenishing capital depleted by record lending. Agricultural Bank will sell a 15 percent stake in an initial public offer, according to a prospectus published June 4. The lender will likely raise no more than $22 billion, Haitong Securities Co. estimated, less than the $30 billion local media had reported.
• Wage Increases in China to Damp Capital Spending, BofA Merrill Lynch Says. Investors should sell shares of Chinese cement and metal companies as increases in labor costs will curb capital spending in those industries, according to BofA Merrill Lynch Global Research. “We believe the market may have underestimated the negative impact on corporate’s capex desire, and thus overall investment in China,” Merrill Lynch strategists led by David Cui wrote in a report obtained today. “Investors should continue to sell investment-led sectors, particularly cement and non-ferrous producers.” Seven Chinese provinces raised minimum wages in the first quarter after halting them last year amid the global recession, according to the Labor Ministry. Higher salaries may deter foreign investment in China, which has been a low-cost manufacturing base for companies such as Honda Motor Co. The Japanese automaker raised the pay at its Chinese parts factory by 24 percent after a walk out forced it to stop production. The government must address the decline in workers’ wages as a proportion of gross national product because the country can no longer afford to rely on cheap labor to continue to drive economic growth, the China Daily said in an editorial on May 31.

Wall Street Journal:

• Smartphone Shipments Likely to Double. Global smartphone shipments will likely more than double in the next four years, signaling dramatic potential growth for market leaders such as Apple Inc.'s(AAPL) iPhone, according to data expected to be released by market tracker iSuppli Corp. early next week.
• Drilling Moratorium Reverberates Throughout Industry. From small wildcatters to oil-services giants, the petroleum industry is bracing for bad times now that the Obama administration has put a six-month moratorium on deepwater oil exploration in the wake of the Gulf of Mexico disaster. BP PLC's failure to plug the mile-deep well that has been leaking oil since April is sending shudders down the spines of industry leaders who previously considered offshore exploration to be one of the last lucrative frontiers in the domestic oil business. BP and other companies involved in the well, such as drilling contractor Transocean Ltd., have already seen their shares battered by the prolonged spill. Three credit-rating firms have also downgraded the debt of BP, which made progress over the weekend siphoning oil from the leaking well. Now, the repercussions of the Deepwater Horizon accident are spreading broadly through the industry. Analysts at J.P. Morgan Chase & Co. said that drilling companies are facing pressure to lower their rates. Companies that operate oil-service fleets are fighting efforts to cancel their contracts. Several companies, including Anadarko Petroleum Corp. and Hornbeck Offshore Services Inc., said Thursday they were trying to shift some capital and operations out of the Gulf. "An awful lot of innocent people are having their livelihoods severely impacted," said Lee Hunt, president of the International Association of Drilling Contractors, who has estimated the moratorium could lead to the loss of as many as 40,000 U.S. jobs by summer's end.
• HHS Warns Medicare Insurers on Rates. A fresh fight between insurance companies and the Obama administration is taking shape, this time over how much seniors should pay for their privately run Medicare plans next year. On Monday, insurers that sell Medicare Advantage plans must submit their 2011 bids to the government. In a letter to four insurance-industry executives, Health and Human Services Secretary Kathleen Sebelius warned the companies not to increase premiums and co-payments for seniors.
• Two New Jersey Men Charged in Terror Case. Two New Jersey men were arrested at John F. Kennedy International Airport as they were allegedly trying to board separate flights to Egypt on their way to join the terrorist group Al Shabaab and wage "violent jihad" against people outside the U.S., prosecutors said Sunday. Mohamed Mahmood Alessa, 20 years old, of North Bergen, N.J. and Carlos Eduardo Almonte, 24, of Elmwood Park, N.J., were charged with conspiring to kill, maim and kidnap outside of the U.S., according to the U.S. Attorney's office in Newark, N.J. They face up to life in prison if convicted of the charge.
• Advances Come in War on Cancer.
• Tax Hikes and the 2011 Economic Collapse by Arthur Laffer. Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market. People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies. It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives. Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter. On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts. Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Bloomberg Businessweek:

• Merkel Says Recovery Can't Trump Cutting of Budget Deficits. German Chancellor Angela Merkel said economic growth can’t come at the expense of reductions in budget deficits, hinting at differences with the U.S. over the pace of paring public spending. The German government “believes we must not achieve growth at the expense of high deficits,” Merkel told a news conference. Treasury Secretary Timothy Geithner, who attended a meeting of G-20 finance chiefs in South Korea that ended today, called on Japan and European countries such as Germany to boost domestic demand to complement the U.S. “shift towards higher savings.”

Marketwatch.com:

• Do Bank-Reform Bills Prepare Us for the Next Financial Crisis? Observers discouraged about 'too big to fail' bill approved by the Senate. The Senate has approved the most significant expansion of the regulations governing U.S. financial firms since the Great Depression, yet as the rules inch closer to becoming law, legislative observers worry that the major changes won't be enough to ward off a future economic crisis. "Big banks will have every advantage in the credit market to get bigger and riskier if this bill passes, and we won't have solved 'too big to fail," said Simon Johnson, Massachusetts Institute of Technology Sloan School of Management professor and former International Monetary Fund economic counselor. "In many ways, you've moved a huge step closer to becoming Greece." Johnson argues that the only real way to limit future crises is to break up the big banks so no bank failure can cause collateral damage to the markets.

IBD:

• Wal-Mart(WMT) Contract Could Spell Influx of Students for Online School. On Thursday, Wal-Mart and APU parent American Public Education (APEI) announced a partnership allowing Wal-Mart workers special access to APU's all-Web degree programs.

NY Times:

• Debtors' Prism: Who Has Europe's Loans? IT’S a $2.6 trillion mystery. That’s the amount that foreign banks and other financial companies have lent to public and private institutions in Greece, Spain and Portugal, three countries so mired in economic troubles that analysts and investors assume that a significant portion of that mountain of debt may never be repaid. The problem is, alas, that no one — not investors, not regulators, not even bankers themselves — knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe’s already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks — which appear to hold more than half of that $2.6 trillion in debt — nearly stopped lending money to one another. Now, with government resources strained and confidence in European economies eroding, some analysts say the Continent’s banks have to come clean with a transparent and rigorous accounting of their woes. Until then, they say, nobody will be able to wrestle effectively with Europe’s mounting problems. “The marketplace knows very little about where the real risks are parked,” says Nicolas Véron, an economist at Bruegel, a research organization in Brussels. “That is exactly the problem. As long as there is no semblance of clarity, trust will not return to the banking system.”

Business Insider:

• Property Prices and Volume Plunge for Industry Leader China Vanke. The largest property developer in China, China Vanke, has confirmed the recent trend of falling property prices and transaction volumes which has recently been seen from industry reports. Vanke's transaction volume fell 32.6% year over year in May, while transaction value dropped 20.2% year over year. Capital Vue:
• The Other Scary Jobs Chart: The Mass Exodus From the Workforce.
  

Zero Hedge:

• North Korea Parliament to Hold Rare Second Annual Session Monday, Major Announcement Expected.

Fox News:

• Moore Capital's Main Fund Hit Hard In May. Moore Capital's main hedge fund had a tough month in May, according to investors. The Moore Global Investment fund lost over 9% last month through May 27. That left the fund down more than 6% year to date.
• Paulson & Co.'s Main Funds Lost Over 4% In May.
  

The Washington Independent:

• Republican Opens Investigation into Hedge Fund and Advocacy Group. In April, the multibillion-dollar hedge fund Paulson & Co. was cited in a blockbuster Securities and Exchange Commission civil fraud suit against Wall Street investment bank Goldman Sachs. The SEC complaint alleged that Paulson helped build investment vehicles predicated on rising real-estate prices — and then bet against them, making more than $1 billion on the collapse of the subprime market and the nationwide housing market decline. Now, Rep. Darrell Issa (R-Calif.), the ranking Republican on the House Oversight Committee, has opened an investigation into whether Paulson did much the same — blowing up the subprime bubble while standing to reap hundreds of millions when it burst — via a large donation to a nonprofit group. In a May 26 letter to John Paulson, the head of Paulson & Co., Issa asks for documents relating to the firm’s $15 million July 2007 donation to the Center for Responsible Lending, an advocacy group that runs community banks to provide loans to low-income Americans, lobbies for stronger consumer protections on Capitol Hill and offers legal aid to victims of predatory lending, among other activities. The Issa letter implies that Paulson donated to the CRL to stoke the housing bubble and thereby increase its returns.

Miami Herald:

• Big Increase in Mortgage Foreclosures Predicted for This Year. Real estate experts predicted this week that 3.5 million homes nationally will go into foreclosure this year as risky adjustable-rate mortgages written in 2005 reset and unemployment continues. That's up from 2.8 million homeowners who faced foreclosure in 2009, and sets a pace that isn't likely to plateau until late 2011, said RealtyTrac Senior Vice President Rick Sharga. ``The second wave of toxic loans is about to hit,'' said Sharga, whose Irvine, Calif.-based company tracks foreclosure filings. Sharga's panel of speakers, which included a Bank of America representative and Arizona-based mortgage modification executive, painted a bleak picture for anyone who thought the worst of the real estate meltdown is over. Not only will unemployment and rate resets drive foreclosures, but the panel said more people may decide that strategic defaults are ``hip.'' About 44.3 percent of homes in Palm Beach, Broward and Miami-Dade counties are underwater, according to a report released last month by real estate analysis firm Zillow. At the same time, the Mortgage Bankers Association reports that one in five Florida homeowners are either seriously behind on a mortgage payment or in foreclosure -- ranking Florida No. 1 for failed or seriously delinquent home loans. Starting this year or next, a new class of Floridians is expected to face foreclosure, said Brad Hunter, chief economist of MetroStudy in Palm Beach Gardens. The first wave of foreclosures disproportionately hit lower-income borrowers who bought into mortgages they could not afford. ``The new story is going to become it's no longer people from the lower echelon of society that are having trouble keeping up with their adjustable-rate mortgages. It's now people who might have prime mortgages that are middle class or upper middle class or even upper class members of society who are having trouble paying their mortgages,'' Hunter said. Adding to the problem, Hunter points to something called a negatively amortizing loan, in which the payment goes up rather than down each month. Such loans allowed borrowers to pay a fraction of the interest they owed each month until the loans recast and monthly payments easily doubled. Florida is home to $97.5 billion worth of those option adjustable-rate mortgages, Hunter said. Another issue that will continue to mar a real estate recovery is the hundreds of thousands of bank-owned properties that have yet to hit the market. Sharga estimated that just 300,000 of 800,000 bank-owned homes nationally are listed for sale. The unlisted properties are the ``shadow market'' that analysts have been warning could drag down prices. ``Last year, banks slowed down auctions to manage inventory,'' said Sharga, who added that short sales -- where the bank agrees to accept less than what the house is worth -- will help reduce shadow inventory. But, he warned, they won't be enough to solve the ``foreclosure problem.'' ``Bank owned properties will stay at high levels through 2013,'' Sharga said.

iMarketNews.com:

• Germany High Court Mulls Interim Order Against Euro Aid: Press. The German Constitutional Court is weighing the possibility of imposing an interim order against Germany's participation in the E750 billion EU/IMF fiscal rescue package, German weekly Der Spiegel reported Sunday. The magazine cited a letter from the President of the Constitutional Court, Andreas Vosskuhle, to, amongst others, the German government, the European Central Bank and the Bundesbank. The case involves a lawsuit filed against the rescue package by Peter Gauweiler, a lawmaker from Chancellor Angela Merkel's center-right CDU/CSU bloc. An interim order by the court could temporarily forbid the German government from mobilizing the loan guarantees proposed under the EU package, Der Spiegel said. Germany's share of the EU measures amounts to up to E148 billion in guarantees. According to the magazine, the German government in a statement to the Constitutional Court has warned that an interim order could lead to "a self-fulfilling expectation of a default" by fiscally ailing EU member states. Moreover, the government remarked that the EU rescue package "is not a legally binding agreement under international law but only a political declaration of intent." In addition to Gauweiler's lawsuit, three others have been filed at the Constitutional Court against the rescue package. Another lawsuit is to be filed next week, the magazine wrote.

Risk.net:

• The Lombard Street Research chairman tells Credit the German economy is far weaker than has been supposed. While the vulnerabilities of Europe’s peripheral economies have been exposed by the sovereign debt crisis, the idea that Germany’s economy remains robust has gone largely unquestioned.

The Philadelphia Inquirer:

• Lawmakers Call for Tough Review of Comcast(CMCSA) Deal. U.S. Rep. Maxine Waters, a Democrat from Los Angeles, has emerged as a deep skeptic of Comcast Corp.'s proposed $30 billion deal for NBC Universal Inc., and about 70 like-minded lawmakers have joined her in calling for more public hearings on the merger.
  

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends).

Politico:

• Allen: Oil 'Siege' May Last into Fall. Coast Guard Adm. Thad Allen said on Sunday that BP was succeeding in capturing more oil from its runaway well in the Gulf of Mexico, but cautioned that efforts to cap and clean up what’s already the largest oil spill in American history would stretch into the fall. “We’re in the middle of a long-term campaign,” Allen, who’s coordinating the federal response, said CBS's “Face the Nation.” “This siege will go on for a long time. We have spread from South Central Louisiana over to Port Saint Joe, Fla. It won't end soon. We need to have our shoulder to the wheel, do everything we can. This is a very, very, very tough problem.” Even if BP succeeds in capping the well this summer, the cleanup and remediation will take many more months, he said. “This will be well into the fall,” Allen said. “This is a siege across the entire Gulf.”

Reuters:

• Israel Rejects International Inquiry Into Lethal Raid. Israel rejected on Sunday a proposal by U.N. Secretary-General Ban ki-Moon for an international investigation into its deadly raid on a Gaza-bound aid ship and said it had the right to launch its own inquiry. "We are rejecting an international commission. We are discussing with the Obama administration a way in which our inquiry will take place," Michael Oren, Israel's ambassador to Washington, said on the U.S. TV program "Fox News Sunday." The U.N. chief had suggested establishing a panel that would be headed by former New Zealand prime minister Geoffrey Palmer and include representatives from Turkey, Israel and the United States, an Israeli official said earlier in Jerusalem.
• Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he is not worried about Hungary or the current level of the euro, citing an interview Juncker gave to TV5 Monde and Radio France Internationale.
• Clinton Warns of Iran "Stunt" Ahead of Latam Visit. U.S. Secretary of State Hillary Clinton warned on Sunday of Iran "stunts" ahead of a visit to Latin America where regional powerhouse Brazil opposes the U.S. drive for new U.N. sanctions over Tehran's nuclear program. Clinton said she fully expected Iran to "pull some stunt" in the coming days to try to divert pressure for sanctions, but predicted this would fail. "I think we'll see something coming up in the next 24 to 48 hours," Clinton told reporters aboard her plane before departing.

Financial Times:

• Goldman(GS) Bet $35M Against California. Goldman Sachs made a $35m bet in the credit derivatives market against California, the biggest such trade in the past few years by Wall Street banks that underwrite the state's bond sales, according to information that the banks provided to the state. California, the biggest issuer of US state debt, earlier this year began an inquiry into the trading of credit default swaps by its six major underwriters, who have earned $215m of commissions on its bond sales since 2007. Bill Lockyer, California's treasurer, wanted to determine if banks selling its bonds were simultaneously booking profits by betting or facilitating bets against the debt. Mr Lockyer also wanted to work out the effect that trading in credit derivatives could have on the perceived risk of default of California and borrowing costs. This is particularly important when US state and local governments have suffered several years of budget deficits and face long-term concern about pension obligations.
• Goldman(GS) Stung by Backlash in China. Public criticism of Goldman Sachs has come to China, where the investment bank has been lambasted in articles in state-controlled media. Parts of the media, apparently emboldened by congressional inquiries and public anger in the west, have openly slated Goldman, arguably the most successful foreign investment bank in China. “Many people believe Goldman Sachs, which goes around the Chinese market slurping gold and sucking silver, may have, using all kinds of deals, created even bigger losses for Chinese companies and investors than it did with its fraudulent actions in the US,” read the opening lines of an article in the China Youth Daily, a state-owned daily newspaper, last week. The article was widely distributed through commercial news portals and the websites of government mouthpiece Xinhua News and the People’s Daily, the Communist Party publication. The reports were highly critical of Goldman for designing and selling oil hedging contracts to state-owned Chinese companies that then lost billions of dollars when oil prices plunged, contrary to Goldman analysts’ predictions, in 2008 and 2009. Probably the most telling assertion in all of the articles is the complaint that Goldman has been too successful in China, that it has made too much money from underwriting initial public offerings, arranging deals and making its own private equity investments. “Many of its domestic competitors and some in the government are very unhappy that they have been doing so well lately.” Chinese business reporters are rarely allowed to criticise powerful state enterprises, but foreign companies are often regarded as fair game.
• Fears Over SEC Derivatives Review. The US Securities and Exchange Commission’s decision to review fund derivative use and defer exemptive applications for some actively managed exchange traded funds has prompted concerns that funds may have to rethink investment strategies. The commission has said it is evaluating the use of derivatives by mutual funds, ETFs and other investment companies to determine if additional protections are necessary, particularly when it comes to leveraged or inverse ETFs. “To the extent you think the reason for this derivatives study is because of the sort of volatile behaviour of leveraged and inverse ETFs over a year ago, the ironic thing is that those very same ETFs have now been granted their virtual monopoly.”

Telegraph:

• Obama Loses the Left: Suddenly, It's Cool to Bash Barack. Europe still worships him and Washington's Obamatrons remain smitten, but former supporters are turning on the President, writes Toby Harnden.
• Euro 'Will be Dead in Five Years'. The euro will have broken up before the end of this Parliamentary term, according to the bulk of economists taking part in a wide-ranging economic survey for The Sunday Telegraph. The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election. The findings underline suspicions that the new Chancellor, George Osborne, will have to firefight a full-blown crisis in Britain's biggest trading partner in his first years in office. Of the 25 leading City economists who took part in the Telegraph survey, 12 predicted that the euro would not survive in its current form this Parliamentary term, compared with eight who suspected it would. Five declared themselves undecided. The finding is only one of a number of remarkable conclusions, including that:

TimesOnline:

• Cameron: 'Years of pain ahead'. DAVID CAMERON has warned that the UK economy is in a far worse state than previously thought and signalled that Britain faces years of “pain” as the spending axe falls. The prime minister indicated a sharp downgrade in official growth forecasts and revealed that welfare and public sector pay would bear the brunt of budget cuts. It is understood that tough measures being considered to help control the £156 billion budget deficit include benefit freezes and cuts in child tax credits. There are also likely to be below-inflation pay rises for state employees on top of next year’s planned freeze. In an interview with The Sunday Times, Cameron said: “Proper statesmanship is taking the right action, explaining to people the purpose behind the pain.” The prime minister said there would be no “trampoline recovery” of the economy. He warned there was a “serious problem” with forecasts inherited from Labour of robust 3% growth next year. “There is a huge amount of debt that has got to be dealt with. Crossing our fingers, waiting for growth and hoping it will go away is simply not an answer,” he said. “The country has got an overdraft. The interest on that overdraft is swallowing up things that the nation should otherwise be spending money on. We have got to take people with us on this difficult journey.”
• BP(BP) Faces Ban on Future American Operations. AMERICAN legislators are examining plans to “debar” BP from government contracts and oil exploration deals as punishment for the Gulf of Mexico oil spill. The proposal comes amid frantic attempts by the Obama administration to quell public anger over the British company’s role in the worst oil spill in the country’s history. The administration is understood to be weighing the legality of a process called debarment. It would stop BP from being awarded new fuel supply contracts by government clients and ban it from being granted new oil drilling leases.
• City Watchdog Fears Euro Disaster. Financial Services Authority probes banks' exposure to the eurozone as sovereign default concerns grow. THE City watchdog is stress-testing Britain’s biggest banks over fears they could be hit by the growing financial problems of the eurozone. A “risk map” of Europe has been drawn up by senior officials at the Financial Services Authority, examining potential problems on a country by country basis. Banks have been asked to model a number of disaster scenarios, including Greece defaulting on its loans. Analysts estimate that British banks have a total exposure of more than £100 billion to Greece, Portugal and Spain alone. Disclosure of the stress tests underlines how serious financial regulators think the eurozone crisis could become. On Friday, Hungary became the latest country to spread fear across Europe when the new government warned that its predecessor had “falsified data” about the country’s public finances. Although Hungary is not part of the single currency, banks across Europe would be hit by any sovereign crisis. Traders have begun to raise concerns about the health of other countries, including Belgium. A research note from Capital Economics, the analyst, last week warned it could become the “Greece of the north” thanks to “persisting weaknesses in the banking sector and a renewed bout of political instability”. Fears for Ireland’s financial stability also re-emerged after the minister of finance said that the country’s banks had to refinance more than €74 billion of debt by October 1. The sum is equivalent to more than half Ireland’s annual economic output.
• Dubai's Debt-Laden Private Equity Group Faces Closure. Dubai’s ambitious attempts to build an overseas investment empire to rival Europe’s biggest private equity firms could soon come to an embarrassing end. Dubai International Capital (DIC), the international investment arm of the Dubai government that once tried to buy Liverpool football club, could be forced to wind itself up.
  

The Guardian:

• Gaza Blockade: Iran Offers Escort to Next Aid Convoy. Iran has warned that it could send Revolutionary Guard naval units to escort humanitarian aid convoys seeking to break the Israeli blockade of Gaza – a move that would certainly be challenged by Israel. Any such Iranian involvement, raised today by an aide to the supreme leader, Ayatollah Ali Khamenei, would constitute a serious escalation of already high tensions with Israel, which accuses Tehran of seeking to build a nuclear weapon and of backing Hamas, the Islamist movement that controls Gaza.

Irish Times:

• Ireland will next week publish two reports into the country's banking crisis, citing the government's schedule of events.

WirtschaftsWoche:`

• The rescue package for some European countries will result in slower economic growth in Germany, citing comments by Hans-Werner Sinn, president of Germany's Ifo economic institute. That's because investments that otherwise would have been made in Germany will move to countries enjoying a higher credit quality through loan guarantees, the report said.
• German electricity customers will pay at least $120 billion in higher bills until 2020 if the German government stands by energy laws subsidizing renewable energy such as wind and solar power, citing a study it asked RWI economic institute to conduct.
  

Deutsche Presse-Agentur:

• Germany plans to cut at least 10,000 public sector jobs by 2014 and will reduce the compensation for civil servants. A program of eight measures to reduce government spending by $12 billion annually for the years to come also prohibits raising existing subsidies, granting new subsidies and will charge power plant operators 2.3 billion euros a year to compensate for additional profit generated by allowing nuclear power plants longer run times.

Der Spiegel:

• The Flip Side of China's Economic Miracle. German businessman Mohammad-Reza Mouazzen wanted to expand his heavy equipment company into China. But it didn't take long before he realized that the country's economic miracle has a dark underbelly.

Bild Zeitung:

• The German Cabinet wants to cut the budget deficit in the three years through 2013 by almost $36 billion. As of yesterday afternoon, the government had agreed on where to make more than half of the reductions.

AWD Holding AG:

• A majority of Germans believes the euro currently is not a stable currency overall, and foresee inflation eroding purchasing power, citing a poll conducted for the financial services broker by Forsa, a polling company. Out of 1,003 Germans asked, 64% said they do not believe the euro is a stable currency overall, and 71% said they believe their currency will lose purchasing power next year because of inflation, AWD said. Fifty-six percent said they disagreed with Germany providing more than $120 billion in loan guarantees for economically weaker euro-zone member states, AWD said, citing the poll.
  

South China Morning Post:

• South Korea may deploy Patriot anti-missile batteries after North Korea sank one of its warships. China has warned against the move, yet the plan could go ahead once military policy and budget reviews are completed later this year, citing senior South Korean officials.

Xinhua:

• Trade unions at companies should step up efforts safeguarding workers' rights and push forward group discussions on increasing compensation for workers, citing a notice issued by the All China Federation of Trade Unions.

Al Masry Al Youm:

• Egypt's central bank has lowered the portion of euro in its foreign currency reserves over the past six months, citing a person close to the central bank.

Weekend Recommendations
Barron's:

• Made positive comments on (TXN), (FBN), (NEM), (RGLD), (GOLD) and (ACOM).
• Made negative comments on (CAB).

Citigroup:

• Upgraded (NILE) to Buy, target $58.

Night Trading

• Asian indices are -3.0% to -2.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 148.5 +13.5 basis points.
• S&P 500 futures -.71%.
• NASDAQ 100 futures -.71%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ALTR)/.52

Economic Releases
3:00 pm EST

• Consumer Credit for April is estimated to fall to -$2.0B versus $2.0B in March.
  

Upcoming Splits

• (ESRX) 2-for-1
• (GIS) 2-for-1
• (DHR) 2-for-1
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Plosser speaking, Fed's Yellen speaking, (MDT) analyst meeting, Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference, RBC Energy/Power Conference, (NKTR) investor breakfast and the (AMGN) investor reception could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the week.