Tuesday Watch

Evening Headlines

Bloomberg:

• Moody's to Place U.K. Banks on Review for Downgrade, Sky Reports. Moody’s Investors Service is to place 14 of the 18 British banks and building societies it covers on review for downgrade, Sky News reported, citing people close to Moody’s. The agency will make the announcement today and more than one of the big four U.K. banks will be placed on review, including Lloyds Banking Group Plc (LLOY), Sky said. Tim Osborne, a Sydney-based Moody’s spokesman, declined to comment when contacted by telephone by Bloomberg News.
• Chinese Stocks Not at Bottom: ICBC Credit Suisse. China’s benchmark stock index may extend declines after erasing all of its gains for 2011 yesterday as higher interest rates slow economic growth without cooling inflation, ICBC Credit Suisse Asset Management Co. said. “We remain cautious in the near term and we haven’t seen the bottom yet,” said Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse Asset, which oversees $8.7 billion. “The economy’s definitely slowing but we’ve yet to see inflation easing. Although a short-term bounce is possible, it’s not the time for bottom fishing. We need to see a clearer policy signal.” The risk of a “hard landing” in China is rising as property sales weaken and construction slows due to weaker demand, JPMorgan Chase & Co. said on May 17.
• Goldman(GS) Won't 'Rule Out' 5-10% Drop for Chinese Stocks. Goldman Sachs Group Inc. (GS) said it wouldn’t “rule out” a further decline of up to 10 percent for Chinese stocks as growth in the world’s second-biggest economy slows and inflation accelerates. The U.S. bank cut its forecasts for China’s gross domestic product growth for this year and next to 9.4 percent and 9.2 percent respectively, while raising its inflation forecasts to 4.7 percent and 3 percent, without specifying its previous projections. Goldman Sachs also lowered its end-2011 target for the Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, to 14,500 from 16,500 amid “policy intervention” and higher oil prices. “We would not rule out a correction of up to 5 percent to 10 percent near term, triggered by earnings per-share cuts, but would buy on such dips given low earnings risks, valuation, likely policy inflection,” Goldman Sachs analysts led by Helen Zhu and Timothy Moe said in a report today. It expects inflation to peak in June and forecasts “normalization of policy sometime in the third quarter in 2011,” according to the report. Goldman Sachs downgraded Chinese steel, aluminum and industrial stocks to “underweight” from “neutral,” while keeping property and bank shares as top picks.
• Savers Lose as Yields on Long-Term CDs Fall Below Inflation Rate. Savers who put their cash in longer- term certificates of deposit are losing out to inflation, according to Market Rates Insight. The annual inflation rate of 3.16 percent in April topped the best 5-year CD rate of 2.4 percent, according to San Anselmo, California-based Market Rates Insight in a report today. Inflation was 2.11 percent in February, surpassing the long-term CD rate of 2.10 percent for the first time since October 2008, Market Rates said. “Right now, people are more concerned about the return of their deposits rather than a return on their deposits,” Dan Geller, executive vice president for Market Rates, a financial data and research company, said in a telephone interview. “People are looking for this one island of safety and security, and insured deposits provides it,” he said.
  
• Nymex Trader Says Oil Prices Have Gone 'Just Nuts,' Blames Goldman(GS): Books. His argument, brutally compacted, goes like this: Oil today is overpriced, driven ever higher by the new flow of money funneled through investment banks, energy hedge funds and exchange-traded and index funds. Feeding the frenzy are bets from the same kind of American investors who moan about paying almost $4 a gallon to fill up their SUVs. This new dynamic has led to wild fluctuations, Dicker says. Remember how oil surged in 2008 to more than $145 a barrel in July, only to plunge to less than $34 by late December? “Nothing proved a speculative bubble more convincingly than the rapid price collapse we saw then,” he writes. Can this be fixed? Yes, says Dicker, though his solution would mean forbidding most individuals from trading oil (and handing some clout back to pros such as himself). If he had his way, commodity index investing would be banned, along with exchange-traded funds that engage in futures.
• Tepco Confirms Meltdown of 2 More Reactors. Tokyo Electric Power Co. confirmed a meltdown of fuel rods in two more reactors at its Fukushima nuclear plant, which has been emitting radiation since an earthquake and tsunami knocked out power and cooling systems. Fuel rods in the No. 3 unit started melting on March 13 and those in the No. 2 reactor on March 14, Junichi Matsumoto, a spokesman at the company known as Tepco, told reporters in Tokyo today. The fuel dropped to the bottom of the pressure vessel after melting although the damage to the vessel is “limited,” he said. Tepco raised the possibility of more extensive damage than assumed at the reactors when it announced last week, more than two months after the disaster, that fuel rods in the No. 1 reactor had melted within 16 hours of the quake on March 11. Tepco’s analysis is catching up with U.S. assessments in early days of the crisis that indicated damage to the station was more severe than Japan officials suggested.

Wall Street Journal:

• Shattered Missouri City Digs Out. Rescuers Search for Survivors Door-to-Door After Storm Leaves at Least 116 Dead and Destroys 2,000 Buildings in Joplin.
• SEC Deepens Probe of Forex Trading. Regulators Are Examining How State Street and BNY Mellon Characterized Transactions to Clients.
• Palestinian Statehood Vote Looms Over U.S.-Israel Rift. Though Israeli Prime Minister Benjamin Netanyahu publicly clashed with President Barack Obama on Friday, the Israeli leader still needs American help on a looming test: a proposed United Nations vote on a resolution to recognize Palestinian statehood. The vote at September's U.N. General Assembly would be mostly symbolic, and carry little legal weight. But passage—which is expected if the resolution proceeds to a vote—would be a very visible show of Israel's isolation on the international stage. It could also undercut the dormant Israeli-Palestinian peace process—a focus of Mr. Obama's foreign policy—by removing the promise of statehood as a motivating force. And it would give the Palestinians more leverage if talks do resume.
• For Global Steel Industry, China Poses Guessing Game. China is the world's largest market for steel. Yet the country's flawed statistics system presents a problem for steelmakers: No one knows exactly how much steel China produces or consumes.
• An Anti-Israel President. The president's peace proposal is a formula for war.
  

MarketWatch:

• More Hedge Funds Lured to New Source of Capital. Managers in the $2 trillion hedge fund industry increasingly are tapping a source of money known as first-loss capital as they compete to raise assets and make their businesses more sustainable.

CNBC:

• Dennis Gartman: Germany to Tell EU 'We're Out!' If you’re watching developments in Greece, Italy, Portugal or the other PIIGS of Europe, you may be distracted from the real story. According to strategic investor Dennis Gartman, most investors are betting which of the troubled nations gets kicked out of the EU first. But he says, don’t be surprised if Germany just packs its bags and walks away. “I think what ends up happening is that Germany says we’re out. We’ve had enough.” Gartman’s thesis is quite simple. He thinks Germany is tired of paying everybody’s bills.

Business Insider:

• Suddenly, The World is Realizing That There's a Possible Revolution in Spain. It's sinking in that something big is happening in Spain, where the youth -- angry about high unemployment and public corruption -- have recreated Tahrir Square across 60 countries. Today TIME magazine asks if the "revolution" has come to Spain. Much of the content will be familiar to readers: Huge protests, economic stagnation, political upheaval, and so on. The key development here is that everyone is seeing that this is a big deal. And of course, the market has noticed. One more bad day, and it's brand new records on 10-year yields.
• Richard Koo on China: There Will Be Blood. (video)
• Niall Ferguson: The Eurozone Has Become a Government Killing Machine. (video)
  

Zero Hedge:

• Latest Chinese Fraud May Cost Maverick Capital Nearly $200 Million.
• Weekly Insider Selling to Buying Ratio: 60x.
• Well That Was Quick: Goldman(GS) Goes Long Crude, Raises 12 Month Brent Forecast to $130/bbl.
  

IBD:

• Lululemon(LULU) Inventory Too Thin To Meet Hefty Demand.

NY Times:

• How An Inquiry of Goldman Sachs(GS) Might Play Out.

CNN Money:

• Euro Contagion Fears Hit Spain and Italy. The euro and the Spanish and Italian bond markets came under pressure on Monday amid growing investor fears that the problems of Greece are hitting the bigger economies of Europe's single currency. The euro fell to record lows against the Swiss franc and two-month lows against the dollar, while Spain's cost of borrowing for 10-year debt rose to highs last seen in September 2000. Italian 10-year bond yields also jumped. Worries over contagion spread to Europe's equity markets, with stocks in Italy the biggest fallers down 3.3 per cent.

NBC:

• Ex-IMF Chief's DNA Found on Maid's Shirt: Sources. A DNA sample taken from Dominique Strauss-Kahn, the former IMF chief accused of sexually assaulting a hotel maid, has been matched to material found on the maid's shirt, sources familiar with the case tell NBC New York.

Reuters:

• NY Fed to Slow Mortgage Bond Sales From Maiden Lane. The Federal Reserve Bank of New York will slow the sales of mortgage-backed securities from its Maiden Lane II portfolio, in part because some transactions in recent weeks have pushed prices lower, said a dealer.
• Financial Regulation Reform Risks Overkill in Emerging Markets.
  

Xinhua:

• The Chinese credit rating company Dagong Global Credit Rating Co. downgraded the U.K.'s local and foreign currency long-term credit rating to A+, from AA-, with an outlook of "negative," citing the company.

Caijing Magazine:

• China's target to control consumer price increases within 4% is a "mission impossible", Wang Jun, a researcher from the China Center for International Economic Exchanges wrote. The country's consumer prices are "very likely" to rise more than 5% this year, Wang wrote.

Financial News:

• Recent rises in pork prices will likely push up China's inflation in May, a People's Bank of China publication. Each 20% increase in the price of pork will likely contribute .6 percentage points to the consumer price index, citing Li Mingliang, an analyst with Haitong Securities Co. The total effect may be about 1 percentage point if the influence of pork prices on other food products is taken into account, Li said.

Securities Times:

• China's central bank may suspend a sale of three-year notes this week and increase banks' reserve requirement ratios, citing one market opinion. Another opinion believes a suspension may also indicate the People's Bank of China is expected a slowdown in growth.

China Daily:

• China should refrain from "excessive" intervention in prices to manage inflation as controls might distort prices and eliminate the role of the market, Zhang Xiaojing, a researcher under the Chinese Academy of Social Sciences, wrote in a commentary. China should cool the economy by curbing "enthusiasm" for investment by local government, Zhang wrote. It should also continue to reduce the scale of lending, which spiked during the stimulus package following the financial crisis, Zhang said.

National Bureau of Statistics:

• Some vegetable prices in China rose as much as 16.4% in the 10 days from May 11 to May 20, compared with the first 10 days of the month.

Evening Recommendations
Citigroup:

• Reiterated Buy on (TECD), target $63.

Night Trading

• Asian equity indices are -.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 111.0 +3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 116.0 +3.0 basis points.
  
• S&P 500 futures +.18%.
  
• NASDAQ 100 futures +.16%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DSW)/.75
• (AZO)/4.97
• (MDT)/.93
• (CPWR)/.15
• (PSS)/.81
• (CBRL)/.66
• (AMAT)/.37

Economic Releases
10:00 am EST

• New Home Sales for April are estimated at 300K versus 300K in March.
• Richmond Fed Manufacturing for May is estimated to fall to 9.0 versus a reading of 10.0 in April.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Rosengren speaking, Fed's Duke speaking, Fed's Hoenig speaking, Fed's Bullard speaking, weekly retail sales reports, 2-Year Treasury Notes auction, Stephens Investment Conference, Stephens Investment Conference, Stifel Nicolaus Cleantech Conference, Wells Fargo Consumer/Gaming/Lodging Conference, Barclays Communications/Media/Technology Conference, UBS Specialty Pharma Conference, CSFB Industrial/Environmental Services, Citigroup Consumer Conference, JPMorgan Homebuilding/Building Products Conference, Goldman Sachs Basic Materials Conference, (FLEX) analyst day, (CKSW) investor day, (EP) analyst meeting and the (BA) investor conference could also impact trading today.
  

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