Friday Watch

Evening Headlines
Bloomberg:

• Santander, BBVA Among Spanish Banks Downgraded by Moody’s. Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest lenders, were cut three levels by Moody’s Investors Service, which cited a recession and mounting loan losses in downgrading 16 of the nation’s banks. Nine firms were cut three notches and seven were kept on review for further reductions, Moody’s said yesterday in a statement. Santander’s U.K.-based subsidiary also was cut. The moves followed Moody’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt. The main drivers for the Spanish bank downgrades were a surge in soured loans, the recession, restricted funding access and the reduced ability of the government to support lenders as its own creditworthiness diminishes, Moody’s said. “Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness,” the ratings firm said. “The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve” this year.
• Fitch Cuts Greece as Leaders Spar Over Euro Membership. Greece’s credit rating was downgraded one level by Fitch Ratings on concerns the country won’t be able to muster the political support needed to sustain its membership in the euro area as leaders began campaigning ahead of the second national vote in six weeks. Greece was cut to CCC from B-, according to an e-mailed statement late yesterday in London. The country’s ceiling was revised to B-, Fitch said in the statement.
• U.S. Banks Sold More Swaps on European Debt as Risks Rose. U.S. banks increased sales of protection against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the last quarter of 2011 as the European debt crisis escalated. Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds. JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc.(GS), two of the top CDS underwriters in the U.S., say they have bought more protection than they sold, indicating they may benefit from defaults in the region. That outcome is called into question by JPMorgan’s $2 billion loss on similar derivatives, which shows that risks don’t vanish when offsetting bets are taken, said Craig Pirrong, a finance professor at the University of Houston. “All these hedges trade one risk for another,” said Pirrong, whose research focuses on derivatives markets. “The banks say they’re flat on European risk, but that’s based on aggregated positions. We don’t know how those will hold off if the European crisis blows up.” JPMorgan Chairman and Chief Executive Officer Jamie Dimon said last week that the bank was trying to reposition a portfolio of corporate credit derivatives and used a flawed trading strategy. The lender, the largest in the U.S. by assets, is believed to have sold protection on an index of corporate debt and bought protection on the same index to hedge its initial bet, according to market participants who asked not to be identified because their trading strategies aren’t public. The two bets moved in opposite directions this year, causing losses and proving that even hedges that look perfect can break down, Pirrong said.
• Japan Bond Risk Surges To Seven-Month High, Default Swaps Show. The cost of insuring Japanese corporate debt from default surged to the highest in more than seven months, according to traders of credit-default swaps. Asian and Australian bond risk gauges also climbed. The Markit iTraxx Japan index increased 7 basis points to 218.5 basis points as of 9:27 a.m. in Tokyo, according to Citigroup Inc. prices. The benchmark is on course for its highest since Oct. 5, according to data provider CMA. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed 8 basis points to 201.5 as of 8:04 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The index is poised to close at its highest since Jan. 16, CMA prices show. The Markit iTraxx Australia index rose 7 basis points to 202 basis points as of 10:18 a.m. in Sydney, Westpac Banking Corp. prices show. The gauge is set for its highest since Nov. 29, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
• North Korea Seen Restarting Work On Nuclear Reactor. North Korea has restarted construction on a nuclear reactor that is an essential component in building nuclear weapons, according to a U.S. university monitoring project. Commercial satellite imagery from April 30 shows that the Pyongyang government is close to completing a containment building for a new experimental light water reactor, according to a website maintained by Johns Hopkins University’s School of Advanced International Studies based in Washington.
• U.S. Imposes Anti-Dumping Duties on Chinese Solar Imports. The U.S. Commerce Department imposed tariffs of 31 percent to 250 percent on Chinese solar-product imports, siding with companies including SolarWorld AG (SWV) in the U.S. that said the items were sold below the cost of production. The fees, announced today in an e-mailed statement, add to duties as high as 4.73 percent imposed earlier for getting unfair subsidies from China’s government. SolarWorld had asked for levies of more than 100 percent. Aaron Chew, a New York- based analyst at Maxim Group LLC, said before the decision that tariffs higher than 10 percent would be considered a victory for the U.S. companies.
• Facebook(FB) Poses Biggest Test Of Rule Curbing Market Orders. Facebook Inc. (FB)’s initial public offering will be the biggest test of a rule introduced in 2011 to protect investors and curb volatility on the first day a company trades. The Financial Industry Regulatory Authority reminded more than 4,400 member firms on May 15 that they shouldn’t accept buy requests known as market orders until trading begins. Such transactions are authorizations to purchase at the best available price, as opposed to limit orders that require investors to specify a minimum or maximum.
• Fed Said to Study How Banks Manage Cash After JPMorgan(JPM) Loss. JPMorgan Chase & Co.'s $2 billion trading loss has prompted the Federal Reserve Bank of New York to examine how banks in its district are managing cash after receiving a flood of deposits since the credit crisis, according to a person familiar with the matter.
• BRIC Bear Market Not Cheap Enough for de Vaulx Finding Zero Buys. The MSCI BRIC (MXBRIC) Index’s slide into a bear market has left equities in the biggest emerging economies trading at the lowest levels since 2009 versus global shares. That’s still not cheap enough for Charles de Vaulx to add a single stock from Brazil, Russia, India or China to his $9.7 billion IVA Worldwide Fund, which beat MSCI’s global gauge by 29 percentage points since its inception in 2008. He’s waiting for further declines of 10 percent to 20 percent before buying.
• High-Yield Debt ETFs Set Markets 'Abuzz' Following Record Trades. The largest trades on record in shares of two exchange-traded funds that invest in junk debt are attracting attention to the four-year-old market that allows anyone from banks to retirees fast and discreet access to speculative-grade bonds and loans. The transactions were completed hours before JPMorgan Chase & Co. disclosed $2 billion of trading losses tied to credit derivatives, an announcement that has heightened awareness of big trades in debt markets.
  
• China Home Prices Fall In More Than Half Cities Tracked. China’s home prices fell in a record 46 of 70 cities tracked by the government in April from a year earlier as officials pledged to keep restrictions on property purchases that have sapped buyer demand. The eastern city of Wenzhou led declines with a 12.3 percent slump in values from a year earlier, while Beijing dropped 1 percent and Shanghai prices declined 1.3 percent, according to data released by the statistics bureau today.
• Shoppers Skipping Pomegranates Show India Rate Dilemma: Economy. Surging food costs offer the most visible sign of India’s inability to contain price pressures, threatening spending in the world’s second-most populous nation. Even as the nation’s benchmark wholesale-price inflation has eased to below 9 percent after breaching that level most of last year, a recently introduced consumer-price gauge shows how little room the central bank has cut to cut interest rates and spur growth. India’s consumer-price index climbed 9.47 percent from a year earlier in March as the cost of egg, vegetables, fish and meat products rose, after an 8.83 percent advance in February. Wholesale-price inflation in April was 7.23 percent, with food prices jumping 10.5 percent.

Wall Street Journal:

• Defiant Message From Greece. The head of Greece's radical left party—throwing down a gauntlet that could increase tensions between Greece and its frustrated European creditors—said he sees little chance Europe will cut off funding to the country but that if it does, Athens will stop paying its debts. A financial collapse in Greece would drag down the rest of the euro zone, said Alexis Tsipras, the 37-year-old head of the Coalition of the Radical Left, known as Syriza, and potentially the country's next prime minister. Instead, he said, Europe must consider a more growth-oriented policy to arrest Greece's spiraling recession.
  
• Groupon(GRPN) Stock Spike Probed. A Wall Street regulator is examining trading in Groupon Inc. that sent its stock price soaring hours before a favorable earnings announcement Monday, according to a person familiar with the matter. The review by the Financial Industry Regulatory Authority, or Finra, is at an early stage, the person said. It follows unusually heavy trading in shares of the online-coupon company in the run-up to its release of strong financial results.
• Groups Sue Again Over Oil Drilling off Alaska. A coalition of environmental and tribal groups filed a challenge Wednesday to a federal air-emissions permit for a Royal Dutch Shell PLC drilling ship, the latest legal maneuver aimed at stopping the oil giant's exploration plan off Alaska's Arctic coast.
• Ross King Retires From Goldman Sachs(GS). Goldman Sachs managing director and chairman of its Financing Group Ross King has retired from the Wall Street bank.
• Key Void at Top for J.P. Morgan(JPM). J.P. Morgan Chase & Co. didn't have a treasurer in place during a five-month period when the bank's Chief Investment Office placed trades that led to more than $2 billion in losses. In addition, the executive put in charge of risk management for the Chief Investment Office in February had little experience in the subject at the time and is the brother-in-law of another top J.P. Morgan executive. Some current and former employees who were stunned by the losses say the staffing decisions may have made it easier for the bad positions to go unchecked.
• Inside JPMorgan;s(JPM) Blunder. J.P. Morgan Chase & Co. Chairman and Chief Executive Officer James Dimon had just committed the most expensive blunder of his 30-year career, failing to detect the risk of trades that had begun to generate huge losses at the bank. On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. "I want to see the positions!" he barked, throwing down the papers, according to attendees. "Now! I want to see everything!"
• The Brains of Hedge-Fund Operations. Of all the elite financial circles, hedge-fund titans may be the most exclusive—and some of the most tight-lipped when it comes to talking to the press. Hedge-fund heavyweights may invest in companies going public more often than they actually go out in public themselves: Indeed, many hedge funders reportedly skipped their own gala in March, a Cipriani Wall Street affair benefiting Hedge Funds Care. So it was with some anticipation that this reporter headed to Tao where a handful of legendary investors gathered to talk up a new deal—that is, a book.

MarketWatch:

• Facebook(FB) IPO Coverage.
• Only Reforms Can Revive China's Growth: Andy Xie.
• Asia Stocks Tumble as Spain Joins List of Fears.
  

Business Insider:

• NEW: Photos From Trayvon Martin Killing Show Zimmerman Bloody And Injured.
• SocGen: This Chinese Indicator Will Predict A Hard Landing.
• BAML's Comprehensive Guide To A Greek Exit, And Its Likely Impact On Markets.
  

Zero Hedge:

• So How Are JPM's(JPM) Prop "Counterparties" Faring?
• One Epic Chinese Bubble - One Chart.
• Everything You Need To Know About Europe's Dilemma In 4 Minutes.
• It's Not Over Yet For JPM(JPM).
  

CNBC:

• Facebook(FB) Prices at $38 With Trading Set to Start Friday.
• A Permanent Precedent. The irritation of the eurozone with Greece is at extreme levels. After all, 80 percent of Greeks say they are in favour of staying in the euro, but then they fail to elect politicians prepared to implement the agreed programme. This drives creditors crazy. Increasingly, the latter are inclined to accept Greek exit, even welcome it.

ABC News:

• FDA Investigating Z-Pak Antibiotic Linked to Heart Risks. The U.S Food and Drug Administration is investigating the antibiotic azithromycin, commonly known as Z-Pak, after a study linked the drug to an increased risk of death. The study, published Wednesday in the New England Journal of Medicine, found patients prescribed Z-Pak were more likely to die than those prescribed amoxicillin, another antibiotic. The results were especially pronounced for those who died of heart attacks, strokes, sudden cardiac death and other cardiovascular causes. Last year, doctors wrote 55.3 million prescriptions for Z-Pak, according to IMS Health.

Reuters:

• Exclusive: U.N. Panel Probes Possible N. Korea Arms Trade With Syria, Myanmar. A U.N. panel of experts that monitors compliance with sanctions on North Korea is investigating reports of possible weapons-related shipments by Pyongyang to Syria and Myanmar, the panel said in a confidential report seen by Reuters on Thursday. "The DPRK (North Korea) continues actively to defy the measures in the (U.N. sanctions) resolutions," the panel said in the report, which it submitted to the U.N. Security Council's North Korea sanctions committee earlier this week.
• JPMorgan(JPM) Unit Has $100 Billion in Securitised Assets, Structured Debt - FT. The unit at the center of JPMorgan Chase & Co's recently revealed $2 billion trading loss has built up more than $100 billion in positions in asset-backed securities and structured products, the Financial Times said on Thursday. The newspaper said this portfolio comprises the "complex, risky bonds at the centre of the financial crisis in 2008", but did not say whether any of the holdings are in unhedged positions. It said the portfolio is separate from holdings in credit derivatives that led to the trading loss by JPMorgan's chief investment office, which has sparked much criticism of the largest U.S. bank and its chief executive, Jamie Dimon. The chief investment office has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralized loan obligations in all markets for three years, the newspaper said, citing more than a dozen senior traders and credit experts. That office's "non-vanilla" portfolio has grown to more than $150 billion, the newspaper said, without citing sources or providing details of the holdings.
• Salesforce(CRM) Ups FY Outlook On Strong Q1, Pipeline. Web-based software maker Salesforce.com Inc raised its full-year outlook after reporting first-quarter results that beat Wall Street forecasts on strong growth across all regions, sending its shares up 7 percent in after-hours trade.
• Option Players Seek Shelter as Risk Gauge Rises. Option investors are seeking protection against a sharp decline in U.S. equities in the near term as uncertainty grows over the European debt crisis and the health of the global economy.
• Autodesk(ADSK) gives weak outlook on Europe worries. Design-software maker Autodesk Inc forecast second-quarter revenue below analysts' estimates citing weakness in Europe, sending its shares down 5 percent after market.
• Equity ETF Outflows Dominate, Bond Funds Gain - Lipper.
  

Financial Times:

• Two Tiers, One Crisis For Spanish Banks. Who is right – the International Monetary Fund or the market? Until a couple of weeks ago, nervous investors had ignored the IMF’s recent assessment that about 70 per cent of Spain’s banks looked essentially healthy and instead had sent all bank shares tumbling by about 40 per cent on the previous year.

Telegraph:

• Are The Germans Destined To Save The Euro? It is an article of faith in Berlin that the single currency must survive, whatever the cost.

The Financial Express:

• Half of corporate India’s forex exposure unhedged, says RBI. The Reserve Bank of India’s (RBI) central board is expected to discuss next week the elevated levels of unhedged foreign currency exposure at private and state-owned companies, which has made them increasingly vulnerable to the sharp depreciation of the rupee. According to data submitted by the Reserve Bank of India (RBI) to the finance ministry, approximately 60% of companies’ non-trade related exposure is unhedged, while the proportion of uncovered exposure for trade loans is lower at 40%. This was the situation at the end of March and since then, the rupee has slipped by more than 11%.

The Economic Times

• India Warns Banks to Avoid Risky Debt Restructuring. The Indian government's finance ministry issued a warning, citing a letter from the corporate restructuring unit. Indian companies facing large debts and cash shortages are looking to rearrange loans.
  

Ming Pao Daily:

• Sotheby's Hong Kong Sales See Fewer China Buyers. Sotheby's Hong Kong spring auction sales fell 30% to $317 million from a year earlier because there were fewer mainland Chinese buyers, citing Kevin Ching, chief executive officer of Sotheby's Asia.

Shanghai Securities News:

• Shanghai stock exchange started a series of measures to curb excessive speculation in new share issues, citing the exchange.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -2.50% to -1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 201.50 +6.5 basis points.
  
• Asia Pacific Sovereign CDS Index 155.50 -2.75 basis points.
  
• FTSE-100 futures -1.30%.
  
• S&P 500 futures -.05%.
  
• NASDAQ 100 futures +.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ANN)/.51
• (BWS)/.09
• (DCI)/.43
• (FL)/.74
• (HIBB)/.92

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The G-8 meeting and the (WIT) Analyst Day could also impact trading today.
  

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