Thursday Watch

Evening Headlines
Bloomberg:

• Spain Underplaying Bank Losses Faces Fate Ireland Couldn’t Avoid. Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system. The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal. “How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.”
• Spanish Banks Erode Creditors With ECB Loans: Mortgages. Spain’s lenders are pledging some of their best assets to raise record levels of secured funding, including from the European Central Bank, eroding creditor safeguards at the same time the government is planning the country’s largest bank bailout. Borrowing from the ECB rose 50 percent in March from the prior month to 227.6 billion euros ($294.3 billion). Bankia Group is among lenders that increased mortgage-backed debt issuance by 35 percent since December 2007 to 535.1 billion euros, or 53 percent of their real-estate loans, according to Spanish Mortgage Association data at the end of 2011. Rodrigo Rato, its chairman, stepped down this week as part of a plan in which the government is willing to inject public funds. Spanish Lenders are increasingly depending on the central bank and secured debt sales to lower funding costs after their return on equity in 2011 was the lowest in more than four decades following the country’s real-estate crash. The ECB provides loans at rates of 1 percent against collateral such as covered bonds and mortgage-backed securities, which would be used to repay the debt in an event of a default, leaving fewer assets available to unsecured creditors, including depositors. “Banks strongly relying on ECB funding and secured bonds are actually subordinating other creditors in the event of a bank insolvency, so recovery levels would be lower” said Helene Heberlein, managing director for covered bonds at Fitch Ratings. “The asset encumbrance is especially worrying from the point of view of banking authorities,” when the “issuers are also deposit-taking institutions.”
• Spain Takes Over Bankia, Readies Second Bailout. Spain said it would take over Bankia (BKIA) SA and prepared to inject public funds into the banking group with the most Spanish real estate as part of government efforts to bolster confidence in the country’s lenders. Spain’s bank bailout fund will convert its 4.5 billion euros ($5.8 billion) of preferred shares in Bankia’s parent company Banco Financiero y de Ahorros, or BFA, into voting shares, the Economy Ministry said in a statement yesterday. The action will give it a controlling stake of 45 percent in Bankia, the ministry said, adding the government will provide the capital that’s “strictly necessary” to clean up the lender.
• China's Latest Reforms Not a Sign of Economic Strength. This year, China has announced a flurry of financial liberalization measures that were perceived by many in the U.S. and Europe as a sign of confidence among Chinese leaders about their economy’s growth prospects. They are defensive steps intended to protect the economy from a coming slowdown and possibly to boost domestic asset prices.
• Iran May Be Erasing Nuclear Work Evidence, Analysts Say. Iran may be erasing evidence of nuclear weapons work at its Parchin military complex southeast of Tehran, according to an analysis of satellite imagery by a Washington-based research institute. Commercial satellite imagery of the Parchin site taken on April 9, compared with a previous image obtained on March 4, shows unidentified items lined up outside a rectangular building and what appears to be water flowing out of the same structure, Paul Brannan, an analyst at the Institute for Science and International Security, said today in a phone interview.
• ICBC Gets Fed Nod as Chinese Banks Seek U.S. Growth. Industrial & Commercial Bank of China (601398) Ltd., the world’s most profitable lender, was approved to operate as a U.S. bank holding company with the purchase of a controlling stake in Bank of East Asia Ltd. (23)’s U.S. unit. The Federal Reserve also granted bank holding company status for ICBC’s government shareholder Central Huijin Investment Ltd. and that company’s parent, sovereign fund China Investment Corp., and applications by Bank of China Ltd. and Agricultural Bank of China Ltd. to open U.S. branches, according to statements posted yesterday on the regulator’s website.
• Euro Diminished in Poll Showing More Than 50% Predicting an Exit. The 17-nation euro area is on the verge of losing one of its members, with more than 50 percent of investors predicting an exit this year as Greece’s election impasse threatens to push the debt crisis to new depths, according to the Bloomberg Global Poll. As Greece faces political paralysis and voters balk at austerity, 57 percent of the 1,253 investors, analysts and traders who are Bloomberg subscribers said at least one country will abandon the euro by year-end and 80 percent expected more pain for Europe’s bond markets. With a majority identifying a deterioration in Europe as a large threat to the world economy, respondents to the May 8 survey were increasingly worried Spain will default and less willing to buy French debt as Francois Hollande takes power.
• Pimco's Gross Cuts Emerging Debt as IMF Sees Slowdown. Bill Gross, who runs the world’s biggest bond fund, cut his holdings of emerging-market debt to a two-year low, selling assets from an area where the International Monetary Fund says growth will slow. Gross reduced the securities to 7 percent of assets in Pacific Investment Management Co.’s Total Return Fund (PTTRX) in April from 10 percent in March, according to Newport Beach, California-based Pimco’s website.
  

Wall Street Journal:

• IMF Drafting New Safeguards For Its Cash, May Limit Euro Lending - Sources. The International Monetary Fund is drafting plans to protect it from potential lending losses, including proposals that could limit the size of loans to euro-zone countries, according to people familiar with the situation. The proposals are being developed as political turnover in troubled countries has renewed concern about a fresh flare-up in Europe's debt crisis. More than a dozen of the world's largest economies joined Europe last month in pledging to boost the IMF's resource base by around $430 billion.
• Spain to Get Room on Deficit Rules. Euro-zone governments are expected to give Spain more leeway to meet its budget-deficit target next year, according to officials involved in the discussions, in a sign they intend to shift away from rigid enforcement of the currency bloc's budget rules. Austerity will still be the guiding principle of European fiscal policies. But the likely Spanish move suggests the rules will be adjusted in some cases to account for the fact that when economies go into recession, their budget deficits usually grow. Officials said the flexibility is unlikely to stop with Spain's politically sensitive deficit target.
• FDIC to Lay Out New Plan for Big Bank Failures. When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC's plan. Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system.
• How a Radical Greek Rescue Plan Fell Short. Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency. After Greece's May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own.
• NYSE Euronext(NYX) Scrutinizing Portfolio In Bid To Cut Costs - COO. NYSE Euronext (NYX) is reviewing a list of about 25 investments and ventures, weighing the sale or closure of several efforts as the transatlantic exchange operator works to cut $250 million in annual costs by 2014.
• MasterCard(MA) Exec: High-End Spending Slowdown A Concern. Growth of consumer spending on luxury items dipped in March and April, a potential "cause for concern" about future economic growth, a MasterCard Inc. (MA) executive said Wednesday. The dip is likely due to rising gasoline prices in the first quarter, a slowdown in travel to the U.S. by European consumers and other factors, Tim Murphy, chief product officer for MasterCard, said during a presentation. "The luxury sector in the last two months has really experienced some down-drafts relative to the overall economy," Murphy said. The luxury category includes things like high-end apparel and travel, though it excludes jewelry. Specifically, spending in the category increased 1.8% and 5.5% year-over-year in April and March, respectively, down from 11.7% in February.
• French Start-Ups Worry About Hollande's. New administrations are times of both optimism and uncertainty, and France's new breed of digital entrepreneurs are watching closely how President-elect François Hollande is going to help them; many are skeptical.
• Clooney Event Taps Big, Small Donors. A dinner at the home of actor George Clooney on Thursday night is expected to raise as much as $15 million for President Barack Obama's re-election, surpassing anything he has raised in a single campaign event since he became a candidate for the office in 2007, according to people familiar with the event. The Obama campaign heavily promoted the Clooney dinner, with Hollywood executive Jeffrey Katzenberg soliciting contributions at $40,000 a head.
• Robert Barro: Stimulus Spending Keeps Failing. The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits.

Barron's:

• (PANL) Drops 18%: Q1 Misses, Samsung Rev Deferred.

MarketWatch:

• China Trade Data Show Surprising Weakness. Chinese trade data showed a sharp drop in activity in April, with both export and import growth falling well short of expectations, raising fresh concerns about the resilience of the Chinese economy amid softening global demand. Exports rose 4.9% in April from a year earlier, while imports rose just 0.3%, official data showed. The results were far below economists’ expectations. A Reuters survey had tipped 11% growth for imports, while a Dow Jones Newswires survey had predicted a 10% rise. For exports, both news services’ surveys had projected an 8.5% gain. China’s trade surplus for April widened to $18.4 billion, up from $5.4 billion in March, but well short of expectations of $10.4 billion in the two surveys.

Business Insider:

• A Wave Of Star Traders Are Dumping Banks For Hedge Funds Over New Cash Bonus Rules.
• The Economic Surprise Index Continues to Fall. (graph)

Zero Hedge:

• 11th Consecutive Outflow From US Equity Mutual Funds Pulls Cash Levels To Record Lows. (graph)
• Europe's Most Parabolic Chart Goes Parabolic-er. (graph)
• "Europe Has Started The Endgame" And Biderman Says "The US Is Next".

CNBC:

• Philip Falcone Voices Concern Over China. Harbinger Capital hedge fund manager Phil Falcone says his view of Europe isn’t entirely dire. “They’re going to have problems,” Falcone said Wednesday at a SALT panel, “but I’m more concerned about how that ripple ... effects, especially China.” China’s recent political dislocations — the most severe since the Tiananmen Square uprising in 1989 — and the fact that the country is dealing with slowing growth and inflation might prove fair bigger issues, he said. You can’t “put Europe in a box,” Falcone said, adding that it’s not a binary scenario in which the continent’s economy either works or it doesn’t.
• Euro Will Have to Be Devalued to Save EU: Siegel. Faced with a stubborn sovereign debt crisis that just won't go away, the European Central Bank will be forced into currency devaluation, Wharton finance professor Jeremy Siegel said.
• Priceline(PCLN) Beats on Earnings; Outlook Falls Short. Online travel agency Priceline reported a big jump in earnings on an increase in travel bookings, but the company predicted a slower pace of bookings growth in the second quarter.
• Cisco(CSCO) Shares Skid as Outlook Disappoints. Cisco Systems shares skidded after the company's outlook fell short of expectations. The networking-gear maker said it expects fiscal fourth-quarter earnings of between 44 and 46 cents a share and revenue growth of 2.5 percent; analysts currently expect earnings of 49 cents a share on revenue growth of 7 percent, according to Thomson Reuters.
• Mobile Growth May Negatively Affect Facebook(FB) Revenue.
• Beyond Greece: EU Banks May Be Next Focus of Markets. So far, Europe’s latest sovereign ills have not spread, but traders are watching the euro zone banks since they would be the first to carry the germs of financial contagion. Following several days of rumors, Spain late Wednesday moved to take state control of its fourth-largest bank, Bankia. The Bank of Spain would hold a 45 percent stake in BFA, the parent of Bankia, which it says is still solvent. The move requires clearance from the EU. This comes as efforts to form a government in Greece among fractured political groups continue to flounder. The developments in Greece, since Sunday’s election, have set global markets on edge and amplified concerns that Greece could leave the euro zone. Greece, it is feared, would be a catalyst for other weak sovereigns to follow.

IBD:

• Dollar General(DG) Woos New Customers With Bargains.

Absolute Return:

• Eton Park Increases Liquidity, Pulls Back on Emerging Markets.

Futures Magazine:

• ISDA to Begin Biggest Revisions to Credit Swaps Since 2009. Credit-default swaps market leaders will meet this week in New York and London to discuss changes to the contracts in what may be the biggest revisions since 2009. The International Swaps and Derivatives Association’s credit steering committee will meet May 11 to discuss changes, said Steven Kennedy, an ISDA spokesman. Possible amendments to standard contracts, which are governed by ISDA, include how debt-for-equity exchanges would be treated after a bankruptcy, specifying that credit swaps only cover losses from defaults that occur after their purchase, and clarifying how the date of a so-called credit event is determined, according to people familiar with the situation.

Dealbreaker:

• Greek CDS Will Be Fixed Soon, In Case You Were Waiting On That. As Greece prepares to default on its new bonds, now seems as good a time as ever to fix the problems that occurred when it defaulted on its old bonds. Remember that?

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows Mitt Romney earning 49% of the vote and President Obama attracting 44% support. Four percent (4%) would vote for a third party candidate, while another three percent (3%) are undecided.

Reuters:

• Zoe Cruz's Voras Capital Hedge Fund Shutting Down - Source. Zoe Cruz, the former Morgan Stanley co-president, is closing her Voras Capital Management hedge fund and returning investor money, a source familiar with the fund said. Cruz is said to have been struggling to raise anything beyond the initial $200 million she obtained from investors, the source said.
• Special Report - Chesapeake's(CHK) Deepest Well: Wall Street.
• China restructures local operations of "Big Four" auditors. China released new rules for the world's top four auditing firms on Thursday that include a requirement for their local operations to be led by Chinese citizens within three years. The rules released by the Finance Ministry said that Chinese operations of the Big Four global audit firms must be "localised" to comply with laws that will set requirements on the ages, experience and training of executives. China said the four auditors - Deloitte Touche Tohmatsu, Pricewaterhousecoopers, Ernst & Young and KPMG - must comply with the new rules by the end of 2017.
• Florida Foreclosure Case Could Slam Banks. The Florida Supreme Court is set to hear oral arguments Thursday in a lawsuit that could undo hundreds of thousands of foreclosures and open up U.S. banks to severe financial liabilities in the state where they face the bulk of their foreclosure-fraud litigation. The court is deciding whether banks who used fraudulent documents to file foreclosure lawsuits can dismiss the cases and refile them later with different paperwork. The decision, which may take up to eight months to render, could affect hundreds of thousands of homeowners in Florida, and could also influence judges in the other 26 states that require lawsuits in foreclosures.
• News Corp(NWSA) profit beats forecasts on cable, movies. Rupert Murdoch's News Corp on Wednesday posted a stronger-than-expected quarterly profit, aided by its cable networks and movie studio business, and its shares rose 2.7 percent in post-market trade.

Telegraph:

• Europe's Delusional Search for Growth.
• Germany warns Greece it will halt aid unless it commits to bailout agreements. Germany has threatened to halt vital financial aid to Greece unless a new government commits to the terms of the country’s bail-out agreements.

Sueddeutsche Zeitung:

• A European financial transaction tax wouldn't harm growth and may even strengthen growth, citing a European Commission study.

The Standard:

• China Warships Steam to Stormy Seas. China has sent five warships to the disputed Scarborough Shoal off the west coast of the Philippines with the warning that Beijing is ready for "any escalation" of the conflict. That comes as the outgunned Philippines looks to the United States for naval support in South China Sea territory that may be rich in energy sources. The five warships are said to be among the most advanced vessels in the Chinese fleet. They include ships with state-of-the- art systems against attack from the sky, while one is an assault ship that carries 20 amphibious tanks and specialized fighting teams among 800 personnel. Japanese surveillance aircraft saw the flotilla west of Okinawa and sailing south on Sunday.

Shanghai Securities News:

• China's State Council plans to expand a property tax trial to other cities this year, citing Qin Hong, head of policy research at the country's Ministry of Housing and Urban-Rural Development. The government is determined to curb speculative housing demand, citing Qin. Home purchase restrictions will continue, citing Qin.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 179.50 +6.5 basis points.
  
• Asia Pacific Sovereign CDS Index 143.75 +4.75 basis points.
  
• FTSE-100 futures -.17%.
  
• S&P 500 futures +.13%.
  
• NASDAQ 100 futures -.21%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KSS)/.60
• (CA)/.52
• (MCP)/.14
• (CECO)/.25
• (MDR)/.15
• (ESRX)/.77
• (NUAN)/.40
• (JWN)/.75
• (BID)/-.15
• (MHS)/.99
• (DYN)/-.62

Economic Releases
8:30 am EST

• The Import Price Index for April is estimated to fall -.2% versus a +1.3% gain in March.
• The Trade Deficit for March is estimated to widen to -$50.0B versus -$46.0B in February.
• Initial Jobless Claims are estimated to rise to 368K versus 365K the prior week.
• Continuing Claims are estimated to fall to 3275K versus 3276K prior.
  

2:00 pm EST

• The Monthly Budget Statement for April is estimated at $30.5B versus -$40.4B in March.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Kocherlakota speaking, weekly EIA natural gas inventory report, 30Y T-Bond auction, USDA crop report, weekly Bloomberg Consumer Comfort Index, BoE rate decision, China trade balance, China inflation data, France govt budget, Goldman Sachs Consumer Products Symposium, (NDAQ) investor day, (WY) analyst meeting, (TLM) investor day and the (HAE) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and technology 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.