Thursday Watch

Evening Headlines
Bloomberg:

• IMF's Lagarde Says Greek Euro Exit Would Be Expensive. International Monetary Fund Managing Director Christine Lagarde said a Greek exit from the euro area would be “extremely expensive” and hard. Still, the IMF has to be “technically prepared for anything because it’s our job,” she said in an interview with Dutch public television broadcast today. “I’m not suggesting that this is a desirable solution. I’m just saying that this is within the range of multiple options, one that we have to technically look at.” A Greek caretaker government will prepare new elections probably on June 17 that are shaping up as a ballot on whether the country should remain a euro member, following inconclusive May 6 voting that pushed a political party opposed to Greece’s international bailout into second place. The IMF co-financed two bailout packages to the Mediterranean nation. To stay within the euro region requires efforts to “abide by the program which has been put into place” as conditions attached to the latest loan package, Lagarde said. She said a euro exit wouldn’t reflect the will of the Greek people. “No country is immune from hardship happening anywhere,” Lagarde said. “Within the euro zone, a currency union, what happens to any member is going to affect others.” Her comments echo concern by World Bank President Robert Zoellick that a Greek exit from the euro could have ripple effects reminiscent of 2008, when Lehman Brothers Holdings Inc.’s collapse was followed by a global financial crisis.
  
• Rajoy Risks Bailout Yields in Trial of Spain's Funding. Spain will try to show investors it can keep funding itself today as yields approach levels that pushed other nations into bailouts and foreign investors shun the country’s bonds. Spain will seek to sell 1.5 billion euros ($1.9 billion) to 2.5 billion euros of bonds maturing in 2015 and 2016, about half the level it aimed for a year ago. Spanish 10-year bond yields rose as high as 6.5 percent yesterday, approaching the 7 percent mark that pushed Greece, Ireland and Portugal toward European rescue packages. “Spain is potentially the biggest euro-zone accident waiting to happen,” said Neil Williams, chief economist at Hermes Fund Management in London. “Unless there is a sudden and sustainable improvement in Spain’s underlying competitiveness the next round of euro-zone governments’ support will have to stretch beyond the debtor nations currently on investors’ radars.”
• Dollar Funding Costs Jump as Debt Sales Scrapped: Credit Markets. The cost to borrow in dollars is rising at the fastest pace in five months as Europe's debt crisis leads investors to seek shelter in U.S. assets, spurring companies from China to Brazil to cancel bond sales. One-year cross-currency basis swaps fell to 68 basis points below the euro interbank offered rate yesterday from 53 on May 10, the biggest four-day drop since Dec. 14.
• Italy Tax Agents on Frontline of Anti-Austerity Backlash. For 10 years, Daniela Ballico has been knocking on Romans’ doors seeking back taxes. Now with Italy’s tax-collectors on the frontline of an anti-austerity backlash, she no longer has the courage to ring their bells. Equitalia, the state tax-collection agency, has been targeted in a wave of attacks as Italians chafe under stepped-up efforts to recover an estimated 120 billion euros ($153 billion) in lost revenue from evasion. On May 12, a Molotov cocktail exploded outside Equitalia’s Livorno office, one day after a parcel bomb was delivered to the Rome headquarters, site of a December explosion that tore off part of the general manager’s hand. “I have never seen such a tense atmosphere” said Ballico, who has been employed by Equitalia since 1998 and is now on temporary leave to work for the UGL labor union. “They call us loan sharks, bloodsuckers; my colleagues have to deal with anxiety and stomach aches every day and they are scared.”
• Greenlight's Einhorn Says French Default Not Out of the Question. Hedge-fund manager David Einhorn said there's a possibility the French government may default on its debt. "A French default is not out of the question," Einhorn said today at the Ira Sohn investment conference in New York.
  
• AIG(AIG) Wagers on Subprime Betting Second Time Different: Mortgages. American International Group Inc., the insurer that needed a $182.3 billion bailout from the U.S. government in 2008 after failed mortgage investments, is betting this time it's different. Chief Executive Officer Robert Benmosche has increased non- government-guaranteed residential and commercial-mortgage backed securities holdings by $11.1 billion since 2010 to $28.4 billion at the end of March, according to regulatory filings. The New York-based insurer has acquired debt sold by the Federal Reserve that the central bank acquired from AIG when the company was rescued, including $600 million of CMBS last month. AIG, which is also bolstering its unit that insures home loans with low down payments, is wagering that a more than 35 percent plunge in property values, cheaper prices for the securities and fewer competitors justify returning to investments that four years ago required the government to step in when it was unable to meet margin calls to banks.
• Russian Funds Flee as Anti-Putin Demonstrators Dig In. Investors are fleeing Russia as demonstrators against President Vladimir Putin dig in, exacerbating the impact of Europe’s debt crisis on the country’s markets, money managers from Frankfurt to Moscow said. Activists who clashed with police before Putin’s May 7 inauguration are protesting non-stop in Moscow, using the Occupy Wall Street movement’s tactics. As the benchmark RTS equity index entered a bear market, Russia-focused equity funds recorded $251 million of outflows in the seven days to May 9, the most this year, while China lost $127 million, India $148 million and Brazil $167 million, EPFR Global data show.
• BRIC Stocks Erase 2012 Gains as Technology Shares Drop on China. The MSCI BRIC Index for shares in Brazil, Russia, India and China tumbled for a fourth day, wiping out this year’s gains, as concern deepened that China’s economic growth is slowing and Europe’s debt crisis is spreading. The benchmark measure for the largest developing nations dropped 2.3 percent to 262.10 as of 4:35 p.m. in New York, led by an 11 percent decline in Shanghai-based Semiconductor Manufacturing Corp. after it was cut from the MSCI China Index. The Bovespa Index fell for a seventh day. Usinas Siderurgicas de Minas Gerais SA, Brazil’s second-largest steelmaker, dropped 7.3 percent. The MSCI Emerging Markets Index hit the lowest level since Jan. 2. Gauges sank more than 2 percent from Hungary to Taiwan.
• Bond Market May Not Warn When Debt Crisis Strikes. One by one, European nations are letting their voices be heard, tossing out the party in power and voting in those who, in some cases, have a more radical agenda or, in others, are just willing to say “no” to the status quo. A bas l’austerite! Down with austerity! Up with growth! If only it were that simple. That’s how the trade-off is being portrayed, and perhaps that’s what policy makers pushing the idea, and individuals on the receiving end, want to believe. With many euro-zone countries in recession, one can understand the appeal. Spend more, grow more and presto! The debt shrinks in relation to the economy and becomes more manageable. “Wishful thinking,” said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, who knows a thing or two about debt. “You seldom grow your way out of debt. The historic experience is very rare.”
• Japan Growth Pick-Up Clouded by Deepening Europe Risk: Economy. Japan’s economy expanded faster than estimated in the first quarter, boosted by reconstruction spending that’s poised to fade just as a worsening in Europe’s crisis threatens to curtail export demand. Gross domestic product rose an annualized 4.1 percent from the final three months of 2011, exceeding all but seven of 27 estimates in a Bloomberg News survey of economists, a Cabinet Office report showed today in Tokyo. Singapore also reported a rebound in growth last quarter, while warning about the risk of a disorderly European debt default.
• N. Korea Ship Seizes Chinese Boats for Ransom, Global Times Says. A North Korean ship seized three Chinese boats with 29 fishermen aboard and demanded more than $140,000 to release them, China’s Global Times newspaper reported today. The fishing boats were captured at gunpoint while trawling in Chinese waters on May 8, the newspaper said, citing an owner of one of the boats, identified as Zhang Dechang. He said the captors were demanding 300,000 yuan ($47,500) to release each vessel. China’s Foreign Ministry is trying to verify what happened and resolve the issue, state-run China Central Television reported on its website yesterday. A standoff could strain ties between North Korea and China, its main financial and diplomatic backer.
• China Expands Scope for Short Selling, Securities Journal Says. China will start a trial next week that will allow brokerages to borrow stocks for clients wishing to conduct short selling, the China Securities Journal reported. Brokerages can also borrow money on behalf of clients for margin financing, the newspaper reported today, without saying where it got the information. Twenty-five securities companies will participate in the test, along with the stock exchange, fund management companies and China Securities Finance Co., which was set up as an agency to provide funds and stocks for brokerages’ short selling and margin trading.

Wall Street Journal:

• Experts Try to Chart Path for Exit From Currency. Returning to a national currency after more than a decade of using the euro and having its money managed by the European Central Bank would catapult Greece into a financial, legal and political no man's land. Countries have defaulted, devalued, or even withdrawn from a broader monetary union in the past. But none has done it all at once—and certainly not an economy so deeply integrated into global financial markets.
  
• Prospects for European Banks Once Again Darken. The start of 2012 was meant to herald a brighter future for European banks. Five months on, the picture is darkening fast. Until recently, European banks were basking in the glow of €1 trillion ($1.27 trillion) of cheap loans dished out by the European Central Bank. With fears that Greece could exit the euro back on the horizon, a credit-rating review of 114 European financial institutions under way by Moody's and the need for many European banks to shrink themselves back to health, the outlook is less rosy, analysts say. "Clearly sentiment has soured," said James Longsdon, a managing director of European, Middle East and Africa institutions at Fitch Ratings.
• Senators Urge Regulators To Act On Speculative Trading Limits. Senators have urged "swift action" from regulators to curb speculation in gas and oil markets, even as the price of gas has started to fall.
• Blackstone(BX) Loan in Favorable Modification, Deutsche Bank Says. A Blackstone Group LP (BX) property loan has received what "may be one of the more questionable [loan] modifications to date" by getting rosy financing terms at the expense of bondholders, marking a troublesome precedent for distressed real-estate workouts, Deutsche Bank said Wednesday. Special servicer Berkadia Commercial Mortgage extended for two years the maturity on about $400 million of commercial mortgage-backed securities, or CMBS, debt on 16 office properties, leaving the interest rate unchanged at a level more than four percentage points below the market rate.
• SEC Probes Role of Hedge Fund in CDOs. U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, according to people familiar with the matter. While Magnetar has faced scrutiny over its role in various collateralized debt obligations, or CDOs, the Illinois firm itself now is a target of an investigation by the Securities and Exchange Commission, these people said.
• Boyd Gaming(BYD) to Buy Peninsula Gaming for $745 Million. Boyd Gaming Corp. (BYD) said Wednesday it will acquire privately held casino operator Peninsula Gaming LLC at a cost of $745 million and is also refinancing $700 million of Peninsula's existing debt. The acquisition gives Boyd a stronger foothold in the Midwest and South and should offset some the pressures the company has felt in its core markets Las Vegas and Atlantic City. In the wake of the announcement, Boyd's share price rose roughly 12% to $7.84 in after-market activity.
• Geithner, Dimon Discussed Volcker Rule In March. Treasury Secretary Timothy Geithner and J.P. Morgan Chase & Co. (JPM) Chief Executive James Dimon met in early March to discuss a new rule restricting commercial banks from trading with their own money, meeting logs released Wednesday by Treasury show.
• White House Steps Up Push to Toughen Rules on Banks. In the wake of losses at J.P. Morgan Chase & Co., the White House is seeking to ensure a tough interpretation of a regulation designed to prevent banks from making bets with their own money, according to people familiar with the matter.
• From 'Caveman' to 'Whale'. Months before Bruno Iksil became famous as the "London whale," the trader who contributed to a loss of more than $2 billion at J.P. Morgan Chase & Co., he earned a different nickname: the "Caveman," for pursuing trades that rivals sometimes thought were overly aggressive but often led to huge profits. Late last year, Mr. Iksil, a London-based trader in J.P. Morgan's Chief Investment Office, turned heads among fellow debt-market traders with a wager against a group of junk-bond-rated companies, traders say.
• Fall in Chinese Loans Poses Economic Threat. Banks Narrow Range of Firms They Are Willing to Assist, While Companies Are Wary of Borrowing Amid Unsure Prospects.

Business Insider:

• Exclusive Photos: Here's The Hot New Way They're Extracting Oil From Canada's Massive Oil Sands.
• It Looks A Lot Like China's Security Head Is About To Be Ousted.
• The Most Important Energy Project In The World Is Happening In This Remote Part Of Canada.

Zero Hedge:

• Quantifying The Plan Z Dry Powder - This Is The Greek ELA Borrowing Capacity.
• The Fabled Greek Mega-Bailout.
• Listing David Einhorn's Likes and Dislikes.
  

CNBC:

• JPMorgan(JPM) Fallout 'Could Get a Lot Worse': Whitney. The JPMorgan Chase trading controversy comes at an inopportune time both for the bank and the industry as a whole, which needs to rethink the way it does business, analyst Meredith Whitney told CNBC.

NY Times:

• JPMorgan's(JPM) Trading Loss Is Said to Rise at Least 50%. The trading losses suffered by JPMorgan Chase have surged in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion, according to people with knowledge of the losses. When Jamie Dimon, JPMorgan’s chief executive, announced the losses last Thursday, he indicated they could double within the next few quarters. But that process has been compressed into four trading days as hedge funds and other investors take advantage of JPMorgan’s distress, fueling faster deterioration in the underlying credit market positions held by the bank.
• Ahead of Facebook(FB) IPO, a Skeptical Madison Ave. With Facebook, Mark Zuckerberg has created a seemingly perfect home on the Web, one where people feel comfortable chatting with friends, playing games, sharing photos and videos, listening to music and revealing the most intimate details of their lives. The $100 billion question is whether Facebook will be a perfect home for advertisers, as well.

market folly:

• Notes From Ira Sohn Conference Presentations 2012.

DerivativesIntelligence:

• Managers Buy Russia CDS On Oil Price Drop. Asset managers are buying credit default swaps on Russia because of the impact lower oil prices could have on the country's finances.
  

Mortgage News Daily:

• Judicial States Continue to Skew Foreclosure Statistics. Nationally the percentage of loans in foreclosure fell slightly but Mike Fratantoni MBA's Vice President of Research and Economics said the top-line figure covers up a couple of trends. "First, the percentage of loans in foreclosure is up for prime and FHA loans. The percentage of subprime loans in foreclosure continues to fall as the subprime loans age and the problems loans are resolved one way or the other. However, the percentage of loans in foreclosure for both FHA loans and prime fixed-rate loans are climbing and are just below all -time records." "The problem continues to be the slow-moving judicial foreclosure systems in some of the largest states," Franantoni said. While the rate of foreclosure starts is essentially the same in judicial and non-judicial foreclosure states, the percent of loans in the foreclosure process has reached another all-time high in the judicial states, 6.9 percent. In contrast that rate has fallen to 2.8 percent in non-judicial state, the lowest since early 2009." The difference in the rates is even more disturbing in certain states. Brinkmann summed up the NDS report saying, "Overall it has good news about where we are going but the bottom line is we are still dependent on the economy." As the job situation has improved so have delinquency figures and as long as this continues and there are no serious problems, such as a melt-down in Europe, we should see more of the same.

The Hill:

• Senate Rejects Obama Budget in 99-0 Vote. A budget resolution based on President Obama’s 2013 budget failed to get any votes in the Senate on Wednesday. In a 99-0 vote, all of the senators present rejected the president’s blueprint. It’s the second year in a row the Senate has voted down Obama’s budget. The House earlier this year unanimously rejected Obama's budget.

Rasmussen Reports:

• 28% Say U.S. Heading in Right Direction.

Reuters:

• Red Robin(RRGB) Sales Miss Estimates; Shares Fall. Restaurant operator Red Robin Gourmet Burgers Inc's first-quarter revenue missed Wall Street estimates, hurt by a decline in guest counts, sending its shares down 8 percent in extended trading.
• Limited Brands(LTD) Q1 Profit Beats, Shares Fall On View. Limited Brands Inc, parent of the Victoria's Secret lingerie store chain, posted a quarterly profit that topped Wall Street's view but its shares fell 3.5 percent after its forecast for the current quarter fell short of analysts' expectations.

Financial Times:

• Spain Bids to Pin Down Real Estate Losses. Spain’s government will on Thursday announce the appointment of Blackrock and Oliver Wyman as independent valuers of the real estate loans that lie at the heart of the country’s banking crisis.

Telegraph:

• Britain must make ready for the storm as clueless Europe tears itself apart. Usually it's war that does the damage; there's a certain irony in the fact that this time around it's a project designed to prevent these periodic outbreaks of insanity by binding nations together in irredeemable economic and legal union – the euro. In fact, the single currency is having the exact opposite effect, only bizarrely, Europeans still refuse to see it. Even the Greeks still cling, ever more desperately, to this totemic symbol of European solidarity.
• Euroland's €1 trillion question: after Greece goes, can Spain stay in? Everyone knows Greece is leaving the euro, the real challenge is preventing the fall-out extending to Spain.

The Guardian:

• Huge Risk of Euro Breakup if EU Fails to Act - David Cameron. David Cameron will issue his starkest warning yet on the plight of the euro on Thursday, saying unless urgent action is taken there will be a breakup, adding he will do whatever possible to keep Britain safe in perilous times. Cameron's stark message comes only a day after the chancellor, George Osborne, had said open speculation about the eurozone was itself damaging the European economy. Cameron and Osborne now believe that with the failure of the Greeks to form a government, a direct warning has to be given to the eurozone leaders about the scale of the threat, and the need for urgent action.

South China Morning Post:

• Solar-Gear Glut to Stay for Year, Suntech(STP) Says. Equipment, parts to remain in global oversupply, downward pressure on prices to continue for at least 1 year, co. Chairman Shi Zhengrong says, citing an interview. Shi said he sees no sign of a price rebound. China should consider asking banks to relax lending to solar-equipment industry because of losses, Shi said.

Evening Recommendations
Piper Jaffray:

• Rated (CFN) Overweight, target $34.

Susquehanna:

• Rated (SNDK) Positive, target $47.

Night Trading

• Asian equity indices are -.50% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 195.0 +2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 158.25 +8.75 basis points.
  
• FTSE-100 futures unch.
  
• S&P 500 futures +.42%.
  
• NASDAQ 100 futures +.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AAP)/1.81
• (QSII)/.28
• (SSI)/-.02
• (WMT)/1.04
• (ROST)/.93
• (CSC)/.20
• (GPS)/.45
• (CRM)/.34
• (ARUN)/.16
• (INTU)/2.48
• (BRCD)/.12
• (PLCE)/1.06
• (DLTR)/.97
• (SHLD)/-.67
• (AMAT)/.24
• (ADSK)/.47
• (GME)/.54
• (BKE)/.76
• (PCP)/2.27

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 365K versus 367K the prior week.
• Continuing Claims are estimated to fall to 3225K versus 3229K prior.
  

10:00 am EST

• Philly Fed for May is estimated to rise to 10.0 versus a reading of 8.5 in April.
• Leading Indicators for April are estimated to rise +.1% versus a +.3% gain in March.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bullard speaking, Spain 10-Year bond auction, 10-Year TIPS auction, weekly EIA natural gas inventory report, pricing of the (FB) IPO, weekly Bloomberg Consumer Comfort Index, Bloomberg Economic Expectations Index for May, BofA Merrill Transports Conference, (SYY) investor day and the (HBC) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and consumer staple shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.