Tuesday Watch

Evening Headlines
Bloomberg:

• ECB Loans Plant Seeds of European Disintegration: Euro Credit. European Central Bank measures to stem the region's debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy's reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union. "As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bailout one of those," said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. "Basically you're planting the seeds for the disintegration of the euro zone."
• Bonds Prove Only Winners for First Time Since 2008 on Contagion Fears. For the first time since the start of 2008, bonds were the only investments to provide positive returns amid renewed concern the global economy is slowing and as widening deficits in Europe threaten contagion. Fixed-income assets -- from Australian government debt to U.S. Treasuries to global junk bonds -- gained 0.57 percent last month through April 27 including reinvested interest, according to Bank of America Merrill Lynch index data. The MSCI All- Country World Index of stocks lost 1.1 percent including dividends while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 0.5 percent. The U.S. Dollar Index dropped 0.29 percent. “Concerns of an economic slowdown and renewed risks over Europe are the biggest drivers,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $330 billion, said April 26 in a telephone interview. “There’s renewed concerns about Europe, and Spain in particular.”
• Reinhart, Rogoff See Huge Output Losses From High Debt. The U.S. and other developed economies with high public debt potentially face “massive” losses of output lasting more than a decade, even if their interest rates remain low, according to new research by economists Carmen and Vincent Reinhart and Kenneth Rogoff. In a paper published today on the National Bureau of Economic Research’s website, they found that countries with debts exceeding 90 percent of the economy historically have experienced subpar economic growth for more than 20 years. That has left output at the end of the period a quarter below where it would have been otherwise. “The long-term risks of high debt are real,” they wrote. “Growth effects are significant” even when debtor nations are able to borrow “at relatively low real interest rates.”
• JPMorgan’s(JPM) Zubrow Says Fed Risk Rule May Hurt Markets. JPMorgan Chase & Co. (JPM) said a Federal Reserve proposal to cut risk by capping a bank’s dealings with any one lender, corporation or foreign government fails to strike the “correct balance” and may harm financial markets. The plan “could destabilize markets,” Barry Zubrow, executive vice president of corporate and regulatory affairs for JPMorgan, said yesterday in a comment letter to the central bank. The Fed is reaching “well beyond” the Dodd-Frank reform legislation with “disruptive” standards that duplicate or conflict with other rules and directives, he wrote.
• Obama Fails to Stem Middle-Class Hollowing Out. Barack Obama campaigned four years ago assailing President George W. Bush for wage losses suffered by the middle class. More than three years into Obama’s own presidency, those declines have only deepened. The rebound from the worst recession since the 1930s has generated relatively few of the moderately skilled jobs that once supported the middle class, tightening the financial squeeze on many Americans, even those who are employed. “It started long before Obama, but he hasn’t done anything,” said John Forsyth, 58, a railroad-car inspector and political independent from Lebanon, Ohio. “He kept pushing this change, change, change, and he hasn’t done anything.”
• Infants Born Addicted to Opiates Tripled in Past Decade. The number of babies born dependent on prescription painkillers like Oxycontin tripled in the last decade along with higher costs to treat their withdrawal symptoms, research showed. The surge in newborns with withdrawal symptoms from 2000 to 2009 was accompanied by a five-fold increase in the number of mothers using the opiate drugs during pregnancy, according to a study today in the Journal of the American Medical Association. The average hospital bill to treat the babies jumped 35 percent to $53,400 in the same period, the research found. Sales of opiate painkillers such as Oxycontin and Vicodin increased four-fold during the decade, according to the study.

Wall Street Journal:

• Europe, in Slump, Rethinks Austerity. Spain has joined seven other euro-zone nations in recession, according to data released Monday, providing new evidence that austerity policies are failing to spark confidence in the region's economies ahead of a week of expected anti-austerity protests and a string of important national elections. Almost every piece of new economic data in recent weeks has reinforced the impression that swaths of the European economy are contracting. The worsening economic picture is raising political tensions around the euro zone—both French and Greek elections this weekend are expected to castigate incumbents.
• Banks Ease Rules On Some Lending. Consumers found it easier to get credit cards and auto loans in the first quarter of 2012, but standards for home and business loans remained tight, the Federal Reserve said Monday. The central bank's quarterly survey of senior loan officers at American banks and foreign ones with U.S. operations also showed lending demand grew across the board as banks moderately loosened credit standards for the first three months of 2012, compared with the previous quarter.
• NYSE CEO Sees High-Speed Firms Heading For Dark Pools. Regulatory scrutiny around high-speed trading strategies appears to be pushing the business away from stock exchanges and into lesser-regulated platforms such as "dark pools," according to the top executive of NYSE Euronext (NYX).
• Egan-Jones Cuts Spain's Rating To Junk Status At BB+. Credit-rating company Egan-Jones cut its view on Spain to junk status Monday. The ratings firm now rates Spain at double-B-plus, down one notch from its previous rating at triple-B-minus. Egan-Jones, which is smaller than the world's three big ratings firms Standard & Poor's, Moody's Investors Service and Fitch Ratings, is the first to consider Spanish debt junk. Thursday, S&P cut its rating on Spain to triple-B-plus, which is three notches above where Egan-Jones rates Spain. Moody's and Fitch rate Spain even higher than S&P does. In cutting Spain to junk status, Egan-Jones said the country is dealing a "miserable trend" over the past three fiscal years of declining gross domestic product and mushrooming debt. Egan-Jones estimated Spain's debt-to-GDP level at 61% and continuing to rise. Monday, Spain said its economy contracted for the second-straight quarter during the first three months of the year putting it officially into recession. The country's economic weakness and high unemployment mean costs for social payments are surging, which makes its debt load even more unmanageable.
• Fed's Fisher: Too Soon to Talk About Tighter Policy. Although he believes the Federal Reserve has already provided too much stimulus to the economy, a veteran central banker said Monday now isn’t the time to start calling for a tightening in monetary policy. Looking at the various programs the Fed has run to expand its balance sheet by buying bonds to stimulate growth, “it’s not clear to me [the programs have] been fully productive, or even counterproductive,” Federal Reserve Bank of Dallas President Richard Fisher said in an interview with Dow Jones Newswires, held on the sidelines of the Milken Institute Global Conference in Beverly Hills, Calif.
• BofA(BAC) to Cut 2,000 Jobs. Amid the banking industry's relentless belt-tightening, even Bank of America Corp.'s moneymakers aren't safe. The Charlotte, N.C., company is planning about 2,000 staff cuts in its investment banking, commercial banking and non-U.S. wealth-management units, said people familiar with the situation.
• IRS Reviews Chesapeake(CHK) CEO's Perk. Chesapeake Energy Corp. disclosed Monday that the Internal Revenue Service was reviewing aspects of a controversial perk that allows longtime CEO Aubrey McClendon to purchase a small stake in every oil or gas well the company drills.

Business Insider:

• One Of Jim O'Neill's Favorite Economic Indicators Just Came In Awful.
• CNBC is Freaking Out Because Andrew Ross Sorkin's Ratings Are Terrible.
  

Zero Hedge:

• Treasury Forecasts $447 Billion In Funding Needs Thru End Of September - $300 Billion Shy Of Trendline.
• Questions About Europe's Band-Aid Union Reemerge.
• China Manufacturing Continues To 'Contract-And-Expand' Even As April PMI Misses Expectations. (graph)
  

CNBC:

• Pimco Planning for 'Lackluster Economy': El-Erian. "Our strategy is based on a lackluster recovery. So we are assuming it will be a lackluster economy, Pimco CEO Mohamed El-Erian told CNBC's Closing Bell on Monday. Jobs and economic data in the U.S. have been been weakening, "and that’s a problem," he told CNBC during the annual Milken Institute Global Conference. "The last thing we need is a repeat of 2008, 2009, 2010 where the year starts strong" and then declines.
• Global Investors Resume Exit From Euro Debt. Global investors resumed their exit from euro zone bond markets in April, cutting their holdings of the bloc's bonds to their lowest level in over a year as sovereign debt woes re-emerged to hit Spain and Italy again. The surveys of 55 leading investment houses in the United States, continental Europe, Britain and Japan showed holdings of euro zone bonds in balanced portfolios fell to 24.5 percent, compared with 26 percent in March and substantially lower than the 26.9 recorded at height of the crisis in November last year. "Tensions are now rising again as the ECB's tonic wears off," said Dirk Wiedmann, Head of Investment at Rothschild Wealth Management. On aggregate, the poll shows investors upping Japanese and UK bond holdings to compensate for euro zone reductions, while there was a small shift from government and investment grade allocations to speculative "junk" holdings within an overall steady U.S. debt exposure. "Elections in the euro area may spark renewed political uncertainty amid the euro debt crisis," said Giordano Lombardo, group chief investment officer at Pioneer Investments.

Real Clear Markets:

• If I Wanted America to Fail: Free Market Agitprop With a Lesson.

USA Today:

• Delta(DAL) buys oil refinery in a bid to offset rising fuel costs.

Reuters:

• Australia House Prices Fall for Fifth Quarter, Rate Cut Looms. House prices in Australia's major cities fell for the fifth straight quarter in the three months to March, underlining the weakness of the housing market in general and adding to pressure for an immediate cut in interest rates. The Reserve Bank of Australia (RBA) holds its monthly policy meeting Tuesday and is widely expected to cut its cash rate by at least 25 basis points to 4.0 percent given benign inflation and disappointing economic growth outside of mining. Housing has been particularly weak with the government's measure of prices for detached houses falling 1.1 percent in the first quarter, twice the drop forecast. Prices were down 4.5 percent on the same quarter last year, a far cry from the heady growth pace of 19 percent seen as recently as 2010.
• Greece's Venizelos says election could decide euro membership-report. Greece's Evangelos Venizelos, who will lead the ruling Socialists into the May 6 election, said in a newspaper interview on Tuesday that euro membership is not a certainty regardless of the outcome. "There are certain misconceptions that worry me: for instance, the misconception that whatever happens we are not going to leave the euro," Venizelos is quoted as saying in the Guardian.
• Fed is sugar-coating Congress's task -Fisher. The U.S. Federal Reserve's super-easy monetary policy is doing little to spur job creation and is giving Congress license to avoid tackling looming fiscal problems and the towering national debt, a top Fed official said on Monday. "By providing monetary accommodation, we are saying, in essence, 'Congress, you better eat your vegetables, or we are going to serve you a big plate of monetary cookies,'" Richard Fisher, president of the Dallas Fed, told the Milken Institute Global Conference. The Fed's program of bond purchases is pushing down the price of debt, interfering with a pricing mechanism that would otherwise force Congress to come to terms with its "fiscal misfeasance," he said. "We have children in Congress," he said. "They need to be disciplined."

Financial Times:

• Berlin Insists on Eurozone Austerity. Wolfgang Schäuble said the only way to achieve the economic growth that was needed in the region was to continue to rein in budget deficits and pay down debt, praising the tough new Spanish budget – which contains €27bn in new taxes and spending cuts – as an example. “The first precondition in order to have sustainable growth everywhere in Europe is fiscal consolidation,” Mr Schäuble said at a press conference with his Spanish counterpart, Luis de Guindos. “If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake.”

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to +.5% on average.
• Asia Ex-Japan Investment Grade CDS Index 165.0 +2.0 basis points.
  
• Asia Pacific Sovereign CDS Index 136.50 unch.
  
• FTSE-100 futures -.10%.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (BDX)/1.38
• (ADP)/.91
• (BIIB/1.48
• (PFE)/.56
• (VLO)/.28
• (EMR)/.80
• (OSG)/-1.13
• (FDP)/.82
• (ACI)/.18
• (MMC)/.61
• (AVP)/.28
• (ADM)/.60
• (TRW)/1.61
• (CMI)/2.22
• (DPZ)/.50
• (PFCB)/.36
• (WBMD)/-.18
• (OPEN)/.34
• (RGR)/.67
• (BRCM)/.55
• (JLL)/.21
• (GGP)/.21
• (BXP)/1.13
• (CECO)/.25
• (CHK)/.28
• (ODP)/.05
• (KLIC)/.14
• (AGCO)/.86

Economic Releases
10:00 am EST

• Construction Spending for March is estimated to rise +.5% versus a -1.1% decline in February.
• ISM Manufacturing for April is estimated to fall to 53.0 versus a reading of 53.4 in March.
• ISM Prices Paid for April is estimated to fall to 59.0 versus 61.0 in March.
  

Afternoon

• Total Vehicle Sales for April are estimated to rise to 14.4M versus 14.32M in March.
  

Upcoming Splits

• (DGAS) 2-for-1
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, Fed's Williams speaking, Fed's Lockhart speaking, Fed's Plosser speaking, China PMI and the weekly retail sales reports could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial 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.