Tuesday Watch

Evening Headlines
Bloomberg:

• Merkel and Hollande Head for a Showdown on Debt at EU Summit. Germany and France, the leading economies in the 17-nation euro region, are headed for a showdown at the next European Union summit over their views on how to stem a debt crisis that threatens the survival of the single currency. German Chancellor Angela Merkel said she won’t shy away from disagreeing with French President Francois Hollande at the summit on May 23, the next major appointment of leaders seeking to allay concerns among investors that Greece may quit the euro, putting at risk Spain and Italy as well. Good cooperation “doesn’t exclude differing positions,” Merkel told reporters yesterday in Chicago during a meeting of the North Atlantic Treaty Organization. “These may very well arise in the context of the European discussions.” While Franco-German collaboration has been a cornerstone since the founding of the euro, Merkel and Hollande, France’s first socialist president in almost two decades, have gotten off to a rocky start in a relationship that needs to work to spur economic growth and prevent Greece from leaving the euro area.
• Bank Debt Loses LTRO Boost as Greece Overwhelms: Credit Markets. The record rally in bank debt fueled by the ECB injection of $1.3 trillion into the region's financial system has evaporated as the worsening Greek crisis triggers deposit withdrawals and ratings downgrades. The Markit iTraxx Financial Index of credit default swaps on the senior debt of 25 European banks and insurers including Spain's Banco Santander SA and Italy's UniCredit SpA reached 308.39 on May 18, up from this year's low of 181.47 on March 20 and the highest since Dec. 19. "The real risk is not so much the departure of Greece, but contagion," said Roger Francis, an analyst at Mizuho International Plc in London. "There's not the same imminent fear of banks running out of cash, but big systemic fears about what a Greek exit would mean."
  
• Obama Allies Shun Bain Attacks to Avoid Smearing Private Equity. President Barack Obama's campaign has set a target on Mitt Romney's tenure at the helm of Bain Capital LLC. What's missing are high profile surrogates from the Democratic Party and the business community who will hit that theme in interviews and appearances on political talk shows. In fact, some Obama backers are undermining a core argument the president is making against the presumed Republican Party nominee as they try to avoid criticizing the investment community. Newark, New Jersey Mayor Cory Booker yesterday called the private-equity debate "nauseating to the American public" and likened it to potential Republican attacks tying Obama to his former pastor, Reverend Jeremiah Wright Jr., who once urged blacks to sing "God damn American" instead of "God Bless America."
• Hedge Funds Circle as Japan's Asset Bubble Grows. It’s limbo, Japanese-style: How low can bond yields go without triggering a meltdown? This question gains urgency as 10-year government yields disappear before the world’s eyes. At 0.83 percent, the lowest level since 2003, they hardly compensate investors for the risks inherent in buying IOUs from the most indebted nation. Public debt is more than twice the size of the $5.5 trillion economy. Worse, it’s still growing.
• Prostate-Cancer Test Carries More Risk Than Benefit, U.S. Says. The PSA prostate-cancer test used by half of U.S. men older than 40 carries more risks than benefits and shouldn't be used to diagnose the disease, a U.S. panel said, reaffirming its earlier advice. Scientific studies suggest the number of deaths avoided by screening are "very small" compared with risks from testing or treatment that can include infections, incontinence, erectile dysfunction and death, the U.S. Preventive Services Task Force said in a medical journal today.
  

Wall Street Journal:

• Provisioning for Spanish Bank Losses Is Insufficient, IIF Says. Spanish banks’ total loan losses could range between 218 billion and 260 billion euros, more than currently-expected provisioning, the Institute of International Finance predicted Monday. That suggests the government will have to step in to support “a significant number of banks, mainly the cajas,” the institute said, referring to local Spanish banks.
• Top U.S. Money-Laundering Regulator Dismissed. The Treasury Department has dismissed the country's top anti-money-laundering regulator from his post, people familiar with the matter said, a rare move that the Obama administration isn't explaining.
• Once Made in China: Jobs Trickle Back to U.S. Plants.
• Rivals Go to Lunch on JPMorgan's(JPM) Losses. The trading blunders that have cost J.P. Morgan Chase & Co. at least $2 billion are shaping up as a boon for some of the bank's biggest rivals. A group of about a dozen banks, including Goldman Sachs Group Inc. and Bank of America Corp., have scored profits that collectively could total $500 million to $1 billion on trades that sometimes pit them directly against J.P. Morgan's Chief Investment Office, according to traders and people close to the matter.
• Investors Pummel Facebook(FB).
• Catholics Sue Over Health Mandate. The University of Notre Dame, the Archdiocese of New York and 41 other Roman Catholic institutions sued the Obama administration in federal court Monday, the latest push against a requirement in the health-care-overhaul law that employers cover contraception in workers' health plans.
• Targeting John Roberts. The left tries to intimidate the High Court on ObamaCare.

Business Insider:

• This Terrifying Amendment Legalizes The Use Of Propaganda On The US Public. The newest version of the National Defense Authorization Act (NDAA) includes an amendment that would legalize the use of propaganda on the American public, reports Michael Hastings of BuzzFeed. The amendment — proposed by Mac Thornberry (R-Texas) and Adam Smith (D-Wash.) and passed in the House last Friday afternoon — would effectively nullify the Smith-Mundt Act of 1948, which explicitly forbids information and psychological operations aimed at influencing U.S. public opinion.
• Identity Theft Is No Longer The Top Reported Cyber Crime.

Zero Hedge:

• The Elephant In The Room: European Capital (Out)flows And Another €215 Billion In Spanish Deposit Flight.
• Things That Make You Go Hmmm - Such As The "Grexit".
• Forget The "Bazookas": Here Come The "Tomahawks" And "Howitzers" - An R-Rated Walk Thru The Greek Endgame.

CNBC:

• Undercapitalized Banks Pose Biggest Risk to Europe. (video)
• Secret Central Bank Aid Props Up Greek Banks. There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.
• Greece Needs to Accept Bailout Terms: South Korea. South Korea’s President Lee Myung-bak says Greece needs to accept the terms of a $130 billion international bailout agreed in March and there will be no disbursement of money from the International Monetary Fund (IMF), unless the country does so.
  

Reuters:

• Computer Hackers Access U.S. Justice Dept. Website: Spokeswoman. One or more unauthorized users gained access to the inner workings of a website run by the U.S. Justice Department, a department spokeswoman said on Monday after the hacker group Anonymous said they were behind the incident.

Telegraph:

• Drachma scarecrows and the Myths of Greek Exit. We keep hearing that Greece cannot impose exchange and capital controls – as Iceland did – to contain the damage from Drachma Day, restore stability, and prevent a devaluation overshoot. We hear too that Greece would have to leave the EU if it is ejected from/withdraws from the euro. Both assertions are wrong.
• Britain Is Impotent In Eurozone Crisis - Just Get Used To It.
• Germany Isolated as Latin Bloc Calls The Shots. The eurozone's 'Latin Bloc' is in full revolt. The trio of French, Italian, and Spanish leaders - backed by world powers - are to push for a radical shift in Europe's economic strategy at crucial summit on Wednesday.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.50% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 195.0 -4.5 basis points.
  
• Asia Pacific Sovereign CDS Index 160.5 -.5 basis point.
  
• FTSE-100 futures +.43%.
  
• S&P 500 futures -.10%.
  
• NASDAQ 100 futures -.06%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (WSM)/.32
• (DSW)/.90
• (AZO)/6.25
• (CBRL)/.75
• (MDT)/.98
• (BBY)/.59
• (RL)/.85
• (ADI)/.51
• (PETM)/.73
• (DELL)/.46
• (CPWR)/.14
• (GES)/.26
• (PSS)/.44
• (JDAS)/.57
  

Economic Releases
10:00 am EST

• The Richmond Fed Manufacturing Index for May is estimated to fall to 11.0 versus 14.0 in April.
• Existing Home Sales for April are estimated to rise to 4.61M versus 4.48M in March.
  

Upcoming Splits

• (FMC) 2-for-1
  

Other Potential Market Movers

• The Fed's Lockhart speaking, weekly retail sales reports, 2-Yr T-Note auction, Barclays Tech/Media/Telecom Conference, Deutsche Bank Real Estate/Gaming/Lodging/Leisure Conference, Citi Consumer Conference, (WFC) investor day, (SGY) analyst day, (ALB) investor day and the (PRU) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by technology and commodity 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.