Today's Headlines

Bloomberg:

• Banks 'Dodged a Bullet' as Congress Dilutes Rules. Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said. A deal reached by members of a House and Senate conference early this morning diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds. Banks “dodged a bullet,” said Raj Date, executive director for Cambridge Winter Inc.’s center for financial institutions policy and a former Deutsche Bank AG executive. “This has to be a net positive.”
• U.S. commercial bank revenue from trading over-the-counter derivatives and securities surged more than 400% to $8.3 billion in the first quarter compared with fourth quarter 2009. The increase was led by trading credit products, including default swaps, which rose 100-fold to $2.7 billion from $27 million, the Office for the Comptroller of the Currency said today. JPMorgan(JPM) retained its top spot among U.S. commercial banks as of March 31, with $76 trillion of derivatives contracts as measured by notional amount, OCC said. Bank of America(BAC), Goldman Sachs(GS) and Wells Fargo(WFC) were the next four biggest users. The five firms accounted for 97% of the $216.5 trillion in derivatives held by U.S. banks as of March.
• Bank Ownership Cap on OTC Clearing, Execution Dropped. Banks may not have to limit their ownership of derivatives clearinghouses or execution services after a plan to restrict them to 20 percent stakes was excluded from U.S. legislation.
• European Yield Spreads Widen on Concern Debt Crisis Deepening. Belgian, Italian and French 10-year bonds declined, sending their yield differences with benchmark German bunds wider, on concern the region’s debt crisis is deepening as the economic recovery sputters. “This is a supply shock” as banks consider dumping their holdings to repay the ECB, said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “Banks are checking out the market. I anticipate this will intensify next week.”
  
• National Iranian Tanker Co. released eight of 25 supertankers being used to store crude oil, Arctic Securities ASA said. The vessels will offload their cargoes and increase the number of tankers available for hire, Arctic said today.
• Gulf Begins Storm Watch as Weather System Lingers Off Honduras. Residents and business owners along the Gulf of Mexico face a weekend of watching and planning as a weather system that may become the year’s first tropical storm, or hurricane, lingers on their doorstep.
• U.K. Banks 'Vulnerable' to Asset Writedowns, BOE Says. U.K. banks remain “vulnerable” to further writedowns on their assets because of a potential decline in investor appetite for risk, the Bank of England said. Derivatives and other financial instruments accounted for 40 percent of U.K. banks’ total assets at the end of 2009, the central bank said in its semiannual financial stability report published in London today. Globally, mark-to-market losses on assets rose to $7.8 trillion in June from $4.5 trillion in March, it said. “If sovereign risk concerns rise or risk appetite continues to diminish, asset prices could fall further,” the BOE said. “This would have a significant impact on the solvency positions of holders of these assets, including both U.K. and global banks.”
• KB Home(KBH) Falls After Posting Wider Loss Than Estimated. KB Home, the U.S. homebuilder that targets first-time buyers, tumbled to the lowest price in almost a year in New York trading after reporting a wider-than- estimated loss and a drop in new orders.
• Bove Says 'Buy' Banks as Regulatory Overhaul Won't Hurt Them. Investors should buy bank stocks, as they will be able to pass on to consumers the cost of the most sweeping overhaul of U.S. financial regulation since the Great Depression, according to Dick Bove of Rochdale Securities LLC. “They can increase prices,” Bove, who is based in Lutz, Florida, said in a telephone interview. “You’ll see prices on just about every bank product soar. Everybody else will be negatively impacted by this bill, but not the banks. The industry has been pummeled because everybody believed that banks caused the financial crisis. That pummeling is over.”

CNBC:

• Why Wall Street Will Love The 3% Solution in Reform Bill. The new limits on proprietary trading and hedge fund investments may actually benefit big banks more than harm them—especially in the hedge funds they market to clients.

NY Times:

• A New Plan for Valuing Pensions. The board that writes accounting rules for states and cities has proposed a new approach for pension disclosures that falls far short of what some financial experts hoped, but which would still force many governments to highlight pension shortfalls they have played down. The current standard has come under heavy fire from mainstream economists, who say it makes virtually all government pension benefits look less costly than they really are. Government officials have granted pensions to teachers, police, judges and other public workers for years, without reflecting the true cost, analysts say. Now the bills are coming due, and in many cases there is not enough money set aside, adding to the fiscal distress across the country.

NY Post:

• Debit Cards' $20B Issue Merchants, Banks' Bitter DC Battle Over Swipe-Fee Cuts. The move on Capitol Hill to cut the $20 billion a year in debit-card "swipe fees" charged by banks could come back to bite consumers. Under a proposal in the new financial reform package being hammered out last night in Washington, the 3 percent fee that banks charge retailers may be halved -- but banks might look to make up for the loss by ending free checking for bank customers plus hiking other fees, experts say. "This is going to squeeze a good revenue stream for banks and financial institutions," said Greg McBride, senior financial analyst at BankRate.com. "Banks will make up for it by pricing for their services."

Zero Hedge:

• ECRI Leading Economic Index Plunges at -6.9% Rate, Back to December 2007 Levels When Recession Officially Started.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).

Politico:

• Obama Losing Hill Liberals on War.
  

USA Today:

• Whooping Cough Epidemic Hits California. Whooping cough is now an epidemic in California, and is on pace to break a 50-year record for infections for the year. As of June 15, California had 910 recorded cases of the highly contagious disease, and five babies — all under 3 months of age — have died from the disease this year. "Children should be vaccinated against the disease and parents, family members and caregivers of infants need a booster shot," California Department of Public Health director Dr. Mark Horton said Wednesday.

Shulte Roth & Zabel:

• Financial Crisis Inquiry Commission Sends Out Hedge Fund Industry Market Risk Survey.

CBCNews:

• Ottawa Aware of Foreign Influence: Sources. Sources tell CBC News the highest levels of the Canadian government have known for years that foreign countries have been trying to win influence over Canadian politicians and public servants. That information comes a day after CSIS director Richard Fadden said he had never warned officials close to Prime Minister Stephen Harper that some provincial cabinet ministers may be under the sway of countries like China — even though he told the CBC earlier this week the agency was discussing the issue with the Privy Council Office. In an exclusive interview with CBC News earlier this week, Fadden said Canada's spy agency suspects that some municipal politicians and cabinet ministers in two provinces are being swayed by their connections to foreign governments. China was one of the countries Fadden mentioned. Senior intelligence sources say the highest levels of the Canadian government were "absolutely" aware of the issue. "These problems are very well-known," one source said. "This information did not blindside the government." A source suggested the prime minister was personally aware of the issue of foreign agents trying to win influence over politicans and bureaucrats — even if he didn't know the details. "The prime minister is strongly of a view that this is a problem," a source said.
  

Yonhap News:

• N.Korea Vows to Bolster Nuclear Arms on War Anniversary: Report. Marking the 60th anniversary Friday of the outbreak of the Korean War, North Korea vowed to bolster its nuclear weapon capability to cope with U.S. hostilities, the country's main radio station said.

Bear Radar

Style Underperformer:

• Large-Cap Value (+.53%)

Sector Underperformers:

• Education (-3.35%), Airlines (-1.65%) and Wireless (-1.52%)

Stocks Falling on Unusual Volume:

• RIMM, BP, AVAV, ARTC, STST, CHSI, COCO, SAFM, FNGN, APOL, EDMC, RBCN, CIX and KBH
  

Stocks With Unusual Put Option Activity:

• 1) KWK 2) WFR 3) RIMM 4) NKE 5) NTAP
  

Stocks With Most Negative News Mentions:

• 1) BP 2) KBH 3) WHR 4) XOM 5) MS
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.37%)

Sector Outperformers:

• Gold (+1.70%), Banks (+1.19%) and REITs (+1.15%)

Stocks Rising on Unusual Volume:

• ACN, TIBX, ORCL, SNX and HRB
  

Stocks With Unusual Call Option Activity:

• 1) NE 2) RIMM 3) BRCM 4) CTXS 5) OC
  

Stocks With Most Positive News Mentions:

• 1) BA 2) AAPL 3) ORCL 4) GILD 5) RIMM

Friday Watch

Evening Headlines
Bloomberg:

• Private Lenders to Keep at Least 5% of Risk Under New U.S. Financial Rules. Private lenders will be required to keep at least a 5 percent stake in loans they package and sell under an agreement reached by House and Senate lawmakers who are negotiating the financial-regulatory bill. Lawmakers said the goal of the risk retention rule, also known as the skin-in-the-game provision, is to raise the quality of loans by keeping companies tied to the loans they make. The measure would affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans would be forced to retain at least 5 percent of the credit risk. Lawmakers exempted many mortgages from the rules after lobbying by brokers and community banks, who said forcing lenders to keep loans on their books would tie up capital and lead to higher interest rates. Originators of long-term, fixed-interest-rate mortgages would be among those that would not be required to retain risk. The exemption would not apply to mortgages with risky features such as negative amortization, interest-only payments and balloon payments. In addition, loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs would not be required to retain risk. The goal is to allow government agencies to promote lending in the absence of private capital, FHA Commissioner David Stevens said. The rule will curtail lending to consumers, said Tom Deutsch, executive director of the American Securitization Forum, a New York trade group that represents issuers, investors and other participants in the market. “Some credit will become more expensive because of these rules,” Deutsch said in an interview.
• Senators Retain Volcker Rule With Hedge Fund Leeway. Senate negotiators offered changes to the regulatory-overhaul bill that would strengthen part of the language banning proprietary trading at U.S. banks while giving them leeway to invest in private-equity and hedge funds. The proposal Dodd outlined would limit a bank’s investment in private-equity or hedge funds to 3 percent of a fund’s capital. Total investment in private-equity and hedge funds wouldn’t be able to exceed 3 percent of a company’s tangible common equity. The change softens language in the bill the Senate approved last month, which would have barring banks, their affiliates and holding companies from sponsoring or investing in private-equity or hedge funds.
• Bank Credit Risk Rises as Financial-Overhaul Legislation Nears Completion. Swaps on Morgan Stanley gained 16 basis points to 270 basis points, and those on Goldman Sachs increased 8 basis points to 201 basis points, according to CMA DataVision prices. Contracts tied to Bank of America Corp. advanced 6 basis points to 168.
• Bond Sales Diminish as Renault Trims Offering, Swaps Climb: Credit Markets. Bond sales fell and the cost of protecting against default on Greek government debt rose to a record as concern the global economy may slow brought new signs of stress to credit markets. Company debt offerings globally declined 8 percent this week to $36.9 billion, according to data compiled by Bloomberg. Renault SA, France’s second-biggest carmaker, reduced a bond sale by 20 percent, citing “more difficult” market conditions. Credit-default swaps on Greece rose 197 basis points to an all-time high of 1,125 basis points, meaning it costs $1.125 million a year to protect $10 million of the nation’s bonds from non-payment, according to CMA DataVision. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 4.19 basis points to a mid-price of 119.69 basis points as of 6:44 p.m. in New York, the highest since June 14, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 3.89 basis points to 128.69 basis points, Markit prices show. Sales of corporate bonds in the U.S. fell 18 percent this week to $16.5 billion, from $20.3 billion in the period ended June 18, Bloomberg data show. Issuance was below the 2010 average of $19.8 billion for the eighth time in nine weeks, Bloomberg data show. Spreads on speculative-grade bonds widened 21 basis points since June 21 to 689 basis points, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index.
• Morgan Stanley(MS) to Pay $102 Million in Subprime Accord With Massachusetts. Morgan Stanley, the sixth-largest U.S. bank by assets, agreed to pay $102 million to settle claims by Massachusetts that the firm financed and securitized unfair residential loans, state Attorney General Martha Coakley said. Of the $102 million, $58 million will be earmarked for more than 1,000 Massachusetts homeowners, with other funds set aside for the Massachusetts Pension Fund for investment losses and the commonwealth’s general fund, Coakley said today at a press conference in Boston. “This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,” Coakley said. “Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace.”
• ArcelorMittal(MT) Needing Production Cuts as Costs Spiral, Squeezing Returns. ArcelorMittal and competitors in Europe will probably curb steel production to support prices as they struggle to pass on higher raw-material costs, just as a regional debt crisis and rollbacks in state spending cut demand. “You’ll see some blast-furnace stoppages,” said Gordon Moffat, director general of Eurofer, representing steelmakers in Europe including ArcelorMittal, the world’s biggest. “It looks like they’re responding to a weakening of the market.” Slowing demand is damaging efforts to sustain output gains during the past year after the industry hauled itself out of its worst crisis in 60 years. “Prices have come under pressure worldwide,” said Imran Akram, a London-based analyst at Collins Stewart Plc. “It is looking increasingly as if the industry will need to idle more capacity than has been announced.” “There is now a risk that steel production has increased more quickly than the recovery in real demand, which could lead to pricing pressure” in the second half, Matthias Hellstern, an analyst at Moody’s Investors Service, wrote in a note. ArcelorMittal said in April it would expand worldwide output to 80 percent of capacity in the second quarter from 72 percent in the prior three months. In February it said production would reach 85 percent by the end of the year. European producers face falling demand as governments end incentives to buy new cars introduced as part of economic stimulus measures and the debt crisis centered on Greece stifles the chances of a housing-market recovery across the region. Fiat SpA Chief Executive Officer Sergio Marchionne forecast in March that demand for cars in Europe this year will drop about 15 percent to the lowest level since 1994. French new car registrations fell 12 percent in May after a year of monthly gains. Automotive and construction companies made up 43 percent of European steel consumption in 2008, according to Moody’s. “We are looking at weak demand from autos in the second half and at this point construction is likely to remain weak,” said Christian Georges, an analyst at Olivetree Securities Ltd. in London. Steel “price deflation in the second half will be extremely difficult to prevent.”
• China's Stock Markets Are Most Immature in Asia, Goldman(GS) Says. China’s stock markets are “immature” compared with regional rivals, posing a challenge to Shanghai’s ambition of becoming a global financial center within a decade, according to Goldman Sachs Group Inc. Shanghai’s share market has a so-called free float of 30 percent, the lowest among the benchmark equities exchanges in a dozen Asian-Pacific nations, according to data compiled by Goldman. Australia had the highest free-float level at 91 percent, followed by Japan’s 76 percent, the data show. “Despite the high level of liquidity and capitalization, Shanghai’s equity market is still small,” Goldman analysts Christopher Eoyang, Jason Lui and Sunil Koul said in a report. “The structure of Shanghai’s equity market is still relatively undeveloped by regional standards as Chinese regulators have taken a gradualist approach to market development.”
• JPMorgan(JPM) Reorganizes Carbon Unit for More Takeovers. JPMorgan Chase & Co. is reorganizing EcoSecurities, the carbon-emissions company it bought for $206 million, to pursue further takeovers even as the market for greenhouse gases shrinks. “It is possible that EcoSecurities will be in a position to make additional acquisitions in this area over the next few years,” said Mark Nicholls, an independent director for the Dublin-based investor in carbon credits. Nicholls served as its chairman from 2005 until the takeover by JPMorgan last December. “This was not a trading play, not a one- to three-year plan, but a long-term plan by JPMorgan to get into this space, and we are delivering on that plan,” he said in a written response to questions. Boosting its wager may help JPMorgan strengthen its role in a market that the U.S. Commodities Futures Trading Commission says has the potential to be worth $2 trillion. Before that, EcoSecurities Chief Executive Officer Paul Kelly must ride out a slump in emissions trading after the U.S., the European Union and Australia reined in plans to build carbon markets. EcoSecurities has taken stakes in 341 emissions-cutting projects in developing nations, more than any other company under a United Nations-supervised climate change program, data compiled by Bloomberg show. In return, the company earns tradable credits that may be sold to other investors or to industries that use them as pollution permits. Other UN credit investors include Italian utility Enel SpA and Goldman Sachs Group Inc. The value of UN-sponsored credits produced last year dropped 59 percent to $2.7 billion as the bureaucrats running the system struggled to process applications, the World Bank said last month. Kelly, the JPMorgan executive who led the acquisition team and now steers EcoSecurities through the slump, has cut back investment in new projects until the regulatory outlook clears, just as competitors are doing, Nicholls said.
• Osborne Takes 'Chainsaw' to British Government Spending. George Osborne’s spending cuts to narrow the record U.K. deficit will be the longest and deepest since World War II, the Institute for Fiscal Studies says. The squeeze means departments face an unprecedented six years of spending cuts, with transport, higher education and housing at risk of having their budgets reduced by a third, the independent IFS calculates. Spending has never fallen for more than two consecutive years in any other postwar period. “The chancellor unleashed a vast swathe of tax and spending decisions that belied his six weeks in office,” said David Page, an economist at Investec Securities in London. “His first budget took not so much an ax, but a chainsaw, through a variety of expenditure commitments, including welfare payments.”
• Australia's New Leader Gillard Likely to Tax Miners, Morgan Stanley Says. Australia’s new Prime Minister Julia Gillard is still likely to introduce a tax on resources profits following negotiations with mining companies over the levy that helped the premier oust her predecessor, Morgan Stanley said. Gillard was closely connected to former prime minister Kevin Rudd’s policy decisions, which allows little prospect for a big change, Morgan Stanley strategist Gerard Minack said in a telephone interview from Sydney. BHP Billiton Ltd. and Rio Tinto Group slid in Sydney trading on speculation Gillard will pursue the tax. The stocks rose yesterday after she pledged to consult companies on the plan. “We will still get a super profits tax on the mining sector,” said Minack. “You can’t assume that a change in prime minister means that the tax gets dropped.”

Wall Street Journal:

• Snags Slow Financial Overhaul. Congressional Democrats scrambled Thursday to resolve a number of flashpoints in the financial-rules overhaul bill while a fractious block of House Democrats threatened to upend the package. Rep. Barney Frank (D., Mass.) and Sen. Christopher Dodd (D., Conn.) said they believed a final deal on the new package regulating the financial sector would be completed soon, but talks hit snags Thursday. Aides said they believed a deal would still get done but added that the process was slower than expected. The most divisive issue was a provision backed by Sen. Blanche Lincoln (D., Ark.) that could force banks to spin off their derivatives businesses. Many New York Democrats and several dozen business-friendly Democrats have said the provision, known as "716," needs to be removed.
  
• Why It's Safer to Drill in the 'Backyard'. Texas has had 102 oil and gas well blowouts since the start of 2006, without catastrophic consequences. As oil continues to gush from BP's Macondo well and politicians posture, it is time for us to ask why we are drilling in such risky places when there is oil available elsewhere. The answer lies in the mantra NIMBY—"not in my back yard." BP was drilling for oil in 5,000 feet of water in the Mississippi Trench, more than 40 miles off the Louisiana coast. The site was leased in March 2008 from the Interior Department's Minerals Management Service. The area is one of an increasingly limited number of places available for oil and gas development in the United States.
• Iowa Avoids Build America Bonds, Citing Program Uncertainties. The next time Iowa needs to borrow money, it will use traditional tax-exempt bonds instead of Build America Bonds, a state official said, because the savings offered by the subsidized federal program don't outweigh the potential pitfalls--at least for now. "We just decided that the benefit really wasn't worth it and thought we could do really well in the tax-exempt space," Iowa Deputy Treasurer Stefanie Devin said in an interview Thursday with Dow Jones Newswires.
• Commodities Star Trader Andrew Hall Absorbs Loss. Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds. Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund. His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds.

Bloomberg Businessweek:

• More Car Jobs Shift to Mexico. U.S. production may decline over the next decade, despite the bailout.
• For-Profit Colleges Need More Oversight, Democratic Senator Says.
  

CNBC:

• China's Export Economy Begins Turning Inward.

NY Times:

• Local Debt in China Worries Its Auditor. China won praise last year for reviving domestic growth with aggressive bank lending and a $586 billion economic stimulus package. But now the nation’s top auditor is warning that the mounting debt of local governments could undermine the recovery in some parts of the country. Li Jiayi, head of the National Audit Office, said in a report to the legislature this week that borrowing by local governments had created public debt burdens totaling hundreds of billions of dollars. The report questions whether those governments have the resources to pay down the loans. The warning is the latest indication that a portion of the government-backed loans and stimulus money could eventually be categorized as bad loans. It is unclear how serious a threat local government debt is to China’s booming economy. On Thursday Fitch Ratings, the credit rating agency, warned that record loan growth and aggressive efforts by state-run banks to repackage and sell debt to investors had raised credit risks in the country and could “lead to another financial crisis,” according to a report published by Bloomberg News. In a release issued Wednesday by Fitch, Charlene Chu, the firm’s senior director for financial institutions in China, said that the financial positions of Chinese banks were more strained than they appeared to be and that “future asset quality deterioration is a near certainty.”

Zero Hedge:

• Second Straight Hungarian Bond Auction Failure As Citi's Willem Buiter Calls For €2 Trillion European Rescue Facility, Ridicules Stress Tests.

CNNMoney:

• The Future of Oil is the Future of the Gulf.

LA Times:

• California Energy Commission Approves $114.3 Million for Electric and Ethanol Vehicle Infrastructure. Owners of eco-friendly vehicles in California are now $114.3 million closer to having workable options for charging and fueling up.

Chicago Sun-Times:

• Harris: Obama Knew of Blagojevich Plot. A top aide to former Gov. Rod Blagojevich said he believed Barack Obama knew of Blagojevich's plot to win himself a presidential Cabinet post in exchange for appointing Valerie Jarrett to the U.S. Senate. John Harris, Blagojevich's former chief of staff, testified Wednesday in the former governor's corruption trial that three days after the Nov. 4, 2008, presidential election, the ex-governor told Harris he felt confident Obama knew he wanted to swap perks. "The president understands that the governor would be willing to make the appointment of Valerie Jarrett as long as he gets what he's asked for. . . . The governor gets the Cabinet appointment he's asked for," Harris said, explaining a recorded call. Harris said Blagojevich came away believing Obama knew what he wanted after having a conversation with a local union representative, who in turn spoke with labor leader Tom Balanoff, with whom Blagojevich met to discuss a Jarrett appointment. Jarrett, now a White House adviser, was seeking the appointment to Obama's Senate seat. Defense lawyers say Harris' testimony contradicts the government's previous public statements that Obama knew nothing about deal-making involving the Senate seat appointment. The defense on Wednesday moved to force the prosecution to turn over FBI reports of Obama's interview with federal agents in December of 2008. Obama is not accused of wrongdoing. "Testimony elicited by the government from John Harris and wiretaps played in court raise the issue of President Obama's direct knowledge and communication with emissaries and others regarding the appointment to his Senate seat," lawyers wrote in the filing.

Nasdaq:

• Carlyle is First Test for New Chinese Tax Law. The Chinese government is beginning to enforce new tax rules to prevent potential tax revenue from slipping out of the country, with potentially "scary" consequences for private-equity investors, lawyers said. In December 2009, China drafted a new regulation called Circular 698, which requires international shareholders to disclose the sale of positions in Chinese companies through the transfer of shares held by an overseas holding company. The regulation is aimed at preventing investors from using shell companies to shield themselves from local Chinese taxes, lawyers said. In what appears to be the first enforcement of this regulation, a local tax bureau is requiring the Carlyle Group to pay out an estimated $25 million for capital gains on an investment in Yangzhou Chengde Steel Tube Co. (Chengde), which the firm recently exited, LBO Wire has learned. The fact that China's regulatory agencies are enforcing the new rules marks a turning point, lawyers said. "It's big...especially for private equity funds," said Ni Yongjun, a partner in the Shanghai offices of the law firm White & Case LLP. "In the past, you had rules but many times the enforcement was quite weak."

Politico:

• Obama: No Hasty Afghan Exit. A day after replacing the top American general in Afghanistan, President Barack Obama said Thursday that U.S. troops could remain in significant numbers in the country well after his withdrawal timeline begins next summer.
  
• Harry Reid's High-Stakes Climate Bill Gamble. Senate Majority Leader Harry Reid (D-Nev.) is planning a high-risk, high-stakes strategy for bringing climate and energy legislation to the floor ahead of the August recess. The gamble: yoking a bipartisan, fast-track measure to overhaul offshore drilling rules with a broad, contentious bill capping greenhouse gas emissions that otherwise would have almost no chance of passage on its own. Reid’s own Democrats are mixed on the strategy for notching 60 votes. Some argue that public perception of fossil fuels in the wake of the BP oil spill will sway enough of the party’s swing votes and open Republicans to attack if they oppose the measure as their reelection campaigns head into the homestretch.

USA Today:

• Oil Spill Takes Toll on Tourism on Gulf Coast.

Reuters:

• Japan May CPI Falls 1.2% Y/Y, Down 15th Month.
• NYSE Short Interest at Year High as Negativity Grows. Short is up sharply since the beginning of the year. On NYSE it has risen 7.3% since late December and is now at its highest level since the first half of July 2009. On Nasdaq, it is up 15.3% in the last 6 months.
• Oracle(ORCL) Earnings Beat Street View, Shares Rise.
• RIM(RIMM) Shares Drop as BlackBerry Shipments Disappoint.
  

Financial Times:

• Banks Win Battle for Limits to Basel III. Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry. After wrangling over the details of a regulatory overhaul published six months ago, a consensus on the Basel committee is suggesting that its proposals be thinned down. The most significant change to the proposed reforms concerns the committee’s recommendations on the volume of liquid funds that banks should hold to protect them against another financial crisis. Proposed short-term emergency funding measures will go ahead. But the committee is likely to shelve the idea that banks should be forced to maintain a longer term “net stable funding ratio” that aligns the maturity of their assets and liabilities. That contentious proposal, fiercely opposed by the banks, could be replaced by an alternative system of oversight, said officials close to the drafting process.

TimesOnline:

• UK Retirement Age May Be Raised Every Five Years. The age for retirement will rise every five years under radical moves by the coalition to curb the £55 billion-a-year state pension bill. New laws are expected to be introduced in this Parliament that will link pension payments to life expectancy for the first time, senior government sources told The Times. It would mean that in just 25 years time the pension age will have risen to 70, affecting all workers now aged 40. It is estimated that, by automatically pushing back pension entitlement as the population ages, up to £13 billion a year would be recouped. A similar system of linking retirement to life expectancy is being explored in Denmark, where the pension age will rise from 65 to 67 between 2024 and 2027.

Telegraph:

• Ben Bernanke Needs Fresh Monetary Blitz as US Recovery Falters. Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral. Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners.

Guardian:

• Greece Puts Its Islands Up for Sale to Save Economy. Desperate attempt to repay debts also driven by inability to find funds to develop infrastructure on islands. Greece is making it easier for the rich and famous to fulfill their dreams by preparing to sell, or offering long-term leases on, some of its 6,000 sun-kissed islands in a desperate attempt to repay its mountainous debts. The Guardian has learned that an area in Mykonos, one of Greece's top tourist destinations, is one of the sites for sale. The area is one-third owned by the government, which is looking for a buyer willing to inject capital and develop a luxury tourism complex, according to a source close to the negotiations.

Yonhap News:

• North Korea declared a nine-day sailing ban in an area off its western coast, prompting South Korea to be on watch for the possible test-launching of short-range missiles by the communist nation.

Radio Television Hong Kong:

• A People's Bank of China survey of Beijing residents showed 40.9% expect housing prices in the city to drop in the third quarter of the year, citing the Chinese central bank.

China Daily:

• Chinese local government debt may depress banking industry profitability by 7.9% between this year and 2012, citing a report from the Chinese Academy of Social Sciences. Banks may have to set aside 283.1 billion yuan($42 Billion) in provisions for bad loans over the next two years as the ratio of doubtful debt to local financing arms rises to 3.36% and watchlist loans reach 13.46%, according to CASS's 2010 Blue Book for China Finance.
  

South China Morning Post:

• Honda Motor, Japan's No. 2 carmaker, said its China production fell 37% last month from April after the first in a series of labor strikes. The company's China sales dropped 10% from a year earlier in May, quoting figures from consultancy JP Power and Assoc.

Evening Recommendations
Citigroup:

• Reiterated Sell on (RIMM), target $50.

Night Trading

• Asian equity indices are -1.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 135.0 +5.0 basis points.
• Asia Pacific Sovereign CDS Index 131.0 +3.25 basis points.
  
• S&P 500 futures +.08%.
  
• NASDAQ 100 futures -.24%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AZZ)/.57
• (KBH)/-.30
  

Economic Releases
8:30 am EST

• Final 1Q GDP is estimated to rise +3.0% versus a prior estimate of a +3.0% gain.
• Final 1Q Personal Consumption is estimated to rise +3.5% versus a prior estimate of a +3.5% gain.
• Final 1Q GDP Price Index is estimated to rise +1.0% versus a +1.0% prior estimate.
• Final 1Q Core PCE is estimated to rise +.6% versus a prior estimate of a +.6% gain.

9:55 am EST

• Final Univ. of Mich Consumer Confidence for June is estimated at 75.5 versus a prior estimate of 75.5.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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

Stocks Substantially Lower into Final Hour on Rising Sovereign Debt Angst, Increasing Economic Fear, Financial/Energy Sector Pessimism

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 29.07 +8.03%
  
• ISE Sentiment Index 80.0 -20.79%
  
• Total Put/Call 1.24 +27.84%
  
• NYSE Arms 2.52 +119.56%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 120.49 bps +3.37%
  
• European Financial Sector CDS Index 154.34 bps +6.28%
  
• Western Europe Sovereign Debt CDS Index 133.50 bps +6.94%
  
• Emerging Market CDS Index 260.41 bps +1.91%
  
• 2-Year Swap Spread 38.0 +3 bps
  
• TED Spread 41.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .12% unch.
  
• Yield Curve 245.0 +2 bps
  
• China Import Iron Ore Spot $143.10/Metric Tonne -.07%
  
• Citi US Economic Surprise Index -20.0 +.6 point
  
• 10-Year TIPS Spread 1.95% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -168 open in Japan
• DAX Futures: Indicating +15 open in Germany

Portfolio:

• Slightly Lower: On losses in my Technology and Retail long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 trades substantially lower, to session lows, despite a bounce in the euro and rise in commodities. On the positive side, Education, Gold, Drug and Utility stocks are holding up well. On the negative side, Gaming, Semi, Computer, Paper, Oil Service, Road&Rail, Retail, Construction, Networking, Disk Drive, Energy and Alt Energy shares are especially weak, falling 2.5%+. It remains a huge negative that Greece sovereign debt angst continues to rise despite Europe's recent actions. The Greece sovereign cds is rising another +7.98% to 995.94 bps, which is very near its record high of 1,031 on May 7th. Moreover, the China sovereign cds is rising +4.44% to 87.71 bps, the Japan sovereign cds is rising +4.98% to 91.28 bps and the Russia sovereign cds is surging another +4.11% to 193.67 bps. Finally, the European Investment Grade CDS Index is rising another +3.9% to 123.79 bps. Oil is firm today on hurricane/Iran fears and the euro continues to trade well on weak US economic data and short-covering. The AAII % Bulls fell to 34.46% this week, while the % Bears rose to 32.43. Given recent headwinds I would have expected to see a few less bulls. (AAPL) continues to support the Naz and trades very well. (RIMM) reports after the close today. I suspect the company is losing more market share than perceived and will likely disappoint again either this quarter or next. Today's equity decline is a bit too orderly and quiet to indicate another tradable low, in my opinion. I expect US stocks to trade modestly lower into the close from current levels on technical selling, rising US housing worries, increasing sovereign debt angst, China bubble fears, tax hike worries, increasing financial sector pessimism and more shorting.

Today's Headlines

Bloomberg:

• Greek Bond Risk Jumps to Record on Signs of Sputtering Recovery. The cost to insure Greek government bonds against default jumped to a record on speculation the slowing economic recovery will add to the country’s debt woes. Credit-default swaps on Greece rose 145 basis points to an all-time high of 1,077 basis points, according to CMA DataVision. Contracts on Portuguese government securities climbed 16 basis points to a two-week high of 336.5, while Spain rose 4 to 269. Greek bond risk rose as data showed European industrial orders rose less than expected in April, following a report yesterday that showed growth in the region’s services and manufacturing industries slowed in June. “Some type of restructuring is likely inevitable,” said Eric Stein, a portfolio manager for Eaton Vance’s Global Macro Absolute Return Fund, which in 2005 bought credit swaps on $50 million of Greek debt with an annual premium of $99,000 for 15 years, according to regulatory filings. The fund still owned credit swaps on Greece as of March 31, according to its website. “It’s very tough, in the long-term, to service their debt in its current form,” he said. The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds rose 10 basis points to 782 basis points. That’s the most since May 7, before the aid package was announced. Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings increased 16 basis points to 563.5, JPMorgan Chase & Co. prices show. The Markit iTraxx Europe Index of 125 investment-grade companies rose 4 to 129.9.
• U.S. Farmers May Face Subsidy Cuts, Peterson Says. Growers of corn, cotton and other crops may have to accept reduced subsidies in the next farm bill as budget-cutting becomes necessary to contain record deficits, House Agriculture Committee Chairman Collin Peterson said. “We’re not going to have any new money; we’ll probably have less money,” the Minnesota Democrat said today at a hearing in Washington of the House Agriculture subcommittee that oversees commodity programs. “We’re going to have to make it work,” he said.
• BP's(BP) Demise Would Threaten U.S. Energy Security, Industry Jobs. Oil spill aside, U.S. energy security will suffer if BP Plc goes under or is significantly reduced in size. Such a scenario would have implications for U.S. energy policy at home and abroad -- and mostly bad ones, Bloomberg Businessweek reports in its June 28 issue. Obama recognized as much when he said on June 16 that “BP is a strong and viable company, and it is in all of our interests that it remain so.” The company’s demise would be disruptive to the American oil industry, given that BP is the largest oil and gas producer in the U.S., with about 1 million barrels per day of production. Some 7,000 of BP’s 23,000 U.S. employees work in the Houston area, many in a suburban office park just off the Katy Freeway. From there the company runs its Gulf of Mexico offshore operations with a phalanx of engineers, geologists, and computer scientists. “These are highly compensated people,” says J. Robinson West, chairman of Washington-based consultants PFC Energy. Until the Deepwater Horizon accident, BP’s Gulf activities were viewed by the U.S. government as a big plus for U.S. energy security interests. Since the mid-1990s, the British company has been the leader in Gulf exploration, pushing into deeper water and drilling farther into the earth. Its projects were key to the 7 percent growth in production the U.S. achieved last year, reversing an 18-year decline in output. BP’s most daring move has been last year’s $20 billion deal in Iraq to add almost 2 million barrels per day in production to the country’s prized oil field in Rumaila. That attracted deals with other companies, greatly improving Iraq’s economic prospects. “BP was bold in going in first and opening up the way for the rest of them,” says Toby Dodge, an Iraq scholar at the International Institute for Strategic Studies in London. Oppenheimer & Co. oil analyst Fadel Gheit thinks BP could end up in bankruptcy if costs exceed $100 billion, a possibility if partners in the stricken well, such as Anadarko Petroleum Corp., manage to pin full legal responsibility for the oil spill on the U.K.-based producer. If so, BP may have to part with some prized assets, and Chinese and Russian oil companies less sympathetic to U.S. interests could step in as buyers and change the geopolitics of the oil industry. “Companies will be interested in buying assets in Azerbaijan, Angola, Brazil, and potentially also Norway,” says Gudmund Halle Isfeldt, an analyst at DnB Nor ASA in Oslo, Norway’s largest bank.
• Iceland's Creditor Risk Grows as Banks Face Losses. Icelandic banks may face a second crisis as a court ruling banning some foreign currency loans saddles lenders, mostly owned by international creditors, with losses on $28 billion of debt. “If the decision means all loans in kronur linked to the value of foreign currencies are illegal, I can’t imagine the Icelandic banking sector will survive that,” said Oddgeir A. Ottesen, an economist at IFS Consulting in Reykjavik, in a telephone interview. Credit default swaps on Iceland’s five-year debt rose 5 basis points to 322, the first increase this week and the biggest jump since June 4, according to CMA DataVision prices.
• New York May Tax Clothing Sales to Narrow Budget Gap. New York Governor David Paterson said a sales tax on clothing purchases of less than $110 might be part of actions needed to close the state’s $9.2 billion budget deficit. “Taxes on clothes has been brought back to us” by legislators, Paterson said in an interview on New York City radio station WOR today. “It’s in the discussion phase.”
• Merkel, Leaving for G-20 Meeting, Sees Rift on Deficits, Rules. German Chancellor Angela Merkel said she expects conflict at the Group of 20 summit in Canada this week on issues ranging from economic policy to financial regulation. Europeans and especially “Germans are of the opinion that the reduction of deficits is absolutely necessary to create sustainable economic growth,” Merkel told reporters at the Chancellery in Berlin today before leaving for Canada. “There are others who don’t see the exit strategy as we see it; I think there will be very fruitful but also controversial debates on these themes.” Merkel’s comments underscore a divergence with President Barack Obama, who in a letter to his G-20 counterparts dated June 16 urged a focus on economic growth, saying order to public finances should be restored in the “medium term.”
• The extra yield investors demand to hold 10-year Treasury notes over 2-year securities has fallen to a level signaling further strength in the market for government debt, according to Royal Bank of Scotland Group Plc. A close below 2,435 percentage points, "where the primary steepening trendline comes in," will indicate a further drop in yields, wrote William O'Donnell, managing director in Stamford, Connecticut, at RBS Securities, in a research note today.
• Apple(AAPL) May Sell 1 Million iPhones in New Model's Debut.
• Lennar Home(LEN) Orders Fall as Much as 25% in June, CEO Miller Says. Lennar Corp.’s home sales are down 20 percent to 25 percent this month compared with a year earlier as the expiration of a government tax credit for buyers saps demand, Chief Executive Officer Stuart Miller said. “The entire market knew there’d be a slowdown as we came off the tax credit,” Miller said on a conference call with investors today. “It’s just that the reality of it doesn’t feel good.” Toll Brothers Inc., the biggest U.S. luxury-home builder, said on June 16 that orders were running about 20 percent behind year-earlier levels in the three weeks after its May 26 earnings release. Meritage Homes Corp.“Most people are viewing the glass that is half empty right now,” Toll Brothers CEO Douglas Yearley Jr. said at an investors conference sponsored by Deutsche Bank AG in Chicago today. “They are not buying.” expects sales for its quarter ending June 30 to fall about 25 percent below the same period last year, when the Scottsdale, Arizona-based company closed on 890 homes, CEO Steven J. Hilton said at the conference.

Wall Street Journal:

• States See Mixed Demand for Appliance Rebates. States have paid out less than half the money set aside for rebates on energy-efficient household appliances, disappointing retailers and manufacturers that had hoped for a repeat of the hot demand fueled by last year's cash for clunkers auto scheme. The Department of Energy said this week that $108 million of the $300 million set aside for the program had been paid out on purchases of appliances such as clothes washers and heating and cooling systems.
• Representative McMahon to Vote 'No' If Derivatives Plan Isn't Altered. Rep. Michael McMahon (D., N.Y.) said in an interview today that he will vote against the financial overhaul bill if a section that could require banks to spin off their derivatives businesses isn’t changed immediately. McMahon’s threat underscores New York Democrats’ hostility toward the provision, known as “716” and inserted by Sen. Blanche Lincoln (D., Ark.). He said New York Democrats are discussing what they should do, and that others appeared to also be weighing voting against the bill.
• U.S. Financial Clouds Looming. How bad are things out there? One index suggests spillover from the European sovereign-debt crisis has pushed U.S. financial conditions to their worst since the Lehman Brothers aftermath. In the second quarter, the U.S. Monetary Policy Forum conditions index fell to minus-1.82, its lowest since the fourth quarter of 2008, Deutsche Bank calculates.
• Democrats Face Split on Derivatives Rules.
  

NY Times:

• Cuomo Accepts Millions From Interests He Assails. Attorney General Andrew M. Cuomo, declaring his candidacy for governor of New York, could not have been clearer. “The influence of lobbyists and their special interests must be drastically reduced with new contribution limits,” Mr. Cuomo said last month. “We will be taking on very powerful special interests which have much to lose. We must change systems and cultures long in the making.” But as he delivered his announcement, Mr. Cuomo was sitting on millions in campaign cash from the very special interests whose influence he said he wanted to limit. An analysis by The New York Times shows that of the estimated $7.1 million that the Cuomo campaign has received from political action committees, associations, limited liability corporations and other entities, more than half has come from the biggest players in Albany: organized labor, the real estate and related industries like construction, the health care sector and lobbying firms.
• Hedge Fund Regulations Stall in Europe. Talks have collapsed between the European Parliament and national governments over new controls for hedge funds due to a continuing dispute over licensing for funds from outside the bloc. On Thursday, the parliamentarian leading negotiations with European countries said he had disbanded efforts to reach an agreement this month on rules to clamp down on hedge funds and private equity.

NY Post:

• Port Authority Cops on Lookout for Terror Attack. Port Authority cops who staff the agency’s bridges and tunnels were read harrowing details of a terrorist threat today advising them to be on the lookout for a fuel-filled tanker meant to explode prior to a secondary blast designed to decimate any first responders, The Post has learned. The chilling warning was read at roll call for four police commands – cops assigned to the Holland and Lincoln Tunnel; the George Washington Bridge; and also the Staten Island command, which incorporates the Bayonne and Goethals Bridge and the Outerbridge Crossing, a source said.

Business Insider:

• Citi: Brace For An Avalanche of Economic Downgrades. The rising expectations cycle appears to be peaking, according to Citi in a new strategy note. We're in for a double dip for growth expectations, if not a complete double dip for the economy:
• Goldman(GS) Sorry, Housing Prices Will Keep Falling for Two Years.
• The Banks Keep Stealing - Why Do We Keep Paying? by Dylan Ratigan.
• Hugh Hendry: Soros is a Socialist, The Euro is Doomed and Everyone's Shorting the Wrong Continent.
  

Washington Post:

• Poll: Lawmakers Who Weaken FinReg Could Be Vulnerable. The poll, which was commissioned by Americans for Financial Reform, finds that an overwhelming majority would be less likely to reelect their member of Congress if they weaken FinReg: When asked if they would be more or less likely to re-elect their member of Congress if he or she "voted for loopholes that would make it easier for Wall Street and the big banks to keep doing business as usual," fully 78% of voters said they would be less likely to re-elect their member of Congress, while 63% said they would be much less likely to re-elect him or her. You may be tempted to dismiss this finding because it's a Dem firm. So check out the new NBC/WSJ poll. It finds that 53 percent generally want their Congressional candidate to support reforming Wall Street, 25 percent enthusiastically so. Getting meaningful FinReg appears to be on the minds of Americans, and it could be a voting issue this fall.

Politico:

• Democrats Exempt Unions From Disclosure Rules. A Democratic amendment tucked into campaign finance legislation Wednesday night appears to exempt big labor unions from proposed disclosure requirements. The change, inserted by Rep. Bob Brady (D-Pa.), chairman of the committee charged with handling the bill and a key union ally, would also affect other groups funded by members who pay dues of less than $50,000.
• Corker Warns of Bank Bill 'Hijacking'. Sen. Bob Corker (R-Tenn.) accused a handful of senators Thursday of “hijacking” the Wall Street reform negotiations. Corker directed his comments at Banking Committee Chairman Chris Dodd, but he was referring to the Connecticut Democrat's intense negotiations with a handful of moderate Republicans and Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.). “A few senators, over very parochial single-issue items, almost are hijacking the process, and I just want to say to my friend there are a numbers of ways to get to 60 votes,” Corker said to Dodd. “And it is fascinating to watch. Now, a few senators who really haven’t spent a lot of time on this issue — over one issue — potentially hijacked the process."

Reuters:

• FACTBOX - China Labor Strikes Bring Factories to a Halt. Discontent among China's estimated 130 million strong migrant workers, who have helped power the country's growth, threatens to undermine the government's legitimacy and erode the nation's competitiveness as a low-cost factory hub.

Financial Times:

• China Currency Dispute Has Not Gone Away. Near the end of the first week of trading under the new regime, the renminbi has only appreciated against the dollar by the grand total of 0.39 per cent. When the Chinese central bank said there would be no dramatic movements in the exchange rate, it clearly was not kidding. His message was this: while foreign governments might see the new policy as a passport to a stronger renminbi, China’s export lobby is welcoming it as a way of protecting itself from a weaker euro. Those objectives could easily conflict. Some of this confusion will spill over into this weekend’s G20 summit.

Handelsblatt:

• Government support to stimulate the economy can't last forever, German Finance Minister Wolfgang Schaeuble wrote. "Stimulating overall demand with funds financed by credits mustn't become the permanent state, like feeding a drug-addiction," Schaeuble wrote.
  

Repubblica:

• European Central Bank President Jean-Claude Trichet said the credibility of austerity measures taken by governments needs to be kept constantly under control, citing an interview with him. It's wrong to think that austerity measures taken by governments such as Germany strangle a recovery, he said.

El Comercio:

• OPEC President Wilson Pastor said stricter regulations on deepwater oil exploration following the BP Plc(BP) spill in the Gulf of Mexico will boost crude prices.