Wednesday Watch

Evening Headlines
Bloomberg:

• Euro Falls to 4-Year Low, Yen Jumps on German Speculation Ban. The euro sank to the weakest level in more than four years and the pound slumped to a 13-month low as Germany’s ban on some speculative sales triggered concern that Europe’s debt crisis will worsen. The yen gained against all 16 major counterparts amid heightened demand for safety after Germany prohibited naked short-selling and speculating on sovereign debt, and the Bank of Italy allowed lenders to exclude losses on government bonds. “If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.” “The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.”
  
• Hedge Funds Bet Europe's $1 Trillion Bailout Won't Solve Crisis. Kyle Bass, who made $500 million in 2007 on the U.S. subprime collapse, is betting Europe’s debt crisis won’t be solved by the $1 trillion loan package the International Monetary Fund and European Union agreed on last week. “The EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world,” wrote Bass, head of Dallas-based Hayman Advisors LP, in a letter to clients sent after the bailout was announced.
  
• Swaps Soar on Germany's 'Act of Desperation': Credit Markets. Credit-default swaps soared on German Chancellor Angela Merkel’s plan to ban speculation on European government bonds, with the contracts sparking concern among investors about increasing government regulation. The Markit CDX North America Investment Grade Index Series 14 climbed 12.17 basis points to a mid-price of 120.67 basis points in New York, according to Markit Group Ltd. The increase in the index, which typically rises as investor confidence deteriorates, was the second-largest since March 2009. “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. The Markit iTraxx Australia index jumped 17 basis points to 125 basis points as of 10:35 a.m. in Sydney, on course for its biggest one-day gain since May 7, according to Nomura Holdings Inc. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 15 basis points to 136.5 as of 8:42 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Japan index climbed 14.5 basis points to 138.5 as of 9:10 a.m. in Tokyo, according to Morgan Stanley.
• CLSA 'Massively Underweight' Australia on China. Australian equities will be the biggest losers in the Asia-Pacific region this year as a slowing Chinese economy cuts demand for commodities, according to CLSA Asia Pacific Markets. “We are massively underweight Australia,” Christopher Wood, the second-ranked Asia strategist in Institutional Investor magazine’s annual poll, said in an interview yesterday in Shanghai. “Australia is perceived as an economy that is geared to China on the commodity side.” “The impact of tightening is starting to affect other markets such as commodities,” said Hong Kong-based Wood, who is CLSA’s chief equity strategist.
• Goldman Sachs(GS) Advice Hands Clients Losses in 7 of 9 Top Trades. Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who followed the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar. The trades are distributed by Goldman Sachs’s global markets economic research group. It tracks the performance of the trades in a daily research note sent to clients. The time period of the recommendations is 12 months.
  
• Goldman(GS) to Face SEC Deputy Director in Subprime Suit. Lawyers for Goldman Sachs Group Inc. will face Lorin Reisner, the deputy director of enforcement for the Securities and Exchange Commission, in the agency’s lawsuit over the bank’s use of subprime mortgage-backed securities. Reisner today filed a one-sentence “notice of appearance” in federal court in Manhattan, indicating he will participate in the case. Reisner, who worked at the law firm Debevoise & Plimpton LLP before joining the SEC last year, was an assistant U.S. attorney in New York from 1990 to 1994. “It sends a strong message that the enforcement division is both stepping up to the plate and standing behind its case,” said Jacob Frenkel, a former SEC enforcement division attorney, who isn’t involved in the Goldman lawsuit. “It’s unusual, but it’s a logical and brilliant move when you have skilled trial lawyers who are part of senior management who step forward.”
• Brazil's Bovespa Tumbles on Europe Concern, Credit-Card Rules. Brazil’s Bovespa stock index fell to the lowest level since October on concern the debt crisis in Europe will curb global growth and a government plan to overhaul credit-card regulations will hurt payment processors. Payment firms Cielo SA and Redecard SA fell more than 10 percent after a Justice Ministry official said the nation will ask companies to reduce fees. Itau Unibanco Holding SA led a drop for financial companies, following a bank sell-off around the world, after Germany’s ban of certain bearish investments fueled concern Europe’s debt crisis will worsen. The Bovespa slid 3.2 percent to 60,841.08, the biggest drop since May 4. The decline extended the drop from its April 8 high to 15 percent.
• BHP(BHP) Won't Rule Out Dividend Cut on Resources Tax, Review Reports. BHP Billiton Ltd. Chief Executive Officer Marius Kloppers won’t rule out a cut in the company’s dividend because of the Australian government’s plan to impose a resource profits tax, the Australian Financial Review reported, citing an interview.
• China to Drive a 'Hard Bargain' on Yuan, State Researcher Writes. China, as the largest holder of U.S. debt, should drive a “hard bargain” with the U.S., especially as it relates to an appreciation of the yuan, Zhang Monan, an economics researcher with the State Information Center, wrote in a commentary in the China Daily today. The nation should transform its financial clout into policies that are in its advantage and also use that clout to improve China’s ability to fend off pressure from the outside world, Zhang wrote. China should push to make the yuan an international currency, which includes increasing the proportion of global trade settled in yuan, developing the yuan into a leading investment currency and making the yuan a leading reserve currency, Zhang wrote. Steps should also be taken to adjust China’s foreign assets structure so that its “capital advantages” become “institutional, resources and investment advantages,” Zhang wrote.
• Kroll to Begin Rating Mortgage Bonds Next Quarter. Jules Kroll, the risk consulting executive whose former company’s work included probing the hidden assets of Iraq dictator Saddam Hussein’s regime in the 1990s, plans to start his credit-ratings business with grades on U.S. home-loan debt “early” next quarter. Kroll Bond Ratings Inc. will initially offer unpaid opinions on outstanding securities, “some of which we feel have ratings that are still substantially too high and others that we feel have been marked down overly aggressively” as existing competitors respond to criticism, Kroll, 69, said today in a telephone interview.
• Copper Drops, Snapping Rebound, on Renewed Europe Debt Concern. Copper dropped, snapping a rebound from a three-month low, on concern Europe’s debt crisis may worsen and reduce demand for raw materials. Aluminum, lead, zinc and nickel also fell. Three-month delivery copper on the London Metal Exchange slumped as much as 3.4 percent to $6,470 a metric ton and traded at $6,540 at 9:30 a.m. in Shanghai. “There may be short-lived rebounds now and then for some metals but the big downtrend is not over yet against the macro backdrop,” Zhu Mingyuan, an analyst at Xiangyu Futures Co., said from Shanghai. Aluminum in London dropped 1.9 percent to $2,014 a ton. Lead slumped 3.8 percent to $1,765 a ton and tin fell 1.3 percent to $17,270 a ton.
• Calpers Demands $600 Million More From California Amid Deficit. The California Public Employees’ Retirement System, the largest U.S. public pension, wants an extra $600.7 million from the state, which is confronting a $19 billion budget deficit. The pension fund’s 13-member governing board is set to vote tomorrow to increase the amount the state must pay as its share of retirement costs to $3.9 billion in the fiscal year that starts July 1. The state put in $3.3 billion this year. The increase is needed, Calpers managers have said, after a 24 percent drop in the fund’s value in the past fiscal year. “This is further evidence of an unsustainable pension system that must be reformed,” Schwarzenegger, 62, a two-term Republican, said today in a statement. “Every additional dollar we spend on state employee pensions is a dollar we take from education, health, and public safety.”
• Microsoft(MSFT) Sues Salesforce.com(CRM) for Infringing Patents.
• Harvard's Rogoff Says EU's Bazooka Won't Prevent Defaults. Kenneth Rogoff says Europe’s unprecedented aid package, worth roughly $1 trillion, won’t be enough to prevent sovereign debt defaults. What’s needed, the Harvard University economist says, is a mechanism to allow countries such as Greece to walk away from the euro.
• 'Tainted' Credits Pull Down UN Carbon Price: Energy Markets. Emission traders’ most-profitable credits, linked to greenhouse gases considered more harmful than carbon dioxide, are dragging the United Nations carbon market to its biggest discount in a year. The UN faces a devaluation of the tradable credits it gives investors that pay for projects to reduce hydrofluorocarbons, or HFCs, because the European Union may favor alternatives such as windfarms to combat global warming. UN offsets for 2012 traded yesterday at 4.11 euros ($5.04) a metric ton less than comparable EU permits, twice the spread at the end of last year. Goldman Sachs Group Inc. and Royal Dutch Shell Plc are among investors that may get lower returns amid a clampdown on HFCs.
• Goldman, Credit Suisse Cut China Property Forecasts. Goldman Sachs Group Inc. and Credit Suisse Group Inc. cut profit and share-price estimates for Chinese property companies, citing a government clampdown on speculation to avoid asset bubbles. Goldman Sachs lowered its 2010 net income estimates by an average 13 percent and reduced earnings forecasts for the next two years by 25 percent, analysts led by Yi Wang wrote in a report today. Credit Suisse pared earnings-per-share estimates by as much as 15 percent for 2010 and 20 percent for 2011. The brokerages slashed share-price targets by as much as 57 percent. The MSCI China Real Estate Index’s 16 companies have slumped an average 24 percent this year as the central bank raised bank reserve requirements three times, while the government increased down-payment requirements for second homes and banned loans for third-home purchases. “In view of the revised tightening measures since mid- April, we turn more cautious on the property sector, particularly on transaction volumes for the remainder of the year,” Credit Suisse analysts led by Jinsong Du wrote in a report yesterday. Property transaction volumes will tumble by about 15 percent on average this year from 2009, the brokerage estimated, keeping an earlier forecast that prices will slump 30 percent from current levels. Goldman Sachs predicted volumes will fall 40 percent between May and December from a year earlier, while home prices will fall as much as 30 percent from current levels, according to a note today. “A number of developers with funding gaps may face refinancing issues if banks tighten credit to developers further,” the Goldman Sachs analysts wrote. “We suggest investors avoid such secondary real estate brokers due to their high leverage to transaction volumes.” Sales of new homes in Shanghai fell to a five-year low last week as tightening measures took effect, property consultant Shanghai UWin Real Estate Information Services Co. said yesterday in an e-mailed statement. Sales from May 10 to May 16 fell 16 percent to 60,000 square meters from the week before, the lowest level for the same period since 2005.
• Justice Department Investigating Hamptons NY Property Market.
• Australia Consumer Confidence Falls Most in 19 Months. Australian consumer confidence tumbled by the most in 19 months after the central bank boosted borrowing costs for the sixth time since October and concern about European debt triggered turmoil on financial markets. The sentiment index fell 7 percent to 108 points this month, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers conducted between May 10 and May 16 and released today in Sydney.

Wall Street Journal:

• Primary Voters Rebuke Parties. In Arkansas, Sen. Blanche Lincoln was pushed into a June run-off by a union-supported candidate who portrayed her as a friend of Wall Street banks. In all three, voters showed they were ready to sever ties with candidates too closely identified with Washington and its political leaders.
• Officials Fear Slick Will Flow Up Coast. An ocean current could carry oil leaking into the Gulf of Mexico around Florida and up the East Coast, federal officials said Tuesday. Officials also announced they were closing one-fifth of federal waters in the Gulf to fishing—a major blow to the seafood industry—due to the threat of oil still leaking from a well opened by the Deepwater Horizon drilling rig, which burned and sank late last month. A thread of oil from the spill already may have entered a movement of water in the Gulf known as the Loop Current, said Jane Lubchenco, administrator of the National Oceanic and Atmospheric Administration. Oil in the Loop Current could reach Florida within 10 days and then start heading up the East Coast, she said.
• US Airways(LCC) CEO: Some In Washington 'Hell-Bent' On Interfering In Industry. US Airways Group Inc. (LLC) Chief Executive Doug Parker criticized the Obama administration and congressional Democrats Tuesday for their approach to aviation policy, saying "the biggest threat to our viability is government intervention." Parker, using harsh language during a speech at an aviation luncheon here, said some members of the administration and Congress are "hell-bent" on instituting policies that he said would hamper the industry's recovery. He cited legislation passed by the House that he said could lead to billions of dollars in additional fees annually for airlines, would curb global airline alliances and shift costs of air traffic-control system upgrades to the industry. He also criticized a ruling by U.S. regulators this month requiring Delta Air Lines Inc. (DAL) and US Airways to divest some takeoff landing slots in New York and Washington as a pre-condition for a larger slot swap in the two cities. He called the decision "stunning," and reiterated plans to appeal it in federal court. "It's a disturbing state of affairs," Parker said, adding that the ruling on the slot swap in particular "doesn't bode well" for the industry's future dealings with the Obama administration. Parker, who also is chairman of US Airways, said the policies out of Washington could threaten the industry's recovery.

Bloomberg Businessweek:

• China Stocks Will Extend Bear Market Plunge: Technical Analysis. The bear market in Chinese stocks will deepen after the nation’s Shanghai Composite Index dropped beneath its low reached in August, according to Bespoke Investment Group LLC. The measure tumbled 1.9 percent on May 11, stretching its loss from a November high to 21 percent. A bear market is commonly defined as a decline of at least 20 percent from a high. The plunge dragged the Shanghai index beneath a three- month closing low reached Aug. 31, and while the gauge climbed back above that level on May 13, it fell below it again this week, a sign that more losses are likely, according to Bespoke. China stocks have suffered 25 bear markets since 1990, with drops averaging 35 percent, according to Bespoke.

CNBC:

• Hewlett-Packard Earnings Beat Wall Street Forecasts. Hewlett-Packard beat expectations on solid demand for personal computers and servers and a resurgence in its printing business, and the company raised its full-year outlook.

Fox News:

• CFTC, SEC Summary On 'Flash Crash' Focuses On 6 Hypotheses. Market regulators are exploring six hypotheses surrounding the May 6 "flash crash"--including the use of stop-loss orders and stub quotes--but they haven't pinpointed a single cause, according to joint report issued Tuesday. While they haven't isolated a single cause, they are looking closely at trading in the E-mini S&P 500 futures contract, where the patterns are closely linked to the volatile market behavior during the tumult. Other things that may have contributed to the market plunge in the report include:

NY Times:

• Clients Worried About Goldman's(GS) Dueling Goals.

Business Insider:

• Suddenly, Everyone's In the CRASH Camp, Not Just The Bear Camp. Here a Swan, there a Swan, everywhere a Black Swan...Newsletter writers, hedge fund managers, journalists, bloggers, technicians, fundamental analysts, economists and strategists are joining the crash camp left and right. Not the bear camp...the crash camp. So what is the herd hearing/ seeing?

Zero Hedge:

• Goldman(GS) Bails Out ShoreBank as Wall Street Tries To Win Back Favor With Obama.
• Wednesday Trading Session Set to Be "The Most Volatile in Living Memory" Warns Telegraph, Plunge in Bunds Expected.
  

San Francisco Examiner:

• Hedge Fund Regulation Protects Banks, Big Hedge Funds. One reason Big Business often supports bigger government is the tendency of regulation to disproportionately burden smaller businesses. Wal-Mart can afford an employer mandate in health insurance, but Mom n Pop can’t. Toy inspection requirements weigh down more heavily on a craftsman than on Mattel. Today, we’re seeing the same thing with hedge funds, where past regulation proposals seemed aimed at protecting banks from hedge funds, and current ones seem aimed at protecting big hedge funds from smaller ones. At CNBC.com, John Carney (my brother) quotes University of Illinois law professor Larry Ribstein on the previous effort by the SEC to regulate hedge funds: Indeed, the rule seemed mainly aimed at protecting banks and big funds from the competitive threat represented by smaller hedge funds rather than targeting a need for investor protection. The whole history of hedge-fund regulation — and the increasing closeness of hedge funds and government (especially Chuck Schumer) — is worth studying. You can start with this New York Times piece from the first weeks of a Democratic Congress. Then see what happened to Democratic fundraising from hedge funds over that summer. And cap it off with Kim Strassel’s expert take on the picture.
  

Politico:

• Chris Dodd Tries to Gut Derivatives Bill. With Sen. Blanche Lincoln in Arkansas fighting for her political life, Senate Banking Committee Chairman Chris Dodd (D-Conn.) quietly introduced an amendment Tuesday gutting her plan to crack down on derivatives trading. The Wall Street reform bill includes Lincoln’s plan to ban banks from trading most derivatives, the complex financial instruments that contributed to the 2008 economic crisis. But some Senate Democrats, as well as administration officials and Wall Street banks, have lined up against the restriction, saying it would put the trades out of the reach of regulators. Dodd’s proposal, which aimed at resolving those differences, would delay implementation of the ban by two years while a federal council of regulators studied it — a move that would likely prevent the prohibition from ever going into effect. He was required to submit the amendment by noon Tuesday for it to be considered ahead of final passage. Lincoln said in a statement that she would oppose attempts to water down the derivatives trading ban.
• The Admiral Sinks Specter. Rep. Joe Sestak knocked out five-term Sen. Arlen Specter (D-Pa.) in a closely watched Democratic primary Tuesday night, tapping into a wave of anti-incumbency to bring a dramatic halt to Specter’s 30-year Senate career.
• Rand Paul Tapped Into 'Anger'. Rand Paul, the first-time candidate for elective office who has emerged as a symbol of the national tea party's clout in Republican politics, appears to have clinched the GOP's nomination for this state's open Senate seat — in a victory certain to jolt the political order in Kentucky and across the country.

Reuters:

• Chanos Sees More Short Sale Restrictions in Europe. Prominent short seller James Chanos, whose U.S.-based hedge fund makes money when stock prices fall, said he expects to see additional short-sale restrictions in Europe as other nations follow Germany's ban. "This is certain to be followed by Holland, France and everyone else," Chanos said hours after Germany's financial watchdog announced a temporary ban on "naked" short selling.
  
• Austria Aims for European Ban of Naked Shorts - FT. Austria's finance ministry is pushing for a European-wide ban of naked short-selling of some financial stocks and debt securities after Germany's crack down, the Financial Times reported on Wednesday. "It's our intention to get this on the agenda of the finance ministers' task force meeting on Friday, aiming towards a European ban on naked short selling," the FT quoted an unidentified spokesman for Austria's finance ministry as saying. The newspaper also reported that the European Union's internal market commissioner Michel Barnier said the Commission would present an proposal on how to deal with short-selling this autumn, including measures for sovereign credit default swaps.
• Volcker: Europe's Debt Crisis Shows Risks for U.S. Europe's debt crisis shows the risks for the United States if it does not get its budget deficits under control, former Federal Reserve Chairman Paul Volcker said on Tuesday.
• Google(GOOG) to Fight US Govt if AdMob Deal Blocked.
• US Senate Defeats Measure to Ban Naked CDS. By a vote of 57 to 38, the Senate defeated the proposed ban offered by Democratic Senator Byron Dorgan, who argued that their risky nature was not outweighed by their societal benefits. Democratic Senator Christopher Dodd said a sweeping rewrite of financial regulations he is shepherding toward passage would adequately tame the derivatives by requiring them to be traded through a clearinghouse.

Financial Times:

• Funds Hit Out at Brussels 'Power Grab'. Lawmakers in Brussels are attempting a “power grab” through controversial new rules to regulate hedge fund managers and private equity firms, industry figures have warned. Rewordings of the EU’s new draft directive on alternative fund managers – notably the version by European Union parliamentarians – may shift the power to regulate London’s financial markets to the European Union, according to fund managers. “This is a political exercise in a large degree. This is not an abstract debate over how to best regulate the shadow banking industry,” said Barney Reynolds, a lawyer for Shearman & Sterling. “Parliament’s latest draft gives ESMA [European Securities and Markets Authority, a proposed pan-EU agency] and the Commission an enhanced role in collecting information and setting policy, rather than just co-ordinating among national regulators. It is part of a broader power grab that also appears in other areas [such as regulation of derivatives and credit rating agencies],” said Mr Reynolds. According to the head of one large Mayfair-based buy-out group, “What really worries us is the plan to create a powerful pan-European financial regulator. That is the real battle we should be fighting.” Serious concerns also remain about some of the restrictions imposed by the directive. These include constraints on remuneration, leverage and so-called third country rules, which will determine how non-EU funds and managers are allowed to market themselves within the bloc. “Certain new elements of the texts are legally impossible to implement, other elements we just don’t understand,” said one of London’s leading hedge funds. The effects of the directive – even in its draft forms – are already being felt in some quarters. Europe’s largest hedge fund manager, Brevan Howard, has relocated 50 staff to Geneva because it believes the directive will curtail its ability to deal with non-EU investors if it is based in the EU. Other large fund managers, such as London-based Marshall Wace, have begun to redomicile Cayman Island-based funds to Dublin, in order not to get caught by some of the EU’s proposed restrictions on offshore-based products. Meanwhile, private equity bosses say their big concerns are the extra disclosure requirements for their portfolio companies and the “third country” rules. “Our particular worry is the disclosure regime and the threshold applying to any company with more than 50 employees, which is especially mad,” said Simon Walker, chief executive of the British Private Equity and Venture Capital Association. “That will capture many of the small venture capital-backed start-ups that don’t even have revenues yet.”

Shanghai Securities News:

• The growth of China's exports to Europe may slow by six to seven percentage points in May, June, and in the third quarter of the year as Europe's debt crisis deals a "severe" blow to foreign trade, citing Huo Jianguo, a researcher at the Asian country's Ministry of Commerce. China's exports to Europe rose by 25% in April.

South China Morning Post:

• China Mainland Curbs Reduce Appetite for Hong Kong Flats. Mainland investor sentiment has taken a hammering from recent measures to clamp down on credit and curb property price growth in the country, analysts say - and the spillover effects are already evident in Hong Kong's property market.

Yonhap News:

• South Korea Asks China to Ban Mount Kumgang Tours. Seoul has requested that Beijing exclude North Korea's Mount Kumgang resort from its list of group tour destinations allowed for its people while it seeks understanding on a dispute over the North's recent illegal freeze of South Korean assets there, the Ministry of Culture and Tourism here said Tuesday. The tours, once a cash cow for the poverty-ridden communist country, were suspended in 2008, when a South Korean tourist was shot dead by a North Korean soldier guarding a restricted area. Seoul has demanded a full investigation into the case and safety guarantees for South Korean tourists. The demands have yet to be met.

The Chosun Ilbo:

• Lee, Obama Agree to Act Against North Korea Over Shipwreck. President Lee Myung-bak and his U.S. counterpart Barack Obama agreed to put diplomatic and military pressure on North Korea in the belief that the North was behind the sinking of the Navy corvette Cheonan in the West Sea on March 26. In a telephone conversation with Obama on Tuesday morning, Lee said the findings of an international investigation team "clearly point to North Korean involvement," a Cheong Wa dae official said. The two countries are mulling joint military maneuvers, especially anti-submarine exercises off the west coast, a government official said. They are also discussing seeking further UN Security Council sanctions against the North; blocking passage of North Korean merchant ships through the Jeju Strait; resuming psychological warfare along the military demarcation line; and suspending all inter-Korean business except for the joint Korean Kaesong Industrial Complex. Lee is expected to deliver a nationwide address early next week following the announcement of the findings on Thursday.

Evening Recommendations
Citigroup:

• Reiterated Buy on (DKS), target $34.
• Reiterated Buy on (HPQ), raised target to $64.

Night Trading

• Asian indices are -1.50% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 136.5 +14.0 basis points.
• S&P 500 futures -.67%.
  
• NASDAQ 100 futures -.65%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HRL)/.63
• (CHS)/.20
• (BJ)/.43
• (RL)/.62
• (EV)/.40
• (SNPS)/.39
• (LTD)/.19
• (PETM)/.43
• (GYMB)/.97
• (DE)/1.08
• (ADSK)/.22
• (AMAT)/.21
• (TGT/.87

Economic Releases
8:30 am EST

• The Consumer Price Index for April is estimated to rise +.1% versus a +.1% gain in March.
• The CPI Ex Food & Energy for April is estimated to rise +.1% versus unch. in March.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +500,000 barrels versus a +1,949,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -900,000 barrels versus a -2,814,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,000,000 barrels versus a +1,396,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise by +.3% versus a -1.17% decline the prior week.

2:00 pm EST

• FOMC Minutes

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The 1Q Mortgage Delinquencies report, 1Q MBA Mortgage Foreclosures report, weekly MBA mortgage applications report, Barclay's Capital Financial Services Conference, (OXY) analyst day, (SYK) analyst meeting, (POT) analyst meeting, (AMCC) analyst day, JPMorgan Tech/Media/Telecom Conference, BMO Capital Ag/Protein/Fertilizer Conference, (INTC) shareholders meeting, Robert Baird Growth Stock Conference, could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Sharply Lower into Final Hour on Rising Financial Sector Pessimism, Regulatory Fears, Tax Hike Worries, Euro Decline

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Above Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 33.37 +8.20%
  
• ISE Sentiment Index 96.0 -18.64%
  
• Total Put/Call 1.02 +.99%
  
• NYSE Arms 2.37 +155.41%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 118.55 bps +8.9%
  
• European Financial Sector CDS Index 1335.63 bps -4.48%
  
• Western Europe Sovereign Debt CDS Index 114.33 bps -.72%
  
• Emerging Market CDS Index 272.79 bps +9.38%
  
• 2-Year Swap Spread 38.0 +3 bps
  
• TED Spread 31.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .16% +1 bp
  
• Yield Curve 263.0 -6 bps
  
• China Import Iron Ore Spot $162.90/Metric Tonne -.24%
  
• Citi US Economic Surprise Index +22.80 +1.2 points
  
• 10-Year TIPS Spread 2.18% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -87 open in Japan
• DAX Futures: Indicating -52 open in Germany

Portfolio:

• Slightly Lower: On losses in my Technology 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 equities trade near session lows despite gains in European shares, lower sovereign debt angst and a bounce in Shanghai overnight. On the positive side, HMO, Computer Service, Medical and Oil Tanker stocks are flat. Oil is lower again on rising supply, another euro plunge and worries over Chinese demand. The Spain sovereign cds is falling another -10.44% to 170.02 bps. On the negative side, Bank, Education, I-Bank, Steel, Disk Drive, Alt Energy, REIT and Semi shares are under meaningful pressure, falling 2.5%+. Cyclicals are underperforming, falling -2.3%. The sharp increase in the emerging market and North Amer. Inv. Grade cds is a large negative. As well, the 2-year swap spread is surging to the highest since the peak of the Greece fears 8 days ago. The decline in the euro is disorderly again and the 10-year yield is starting to fall too fast. US stocks have traded poorly all day. Even after a bounce in Shanghai overnight, lower sovereign debt angst, gains in European stocks and a jump in (WMT) shares, US stocks were met with meaningful selling since the open. Losses have accelerated on new regulatory fears and the disorderly decline in the euro. The horrid action in shares of (V)/(MA) is a red flag for the broad market. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, technical selling, regulatory rumors, rising economic fears, increasing financial sector pessimism and tax hike concerns.

Today's Headlines

Bloomberg:

• Sovereign Crisis Spurs 'Lehman II' Concern in Europe. Europe’s banks are facing déjà vu. Less than two years after the collapse of Lehman Brothers Holdings Inc., fresh tremors in the debt markets are threatening to shake the financial system. This time the concern isn’t about subprime mortgages or exotic derivatives, it’s about banks’ holdings of bonds sold by European Union governments including Greece, Portugal and Spain. Pledges of $1 trillion in EU aid have failed to shore up the euro or dispel doubts about the region’s finances. Investors have punished the shares of European financial firms and driven up the cost of insuring against default by banks and insurers on concern measures aimed at reducing the region’s budget deficits will choke economic growth. In a worst- case scenario, government debt restructurings could erode capital and spark another credit crunch, analysts say. “There’s a concern this may be Lehman II,” said Konrad Becker, a Munich-based banking analyst at Merck Finck & Co. “The direct risks of writedowns and loan defaults combined with indirect ones such as mistrust between banks could lead to a systemic crisis.”
• Merchant Commodity Fund Lost 19% in Four Months on Agriculture. Michael Coleman and Doug King’s $1.13 billion Merchant Commodity Fund dropped 19.4 percent in the first four months of the year, lagging behind the industry average, because of losses in agriculture. The fund fell 5.3 percent last month, after a 13.1 percent drop in March, according to a report to investors obtained by Bloomberg News. Agriculture lost 21 percent in the first four months, wiping out gains in energy and freight. Coleman, the Singapore-based managing director of the fund’s manager, Aisling Analytics Pte, declined to comment. The S&P GSCI Agriculture Index lost 15 percent through the end of April as New York-traded raw sugar slumped 44 percent.

Wall Street Journal:

• Market-Wide Circuit Breakers Could Start June 14. U.S. stock exchanges and regulators are expected to propose a six-month pilot program Tuesday of market-wide measures designed to guard against events like the May 6 stock market "flash crash", according to people familiar with the matter. As a coordinated response to the crash that at one point sent the Dow Jones Industrial Average plunging nearly 1,000 points before bouncing back somewhat, "circuit breakers" would be established around specific stocks first, with broader market-wide safeguards tied to index levels to be rolled out later. The pilot program will start on June 14, these people said. The levels that would set off the stock-specific circuit breakers have been the subject of considerable debate, but people familiar with the talks expect a 10% movement in individual stocks to be the trigger for a slowing or time-out in trading of the volatile stocks across trading platforms.
• Toxic CDOs Beset FDIC as Banks Fail. The FDIC has inherited hundreds of potentially worthless bonds that have come back to haunt the Wall Street firms that sold them, the credit-rating firms that graded them and the hundreds of small banks that bought them. The Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more than 250 collateralized debt obligations that were purchased by small institutions that later failed. Although the bonds have a book value of more than $400 million, they are a headache for the agency as it grapples with the toxic assets flowing from many banks around the country.

Barron's:

• Smart Phones: Will There Be More Than Two Mobile Platforms? Right now, the smart phone landscape seems completely cluttered with software platforms: IPhone OS, Android, Windows, Symbian, Maemo, BlackBerry OS, WebOS and a number of others. But that’s not likely to be the case forever. Some of the players will end up being exposed as pretenders. Ashok Kumar, an analyst with Rodman & Renshaw, made the fascinating (and highly controversial) assertion in a research note on Monday that when the dust settles, the market could be down to just two players: Google (GOOG) Android and Apple’s (AAPL) iPhone. Kumar in one short note throws out some astounding predictions:

Bloomberg Businessweek:

• Merkel Pressed on Financial Tax as EU Loans Plan Goes to Vote. Chancellor Angela Merkel’s coalition pressed for a financial levy to be introduced “as quickly as possible,” as they prepared to put the euro-region’s $1 trillion bailout plan to the German parliament this week. The three ruling parties agreed to pursue a financial transaction tax or a levy on financial activities, as well as a ban on naked short selling, Volker Kauder, parliamentary leader of Merkel’s Christian Democrats, told reporters in Berlin today after a meeting of the party caucuses. “We agree that the financial sector must share in the cost of the crisis,” said Birgit Homburger, floor leader of Merkel’s Free Democratic coalition partner. “Those who speculate at the taxpayer’s expense must participate.”
• Euro May Drop to Six-Year Low, Credit Suisse Says in Revision. The euro may fall over the next three months to $1.16 as the sovereign-debt crisis forces the European Central Bank to keep borrowing costs low, according to Credit Suisse Group AG. The last time the euro traded at that level was in November 2003, according to Bloomberg data. Credit Suisse previously forecast that the 16-nation currency would trade at $1.29. The euro will reach $1.25 by the end of the year, according to the median forecast of 42 economists in a Bloomberg survey. “The euro is now a low-yielding currency suffering a deeper crisis of confidence than we expected, with little near- term outlook for support from interest-rate policy,” Credit Suisse strategists including Ray Farris in London and Daniel Katzive in New York wrote in a note to clients today. “We think that euro-dollar will need to trade to obviously cheap levels to generate sustained buying interest in the near term.”
• Credit-Card Industry Faces 'Volcanic' Senate Eruption. Credit-card firms caught off-guard by U.S. Senate passage of curbs on debit fees are facing what one executive sees as a “volcanic” eruption of legislation, including possible limits on interest rates. Sheldon Whitehouse, a Rhode Island Democrat, said yesterday states should be able to enforce their own rate limits on cards, regardless of where the issuer is located. Whitehouse pushed his amendment on the Senate floor the same day that his colleagues voted to let consumers get credit scores for free. The industry already was reeling from the Senate’s surprise passage last week of limits on debit-card “swipe” fees, the levy charged to merchants for each transaction. The stream of proposed rules “rivals only the Icelandic volcanic reports,” Discover Financial Services Chief Financial Officer Roy Guthrie told investors and analysts. “Every half-day we’re getting a new batch,” Guthrie said today during the Barclays Capital Financial Services Conference. “I hope that calmer heads prevail.”
• Feldstein Says Falling Permits May Signal U.S. Housing Slump. A decline in U.S. homebuilding permits last month may indicate a renewed housing slump as demand weakens after the expiration of tax credits, Harvard University economics professor Martin Feldstein said. Permits in April fell by the most since December 2008, according to Commerce Department figures released today in Washington. The report also showed housing starts rose to a 672,000 annual rate last month, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since October 2008. “Permits are an indication of what is going to happen in the future,” Feldstein said in a Bloomberg Television interview. “With the first-time home-buyer credit behind us, we are not going to see the strength of housing demand we have in the last few months as people rushed to take advantage of that program.”
• Senate Rejects Proposal to Prevent Bailouts of U.S. States. The U.S. Senate rejected an amendment to financial-regulation legislation aimed at preventing taxpayer bailouts of state and local governments that have defaulted or are at risk of defaulting on debt. Senator Judd Gregg’s proposal, which would have barred use of federal funds to purchase or guarantee debt or extend lines of credit to governments facing default, failed to win the 60 votes required for adoption. “They shouldn’t expect the federal government to come in and take them out of their distress,” Senator Judd Gregg said before the vote. “There should be nothing that’s too big to fail in this country, including state governments,” said New Hampshire’s Gregg, the top Republican on the Budget Committee. “The people of California, because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their pension programs, their public pension programs which they can’t afford to pay,” Gregg said. “And why did they run up those obligations? So the people running for office in California could get elected.”

CNBC:

• Hedge Fund Inquiry Will Slam Small Funds. The latest push for greater regulatory scrutiny of hedge funds will likely be a boon to the biggest, most established hedge funds and a blow to smaller fund managers.
• Gold Investors Should 'Rush to the Exits': Dennis Gartman.
• Could America Live with European Austerity?
• Germany Planning Sharp Curbs on Some Kinds of Short Selling.
  

NY Post:

• DC's Carried Away. Dem's to Unveil Plan on Private-Equity Partners Tax. Congressional Democrats as soon as today could unveil a plan to raise the tax that private-equity partners pay on the profits they make, but the increase will be phased in over a 10-year period, according to a person familiar with the matter. Under the plan, the tax on carried interest would begin inching upward a year after the legislation was enacted, starting at the current 15 percent and ending at the present ordinary income rate of 35 percent by the 10th year. The hike is part of an amended $200 billion Tax Extenders bill that is also expected to include a tax on oil and the postponement for five years of Medicare cuts that were part of the Health Reform bill. That postponement is estimated to carry a $90 billion price tag. According to the source, to offset some of the costs linked to postponing the Medicare cuts, and extending popular provisions like deductions for state and local sales taxes through the 2010 tax year, the Democrats are proposing an increase in the tax on crude oil and other petroleum products with an eye toward raising $10 billion over 10 years. Lawmakers are also looking to close a tax loophole that allows partners in S-corporations, such as law firms, to take low salaries and get most of their income in the form of distributions in order to avoid paying Social Security and Medicare taxes.

Business Insider:

• The 25 Financial Institutions Most Likely to Default.

Zero Hedge:

• European Union Issues Q&A On "War With Speculators".

NY Daily News:

• Rev. Jeremiah Wright Claims President Obama 'Threw Me Under the Bus' in Letter to African Aid Group. The Rev. Jeremiah Wright, Barack Obama's controversial ex-pastor, threw a hissy fit in a letter to an African aid group, claiming that the president "threw me under the bus" and the White House views him as "toxic." In a missive obtained by the Associated Press, Wright told Africa 6000 International that the Obama administration would likely ignore his efforts to release frozen funds for use in earthquake-stricken Haiti. "No one in the Obama administration will respond to me, listen to me, talk to me or read anything that I write to them. I am 'toxic' in terms of the Obama administration," Wright wrote the president of the Pennsylvania-based group, Joseph Prischak, earlier this year.

The Atlantic:

• Effort to Bring Fannie and Freddie on Budget Fails. Just because we own it doesn't meant we have to recognize it. That was the message of the Senate on Monday evening when it voted down an amendment (.pdf) which would have required the government-sponsored entities Fannie Mae and Freddie Mac be brought on budget. The government promised to stand behind the institutions and put them into conservatorship in 2008. The measure, sponsored by Sen. Mike Crapo (R-ID), failed by a vote of 47-46. Because it was brought up as a motion to waive a budget point of order, it would have required 60 votes. It's pretty confusing to understand how Congress can get away with not recognizing in its budget nationalized corporations that have become part of the federal government. At this time any losses these companies incur will be covered by taxpayers. So shouldn't its "outlays, receipts, deficits or surpluses" be a part of the "Budget of the United States Government"? You would think so. But then you wouldn't know much about politics. This amendment failed for two main reasons. First, it would likely require Congress to raise the debt ceiling. That's something they surely have no desire to do. Second, Congress really has very little desire to rein in Fannie and Freddie.

WNBC TV:

• Times Square Bomb Suspect Considered Other Targets. Failed Times Square bomb suspect Faisal Shahzad had considered targeting several other locations in the city -- including Grand Central and Rockefeller Center -- before deciding to leave an explosives-laden SUV at the "crossroads of the world," law enforcement sources said.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% 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 -17. That matches the lowest rating earned by the president since the passage of his health care proposal two months ago (see trends).
• 64% Favor Offshore Drilling. Despite the major oil rig leak that continues to spew an estimated 5,000 barrels a day into the Gulf of Mexico, the majority of U.S. voters still support offshore oil drilling. The latest Rasmussen Reports national telephone survey of Likely Voters shows 64% believe offshore oil drilling should be allowed, up from 58% earlier this month. Twenty-one percent (21%) say offshore drilling should not be allowed.

Reuters:

• Schaueble Plans to Ban Short-Selling - Sources. German Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight, coalition sources told Reuters on Tuesday.
• Southern California Homes Sales Dip in April. Sales of new and resale homes totaled 20,299 in Los Angeles, Orange, San Diego, Riverside, San Bernardino and Ventura counties last month, down 0.9 percent from March and down 1.0 percent from a year earlier, the report by the real estate information service said.

Der Spiegel:

• Bailout Plan Is All About 'Rescuing Banks and Rich Greeks'. Greece will never be able to repay its debts and may one day have to leave the euro area, former Bundesbank President Karl Otto Poehl said in an interview. The bailout "was about protecting German banks, but especially the French banks, from debt write-offs," Poehl said.

O Globo:

• Brazil's government spending and the country's high interest rates stand as obstacles to receiving a higher debt rating from S&P, citing the rating agency's head in Brazil, Regina Nunes.

DigiTimes:

• Dropping Demand in Europe and Intel CPU Shortages Create Dilemma for Notebook Players. Taiwan-based notebook players have expressed concerns that buying sentiment in Europe may be conservative in the third quarter of 2010, despite the traditional peak season; however, the fact that Intel's 32nm processors are currently facing tight supply has put players into a position forcing them to decide whether they should build up or reduce their inventory. Since future demand in Europe is currently uncertain, most makers are already considering reducing their inventory preparations, but with concerns that the Europe issue may turn out to be fine, the makers are maintaining their Intel CPU orders to avoid shortages of the critical component, sources from notebook players noted. The makers are also keeping a close eye on demand from Europe and are being more careful with their inventory management to prevent overstocked CPU inventories, the sources noted.

Xinhua News:

• China needs to increase the supply of housing to effectively curb the rise in property prices, citing economist Li Yining. Reducing demand alone will cause problems for the construction industry and hurt economic development, Li said.

China Central Television:

• Chinese Premier Wen Jiabao said the global economic crisis is more complicated and serious than expected, and the foundations of the recovery remain fragile.

Bear Radar

Style Underperformer:

• Large-Cap Growth (-1.15%)

Sector Underperformers:

• Education (-3.75%), Banks (-2.86%) and Disk Drives (-2.59%)

Stocks Falling on Unusual Volume:

• V, SHLD, TGT, VLCCF, VECO, TSL, STI, USB, FMBI, TI, IMO, PTR, APOL, DWA, COCO, NTES, RSTI, MYRG, MKTX, ASML, LOGM, AMED, MBLX, CECO, VLTR, CBRL, STX, SWKS, CAVM, DKS, ZNH, ANW, FIS, BAK, XSD and MA
  

Stocks With Unusual Put Option Activity:

• 1) VRSN 2) XRX 3) FIS 4) APOL 5) ESV
  

Stocks With Most Negative News Mentions:

• 1) BP 2) TM 3) WWE 4) PNRA 5) VZ
  

Bull Radar

Style Outperformer:

• Small-Cap Value (+.47%)

Sector Outperformers:

• Gaming (+1.93%), Coal (+1.90%) and Oil Tankers (+1.87%)

Stocks Rising on Unusual Volume:

• TIE, SM, WMT, SU, LGCY, SINA, RNOW, VRSN, OVTI, PWRD, KSWS, FMCN, VPRT, SGEN and FRX
  

Stocks With Unusual Call Option Activity:

• 1) ALTH 2) DPS 3) VRSN 4) DKS 5) EXPE
  

Stocks With Most Positive News Mentions:

• 1) HD 2) GOOG 3) WMT 4) VOD 5) AAPL