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Thursday Watch

Late-Night Headlines
Bloomberg:

- Declining bond-market volatility, a measure of risk, makes buying higher-yielding debt or longer- term Treasuries some of the most attractive trades in fixed income, according to JPMorgan Chase & Co. and Goldman Sachs Group Inc. Merrill Lynch & Co.’s MOVE Index, based on prices of over- the-counter options on Treasuries maturing in two to 30 years, has dropped 52 percent to 126.3 since hitting a record high in October after the collapse of Lehman Brothers Holdings Inc. drove investors to the relative safety of government debt. A record pace of corporate bond sales, declining money market rates and rising stock prices now all suggest the global economy is on the mend. Prospects of limited rate swings with the Federal Reserve forecast to keep its target lending rate near zero percent into next year make it more appealing for investors to exit the safety and relatively low returns of short-term government debt.

- Brazilian stocks are expensive after a rally in equities sent the Bovespa index to its steepest valuations in at least five years, Deutsche Bank AG and Banco Santander SA strategists said. “Brazilian equities appear overbought and relatively expensive,” Santander’s Marcelo Audi and Leonardo Milane wrote in a note to clients today. “We recommend that investors wait for a better entry point.” At Deutsche Bank, Guilherme Paiva said Latin American stocks may drop as much as 15 percent by the end of September because Brazil’s stocks are “rich” and Mexico’s companies may report “very weak” second-quarter earnings. Investors should adopt a “defensive” stance on Latin American stocks as “valuations are rich in Brazil, the Chinese economy should experience another period of gradual deceleration in the third-quarter because of slower loan growth, and a potentially very weak second-quarter earnings season in Mexico,” Paiva, the head of Latin America equity strategy, wrote in a note to clients today.

- Whole Foods Markets Inc.(WFMI), the largest natural-goods grocer in the U.S., reported second-quarter profit that fell less than analysts’ estimates, sending the shares higher in late trading. The shares jumped 10 percent to $22.03 at 4:16 p.m. New York time after the earnings were announced. Earlier, Whole Foods dropped $2.07, or 9.4 percent, to $20 in Nasdaq Stock Market composite trading. The stock has more than doubled this year.

- Former President Bill Clinton urged the Obama administration to make a “genuine effort” to encourage healthy banks to repay the Troubled Asset Relief Program so financial institutions can set executive compensation without fearing a public backlash. “Give them a chance to pay it back and maybe just give it back without the interest or anything else,” Clinton said in an interview with Bloomberg News. The government could say, “You’re back on your own; pay whatever you want” to executives, he said. On executive compensation, Clinton said that “as a general philosophical matter, the government should not set corporate salaries.” Still, he said the current situation, with firms such as American International Group Inc. largely owned by taxpayers, created a dilemma and that compensation at these businesses should be limited.

- Confidence among small-business managers in the US and Japan, the world’s two largest economies, rose in the same month for the first time since August as stimulus spending and credit-easing efforts took hold. “It’s important that the little guy and the mom-and-pop shops have a positive mental attitude,” said Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton Asia Ltd. in Hong Kong. The April increase in the US sentiment index, the first in five months, was the biggest in percentage terms since at least January 1986. “Small businesses have historically led recoveries,” said Douglas Dirks, chief executive officer of Employer Holdings Inc., which provides workers’ compensation insurance. “They are the job generators and innovators who will lead us out of the recession,” he said.

- Crude oil may fall to $50 a barrel as prices have risen too far from their 20-day moving average, said Masahiko Sato, a senior analyst at OvalNext Corp. Sato expects oil to drop to $43.83 in New York, a one-month low reached on April 21, should it decline below the $50 support level amid a lack of a recovery in demand. “Given a lack of bullish fundamental factors, the market is definitely overheated,” Sato from OvalNext, a commodities investment advisor, said by phone from Tokyo.

Wall Street Journal:

- The Obama administration's new drug czar says he wants to banish the idea that the U.S. is fighting "a war on drugs," a move that would underscore a shift favoring treatment over incarceration in trying to reduce illicit drug use. In his first interview since being confirmed to head the White House Office of National Drug Control Policy, Gil Kerlikowske said Wednesday the bellicose analogy was a barrier to dealing with the nation's drug issues. "Regardless of how you try to explain to people it's a 'war on drugs' or a 'war on a product,' people see a war as a war on them," he said. "We're not at war with people in this country." Mr. Kerlikowske's comments are a signal that the Obama administration is set to follow a more moderate -- and likely more controversial -- stance on the nation's drug problems. Prior administrations talked about pushing treatment and reducing demand while continuing to focus primarily on a tough criminal-justice approach. The Obama administration is likely to deal with drugs as a matter of public health rather than criminal justice alone, with treatment's role growing relative to incarceration, Mr. Kerlikowske said.

- After reducing their budgets sharply for months, many businesses across the U.S. have stopped slashing information-technology spending, a shift that could stem revenue declines at tech companies, including Hewlett-Packard Co.(HPQ) and Cisco Systems Inc.(CSCO). Interviews with more than a dozen chief information officers and corporate technology executives who oversee tech spending indicate that a range of U.S. businesses have finished cutting. The change won't show up on tech-company balance sheets for awhile. Cisco's revenue for its most recent quarter was down 17% from a year earlier, EMC's fell 9.2%, and Intel's dropped 26%. Nonetheless, each company's CEO said that other metrics gave them confidence the worst is over. "The early indication is that 2009 may be the low point," says Sarah Friar, a Goldman analyst.

- Staff at the Securities and Exchange Commission have decided to recommend filing civil fraud charges against Angelo Mozilo, the co-founder of Countrywide Financial Corp., according to people familiar with the investigation.

- A group of 18 financial institutions sued MBIA Inc., claiming the bond insurer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively "insolvent." The lawsuit, filed in New York state court on Wednesday afternoon, was brought by U.S. and foreign banks, including J.P. Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC, and UBS AG.

- The Obama administration is weighing plans to detain some terror suspects on U.S. soil -- indefinitely and without trial -- as part of a plan to retool military commission trials that were conducted for prisoners held in Guantanamo Bay, Cuba. The proposal being floated with members of Congress is another indication of President Barack Obama's struggles to establish his counter-terrorism policies, balancing security concerns against attempts to alter Bush-administration practices he has harshly criticized.

MarketWatch.com:
- Chris Crowe can't believe he may lose nearly all the money he invested to send his son to college. He's watched the value of his $13,000 investment in General Motors(GM) bonds dwindle over time. He is now staring at the prospect of a June 1 bankruptcy filing that would further erode those holdings, set aside as a college fund for his 13-year-old son, Cameron. As odd as it sounds, bankruptcy still may work out better for a small bondholder like Crowe than the current deal put forth by the government and GM management to keep the debt-ridden auto giant afloat. That deal trades debt for stock that then gets split. "I got sick to my stomach because I'll get nothing the way they're doing it," said Crowe, a home inspector and electrician in Littleton, Colo. "I certainly don't want GM to go bankrupt, but for me to get 2 cents back for my $13,000, that's criminal," he said. "I stand a better chance of recovering a bigger percent of my money from bankruptcy court." Under President Barack Obama's April plan to rescue GM, bondholders like Crowe would get 225 shares of common stock for every $1,000 in debt they hold. These bondholders-turned-stockholders would own 10% of the company, before a 100-to-1 reverse stock split. Some bondholders say they could get a better deal in bankruptcy. As part of the task force's plan, the U.S. government would own 50% of the company in exchange for its $14.4 billion loan, and the United Auto Workers union would own 39%. The other 1% will remain with current equity holders, who usually get nothing in a bankruptcy. GM has around 100,000 individual bondholders, holding about 20% of the company's $27 billion in outstanding debt, according to 60 Plus, a senior advocacy group that is lobbying lawmakers for individuals who hold GM bonds. Dennis Buchholtz, 67, of Warren, Mich., has learned that lesson the hard way. His $98,000 purchase of GM bonds in 2005 was supposed to supplement social security after he retired as superintendent of a factory that made equipment for auto suppliers. "For heavens sake, this is a huge company and I never anticipated this would be lost," he said. Buchholtz also thought the bondholders would get better deal, because they usually do -- a big reason bonds are considered a more conservative investment than stock. "What bothers me most is that whatever I've read in the past about this, in most bankruptcies, bondholders get paid first," he said.

CNBC.com:
- The World’s 10 Highest Corporate Tax Rates.

- The White House says they’re closing loopholes but Corporate America counters they're nothing but tax increases. Either way, will the Obama plan drag down the economy? The latest talk of taxes stems from President Obama’s sweeping new plan to overhaul the health care system. Although most of us can agree sweeping changes are greatly needed, we’re at odds over how to pay for it. The most likely scenario is tax increases. In fact, Congress is looking closely at capping tax benefits for employer-provided healthcare. In addition, there’s speculation that lawmakers might raise taxes on alcohol, soft drinks and foods high in fat and salt to encourage healthier eating and raise revenue. And that's not all. The White House wants to raise $24 billion over 10 years by tightening rules related to the estate tax. They also want to eliminate current provisions that allow multinationals to defer taxes on profits made overseas. And there’s the great debate over cap and trade – a plan that requires business to buy carbon dioxide emission permits. Seems like a lot of taxes on the table.

- As thousands of General Motors(GM) workers await word on more U.S. plant closures, reports that the company plans to import Chinese-made vehicles to the U.S. have created a political problem for the automaker and the White House.

IBD:

- Some say the fiesta may be over at fast-casual burrito chain Chipotle Mexican Grill (CMG). Others say it's taking a rest to shore up for the next blast.

nj.com:

- A coalition of labor unions, environmental groups and other liberal organizations is asking New Jersey Gov. Jon Corzine to fix the state's budget problems by taxing rich people more. Higher taxes on businesses and those making $300,000 or more annually could generate about $437 million in new revenue, said activists from the Better Choices for New Jersey coalition. Steeper registration fees for the owners of SUVs and other heavy gas-guzzling vehicles pushes would bring in another $80 million, coalition members said Tuesday during a Statehouse news conference.

Politico:

- President Barack Obama’s decision to withhold photographs of abused detainees marks the next phase in the education of the new president on the complicated, combustible issue of torture. Conservatives praised the move as a sign of Obama’s growth in office, while civil libertarians denounced it as a betrayal of the change he’d campaigned on. But it also marked a growing recognition inside the White House of how explosive the question of torture has become — swamping his predecessor’s legacy, entangling the speaker of the House and threatening to overwhelm Obama’s agenda.

Reuters:

- U.S. online travel agencies, hungry for business in an economic recession, may extend or make permanent the booking fee cuts and waivers they implemented this year on a promotional basis. The companies like Orbitz Worldwide and Expedia Inc suspended or reduced some of their booking fees recently to spur demand during the peak summer travel season.

- The Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis. Federal regulators proposed subjecting all over-the-counter derivatives dealers -- whose trades are not made through an exchange, making them hard to monitor -- to "a robust regime of prudential supervision and regulation," including conservative capital, reporting and margin requirements.

- General Motors Corp and Chrysler aim to drop as many as 3,000 U.S. dealers and are expected to begin sending notifications as early as Thursday, three people briefed on the still developing plans said. GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, is expected to send termination notices to up to 2,000 dealers -- a third of its roughly 6,000 U.S. dealers, the sources told Reuters. Chrysler, which filed for bankruptcy on April 30, will also tell up to 1,000 of its 3,189 U.S. dealers it is terminating their franchise agreements, according to the sources who asked not to be identified because the controversial closure plans have not been yet announced.

- POSCO, the world's No.4 steelmaker, on Thursday said it would cut prices of its domestic steel products by up to 20 percent in its biggest-ever price reduction, which came earlier than expected as it seeks to compete against cheaper imports. The South Korean company had said it would not slash steel prices until annual negotiations to decide import prices of iron ore were completed, which was likely to be in the second half. "We've decided to lower the prices of all our products earlier than we had planned, as international steel prices are falling and raw material prices are also expected to decline," POSCO said in a statement.

- Global coal miner Peabody Energy Corp (BTU) has agreed with Australia's White Energy Coal Ltd to build a coal upgrading facility in the United States, and may buy up to a 15 percent stake in the Australian firm. The two said in a statement they will build the facility at Peabody's Powder River Basin site, and plan over 1 million tons of upgraded coal production a year in the first phase. Later expansions could increase the plant's capacity to more than 20 million tons per year. Coal upgrading technology aims to turn poor quality coal with low heating value to one with much higher energy content. The upgraded coal has lower carbon and other emissions.

- DigitalGlobe Inc (DGI), a satellite image company primarily serving the U.S. government, priced its initial public offering at $19 per share on Wednesday, above the estimated range, according to a source familiar with the deal. DigitalGlobe, which is based in Colorado and supplies images to Google Maps and Microsoft's Virtual Earth, sold 14.7 million shares, according to the source, raising $279.3 million in a deal led by underwriters Morgan Stanley (MS) and JP Morgan (JPM). The price estimate range had been $16 to $18.

Financial Times:

- Peer Steinbrück, Germany’s finance minister, on Wednesday attacked proposals to conduct stress tests on individual European banks and labeled the financing checks of US institutions “worthless”. The outspoken minister’s comments came after the International Monetary Fund on Tuesday called for Europe to conduct stress tests of its banks based on the US model. In the most vocal expression of Berlin’s long-standing skepticism about the wisdom of individual stress tests, Mr Steinbrück called the testing of 19 US banks pointless because their results had been altered before publication. “We are currently seeing that the stress test in the US is worthless because the central bank exercised influence as well as the Treasury,” Mr Steinbrück told the German parliament.

- The rush of US homeowners to refinance mortgages at lower rates is creating a boom in the home lending business, prompting banks to hire thousands of new employees and put them to work on extra shifts to process mountains of paper. “Many of them work all day, go home and have dinner with their families, then go back to the office and put in a few more hours, because there’s work to be done,” said Greg Gwizdz, national sales manager of the Wells Fargo home mortgage unit. Lenders could originate up to $2,780bn of new mortgages this year, the Mortgage Bankers Association says. Statistics from mortgage financiers Fannie Mae and Freddie Mac suggest 80 per cent of that activity could involve refinancing. With interest rates for 30-year fixed rate mortgages at around 5 per cent, US homeowners could save close to $18bn on their mortgage repayments this year if they refinance, according to economists at Freddie Mac. Ken Lewis, Bank of America chief executive, said on Monday his company was adding 6,000 workers to beef up its mortgage capabilities. Wells also has added mortgage staff, although it won’t give out specific numbers.

National Bureau of Statistics:

- Industrial profits from companies in 22 provinces in China dropped 32.2% in the first quarter from a year earlier.

Economic Daily News:

- AU Optronics Corp.(AUO) has received 40% more orders than it can meet at current production capacity because of rising television demand from China, citing Chairman KY Lee. The flat-panel maker has resumed expansion at two plants to help meet the demand, Lee said.

Late Buy/Sell Recommendations
Citigroup:

- Buy 5-year credit default swaps on (CBS).

Night Trading
Asian Indices are -3.0% to -1.25% on average.
S&P 500 futures -.23%.
NASDAQ 100 futures -.11%.

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- (AMSC)/.01

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- (KSS)/.44

- (A)/.11

- (CPWR)/.19

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Economic Releases

8:30 am EST

- The Producer Price Index for April is estimated to rise .2% versus a 1.2% decline in March.

- The PPI Ex Food & Energy for April is estimated to rise .1% versus unch. in March.

- Initial Jobless Claims for last week are estimated to rise to 610K versus 601K the prior week.

- Continuing Claims are estimated at 6400K versus 6351K prior.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Plosser speaking, weekly EIA nat gas inventory report, BMO Capital Ag/Protein/Fertilizer Conference, Bank of America Healthcare Conference, (IBM) Analyst Meeting, (MA) Investor Meeting, Robert Baird Growth Conference and the UBS Financial Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Sharply Lower, Weighed Down by Financial, Commodity, Gaming and REIT Shares

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In Play

Stocks Sharply Lower into Final Hour on More Shorting, Rising Financial Sector Angst, More Economic Pessimism, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Financial longs and Medical longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 5.85% and is very high at 33.66. The ISE Sentiment Index is below average at 139.0 and the total put/call is about average at .87. Finally, the NYSE Arms has been running high most of the day, hitting 2.48 at its intraday peak, and is currently 1.32. The Euro Financial Sector Credit Default Swap Index is rising 4.48% today to 127.44 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising .75% to 152.82 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.0% to 72 basis points. The TED spread is now down 391 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 9.04% to 42.75 basis points. The Libor-OIS spread is plunging 13.94% to 61 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.48%, which is down 116 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is down 1 basis point today. Economically-sensitive shares are under the most pressure today with the MS Cyclical Index declining 6.3%. REITs and Banks are also under significant pressure. Copper appears to be rolling over after failing at its 200-day moving average. The US dollar index is likely at another tradable low around current levels. I am closely watching the tech sector for signs that the current pullback has run its course. These stocks should continue to outperform over the intermediate-term. On the positive side, gauges of credit angst continue to improve at a very rapid rate. Nikkei futures indicate a -250 open in Japan and DAX futures indicate a -16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit market angst, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:

- Former Securities and Exchange Commission Chairman Arthur Levitt warned the Obama administration and U.S. regulators against attempting to change the way executives at financial firms are compensated. “Government can jawbone, but for government to regulate I think is overkill and very mistaken because you don’t know where it’s going to end,” Levitt said in an interview with Bloomberg Television today. Efforts by the Obama administration to change Wall Street pay practices are “totally wrongheaded,” he said. The criticism from Levitt, a Democrat appointed to the SEC by former President Bill Clinton, shows that efforts to overhaul pay practices will prove contentious even after a popular outcry over Wall Street bonuses.

- Dwight Anderson, the commodities investor who liquidated his main Ospraie Fund last year after losing 39 percent, is planning a comeback with two new hedge funds set to open July 1. The Ospraie Equity Fund will buy and sell stocks of commodity and basic-materials companies in industries such as chemicals, mining, paper and natural resources, Anderson said in a May 12 letter to investors. The Ospraie Commodity Fund will invest in commodities and related derivatives, according to the letter, a copy of which was obtained by Bloomberg News. Anderson’s former fund invested in commodities and related stocks. It was the world’s largest such hedge fund at its peak, with more than $3.5 billion in assets after averaging annual gains of about 15 percent from 2000 through 2007. He decided in September to shutter the eight-year-old fund and sell assets after losses of more than 30 percent triggered a clause enabling investors to withdraw their money by the month’s end. About 1,441 funds, or 15 percent of those worldwide, closed last year, according to Chicago-based Hedge Fund Research Inc. Ospraie’s clients have gotten 82 percent of their money back. The remaining portion, invested in private companies, might take as long as three years to return, Anderson told investors at the time of the closure.

- Russia is a “weak link” in emerging markets and investors should buy credit default swaps protecting the country’s bond payments to profit from an expected increase in the cost of the contracts, according to RBC Capital Markets. Russian companies will struggle to repay $51.2 billion of debt maturing before December and the banking system needs to be restructured, which could “materially increase financial sector contingent liabilities for the government,” the note said. Credit default swaps have dropped to around 300 basis points for Russia from more than 1,000 basis points in October on optimism the worst of the financial crisis is over, Bloomberg data show. This price “does not accurately reflect the risks,” RBC said.

- The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.

- The premiums banks charge each other for gold coins, reflecting costs above metal content, shrank this month after investor demand eased, Commerzbank AG said. The interbank premium in Europe on a 1-ounce coin such as American Eagle, Krugerrand or Maple Leaf dropped to about 6%, from 10% at the end of April. That was the highest rate for at least a decade.

- Confidence in the global economy jumped to the highest level in 19 months as central bankers pointed to signs of a revival and stress tests on U.S. lenders reassured investors, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index climbed to 38.72 in May from 21.2 in April, the biggest increase since the survey began in November 2007. A measure of U.S. participants’ confidence in the world’s largest economy rose to 34 from 23.9, the survey showed.

- European Union regulators levied a record 1.06 billion-euro ($1.45 billion) fine against Intel Corp.(INTC), the world’s biggest computer-chip maker, and ordered the company to stop using illegal rebates to thwart competitors. Following an eight-year investigation, the European Commission found that Intel impeded competition by giving rebates to computer makers that buy all or almost all of their chips from Intel. The penalty is the biggest antitrust fine in the 27-nation EU’s history, more than double the 497 million- euro penalty against Microsoft Corp. in 2004.

- The U.S. Treasury will tell banks to increase transparency in the over-the-counter derivatives market by making prices available on centralized computer platforms, according to people familiar with the plan. Treasury Secretary Timothy Geithner may announce the decision as soon as today, said the people, who declined to be identified because they weren’t authorized to speak publicly.

- General Motors Corp.(GM) bonds tumbled to record lows on concern that it will fail to restructure in time for a government-imposed deadline on June 1, pushing the largest U.S. automaker into bankruptcy. GM’s $300 million of 9.4 percent bonds due in 2021 fell 4.3 cents to 4.4 cents on the dollar as of 11:46 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Wall Street Journal:

- Tax Increases Could Kill the Recovery. The cap-and-trade levy would hit low-income earners especially hard. Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997. Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment. The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut. But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP. Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices. CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.

- The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter. The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance. In an indication of how broad the effort may become, Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators need to examine compensation practices in the mortgage industry, suggesting new limits could stretch beyond banks.

- The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar. The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead. Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

CNBC:

- Online classified ads service Craigslist will get rid of its "erotic services" category that critics called a front for prostitution, replacing it with an adult category that will be reviewed by Web site employees, state attorneys general announced Wednesday.

- Intel(INTC) denies allegations it used illegal selling practices and will appeal the $1.45 billion dollar fine imposed by the European Commission, company CEO Paul Otellini told CNBC Wednesday.

NY Post:

- Goldman Sachs(GS) and Morgan Stanley(MS) look to reap a combined $100 million in fees from just a few days of work -- and they can thank the government's stress test for the windfall. According to estimates calculated by The Post, Morgan Stanley and Goldman are in line to pocket the combined nine-figure sum as a result of Uncle Sam forcing 10 of the country's largest financial firms to raise $75 billion in much needed cash to gird against potentially choppy markets. Morgan and Goldman have been assigned the lion's share of plum debt and equity underwriting assignments in an otherwise dead capital-raising environment.

Washington Post:

- As American International Group chief executive Edward M. Liddy returns to Washington to face Congress today, new details are emerging about how long federal officials were aware of the company's recent bonus payments to its executives and of how inflammatory the payments could be. Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy.

Reuters:
- World oil demand is still shrinking as the global economy contracts, OPEC said on Wednesday, adding that a rise in oil prices reflected sentiment rather than fundamentals, which were far from balanced. Despite falling demand for oil and promises by the Organization of the Petroleum Exporting Countries to cut output, the producer group said its own production actually increased last month, suggesting rising prices may have encouraged its members to pump more. OPEC said in its Monthly Oil Market Report that its oil output, excluding Iraq, rose to 25.81 million barrels per day (bpd) in April, up from 25.59 million bpd in March. It was the first rise in OPEC output since July last year. The group said global oil demand would drop 1.57 million bpd in 2009 to average 84.03 million bpd. Its previous forecast was for demand to fall by 1.37 million bpd. OPEC still expects higher global oil demand this year than the International Energy Agency, adviser to 28 industrialized countries, which last month forecast consumption this year at 83.4 million bpd. Demand is falling fast in the developed nations of the Organization for Economic Co-operation and Development (OECD), but the global downturn has also curbed previously rapid demand growth in developing countries such as China and India. World oil demand contracted year-on-year by a record 2.4 million bpd in the first quarter of this year with about 95 percent of the total decline attributed to the OECD, OPEC said. The OPEC report cautioned that the recent improvement in market sentiment as prices have risen did not necessarily reflect the realities of demand and supply.

- OpenTable Inc, an online reservation system used in about 10,000 restaurants in the United States, will price its planned initial public offering on May 20, and begin trading the following day, a source close to the deal said Wednesday. OpenTable, which is based in San Francisco, plans to sell 3 million shares in an estimated range of $12 to $14 per share in the deal, which is being underwritten by Bank of America Merrill Lynch (BAC).

- IBM (IBM) Chief Executive Sam Palmisano reiterated his outlook for 2010 earnings, saying the company's focus on high-margin software and its geographic diversity would help buffer the impact of a slower economy. Palmisano said International Business Machines Corp is still targeting earnings of $10 to $11 per share in 2010. The company has also forecast earnings of "at least $9.20" per share in 2009.

- U.S. Bancorp (USB) Chief Executive Richard Davis said the bank expects in a few weeks to be eligible to repay a $6.6 billion taxpayer-funded infusion, becoming one of the first big lenders to exit the much-maligned Troubled Asset Relief Program.

- Verizon Communications Inc(VZ) will sell 4.8 million rural phone lines to Frontier Communications Inc for $5.25 billion in stock, getting rid of the declining business to focus on wireless and broadband services. The deal will triple the size of Frontier, making it the largest rural-only service provider in the United States.

- The U.S. financial system has completed a big part of the painful adjustment away from its excessively leveraged state, and lending is starting to improve, U.S. Treasury Secretary Timothy Geithner said on Wednesday. Speaking to a group of community bankers, Geithner also said the government planned to reopen a $700 billion bailout fund to small banks once the larger ones repay some of the government money they received.

- The U.S. economy showed some shy signs of improvement in April, although the outlook for European countries still looks mixed, credit card network MasterCard (MA) said on Wednesday.

Financial Times:
- Credit risk – measured by key money market spreads – has for the first time fallen below levels last seen before the collapse of Lehman Brothers as banks increasingly lend to each other amid growing confidence that the worst of the financial crisis is over.The gap between London interbank offered rates and overnight market rates – a pure measure of credit risk – on Wednesday dropped below levels on Friday September 12, the last price before the US investment bank collapsed on the following Monday. This spread is the most important gauge of risk in the money markets because it measures the difference between risk-free overnight market rates and three-month Libor, the key benchmark interest rate banks charge each other for lending. The narrowing of this spread suggests fears of a financial meltdown – prevalent after the US investment bank went bankrupt – have sharply receded.

CBC:

- A researcher at the National Microbiology Lab in Winnipeg is facing charges in the United States after allegedly trying to smuggle unidentified biological material across the Manitoba-North Dakota border. U.S. authorities allege Konan Michel Yao had 22 vials of an unidentified substance in the trunk of his car when he tried to cross the border on May 5. He is charged with smuggling merchandise. U.S. customs officers allegedly found the vials wrapped in aluminum foil inside a glove and packaged in a plastic bag, along with electrical wires.

Vedomosti:

- Russian mortgage loans fell 80% in the first quarter from a year earlier.

Bear Radar

Style Underperformer:
Small-cap Value (-5.30%)

Sector Underperformers:
Gaming (-8.52%), Steel (-7.86%) and REITs (-6.26%)

Stocks Falling on Unusual Volume:
CLF, VIP, MBT, LUK, SU, HES, ANDE, AAWW, AIPC, NCMI, PRSC, WRLD, PETS, AAUK, PVTB, GOLD, NAT, TKG, BBT, MTA, FCL, BMC, CSH, SYX and CHA

Stocks With Unusual Put Option Activity:
1) HST 2) STX 3) AMD 4) GT 5) AMAG