Wednesday Watch

Late-Night Headlines
Bloomberg:

- The cost to protect U.S. corporate bonds from default rose the most since March as tumbling U.S. wholesale prices and industrial output further undercut optimism after a three-month rally in the riskiest assets. Credit-default swaps of Goldman Sachs Group Inc. rose to a four-week high, while contracts on Citigroup Inc. soared the most in almost two months, signaling a deterioration in the perception of credit quality. Best Buy Inc. swaps increased to the highest since May 22 after the electronics retailer posted a drop in quarterly profit. Corporate credit in the U.S. slumped for a second day on speculation the economy may not recover as fast as forecast from the longest recession since the 1930s and that the number of defaults and bankruptcies may not slow anytime soon. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 12 climbed 8.5 basis points to 137.5 basis points in New York following a 7-basis-point gain yesterday, the biggest two-day increase since March 3, according to CMA DataVision. Credit-default swaps on Goldman Sachs rose 20.7 basis points to 155 basis points, while contracts on JPMorgan increased 10.8 basis points to 105 basis points, the highest since May 21, according to CMA. Citigroup swaps jumped 61.5 basis points to 460 basis points, CMA prices show. Yields on junk bonds rose the most relative to benchmark rates since May 13, according to Merrill Lynch & Co. index data. The average spread on high-yield, high-risk debt widened 8 basis points today to 1,048 basis points more than Treasuries, according to Merrill’s U.S. High Yield Master II index.

- Eat the rich. Maybe that will work. Even a 100% payroll tax on people earning more than $200,000 a year wouldn’t completely plug the gap between what the US government takes in and what it intends to spend over the next three years. The deficit will reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011, according to President Obama’s recently proposed budget to Congress. The president wants to increase the top two marginal tax rates for people earning more than $200,000 to 36% and 39.6%, and to limit the value of certain deductions. Of the 138 million individual income tax returns filed in 2006, there were 3.85 million with adjusted gross incomes of $200,000 or more, according to the Internal Revenue Service’s Statistics of Income Bulletin. “I think the argument being made by those advocating a higher top marginal tax rate is that closing the budget gap is going to require lots of incremental pain, and those who are doing the best should be contributing something to the effort,” said Joshua Shapiro, chief US economist at MFR Inc., a NY-based consulting firm. However, “everyone knows the vast middle is where the bulk of the wage and salary income is.”

- Aluminum inventories monitored by the London Metal Exchange will jump 16% by the end of the year as producers resume output from idled smelters, said David Wilson, the director of metals research at Societe Generale. Stockpiles tallied by the LME will reach 5 million metric tons by the end of 2009, Wilson forecast. Warehouse supplies reached a record 4.32 million tons and are up 86% this year, LME data show. “There’s the huge potential of new supplies to come into the market in the next four or five years.” Aluminum prices have jumped 16% since the end of March, and some smelters have restarted production on speculation usage will rebound. “There is still a chronic level of oversupply as illustrated in reported stocks,” Wilson said. The aluminum market will be in a “significant” surplus this year, with production exceeding demand by about 2.28 million tons, Wilson said. Demand in china, the world’s biggest metals user, will ease as buyers stop adding to stockpiles, he said. “It’s highly unlikely we’ll see further restocking in China,” Wilson said. “There is a glut of metal in China.”

- Corn fell, erasing an earlier gain, on speculation that warmer weather and ample rainfall in the U.S. Midwest will boost prospects for the nation’s biggest crop. About 70 percent of the crop was in good or excellent condition as of June 14, compared with 57 percent a year earlier, the U.S. Department of Agriculture said yesterday. Warm, wet weather the next 10 days will aid plant development ahead of reproduction in July, said Dale Schultz, a commodity specialist for Gottsch Enterprises in Hastings, Nebraska.

- Reynolds American Inc. said North Carolina Governor Beverly Perdue is putting manufacturing jobs at risk with her proposal to raise cigarette taxes by $1 a pack. “We want more jobs, not taxes,” Daniel Delen, chief executive officer of Reynolds’ R.J. Reynolds Tobacco Co. unit, said today during a rally in Raleigh, North Carolina’s capital. “Taxes cause direct job losses.” More than 400 Reynolds employees gathered to urge legislators to reject raising cigarette taxes in the state that grows the most tobacco in the U.S. and is home to Reynolds and Lorillard Inc.

- Manufacturers, utilities and refineries expecting free handouts from the government in U.S. climate legislation may not be able to avoid the tax collector. Lawmakers are considering taxing $693 billion in pollution credits that the U.S. would give away to companies as part of a bill designed to cut emissions tied to global warming. If carbon allowances are sold or traded in the same way as commodities, taxes would be appropriate, the Joint Committee on Taxation said in a report presented to the Senate Finance Committee today. “That to me does not seem like a good direction to go,” James Miller, chief executive officer of Allentown, Pennsylvania-based PPL Corp., told reporters at a lunch meeting. “We are going to allocate allowances for certain periods of time and distribute them in a manner that we can reduce the impact on ratepayers to some degree,” Miller said. “I’m not sure what we are intending to accomplish then by taxing the allowances that are given to help the ratepayers see a reduced impact of CO2 legislation.”

- U.S. President Barack Obama praised Federal Reserve Chairman Ben S. Bernanke for doing an “extraordinary job” while declining to comment on whether he plans to nominate the central bank chief for a second term. Bernanke has “done an extraordinary job under extraordinary circumstances,” Obama said today in an interview with Bloomberg Television at the White House. On a potential reappointment, Obama said, “I’m not making news on that today.”

- Eastern Bay Investment Management’s James Zhong is selling China’s small-cap stocks after the steepest rally worldwide pushed valuations to the highest level since the shares peaked in January 2008. “We’re seeing a bubble in small-cap stocks,” said Zhong, who helps oversee $220 million in Hong Kong. Zhong predicts the CSI 500 Index, a benchmark for China’s $307 billion market for small-cap equities, will slide as much as 30% “in the near future” because he expects companies will report first-half results that disappoint investors. The jump in mainland-traded equities with a median value of 3.8 billion yuan pushed the price-to-earnings ratio for Shenzhen Topraysolar Co. to 110, data compiled by Bloomberg show. Xuzhou V V Food & Beverage Co. fetches 160 times profit, almost double its PE ratio of 87 at the top of the last bull market. Beijing Vantone Real Estate Co. shares rose 171% since Nov. 9, even as analysts cut their earnings estimates by 35%. Zhong, KBC Goldstate Fund Management’s Larry Wan and Hamon Asset Management Ltd.’s Nina Wu say the advance has gone too far after the CSI 500’s PE ratio jumped to 68, near the level of 69 when the index peaked at 5,487. Investors opened 8 million new brokerage accounts since Nov. 9, 30% more than the previous seven-month period. Shanghai Stock Exchange trading more than doubled to an average 12.8 billion share a day, Bloomberg data show. “Bubbles almost always occur as markets adjust to rapidly increasing liquidity and it’s obvious we’ve had a massive increase in liquidity in China,” said Michael Pettis, a finance professor at Peking University in Beijing and former head of emerging markets at NY-based Bear Stearns Cos. Companies are expected to post a 16.6% increase in 2009 earnings, according to analysts’ estimates compiled by Shanghai Wind Information Co. That compares with NY-based Morgan Stanley’s estimate for a 25% profit decline for companies in developing nations worldwide. KBC’s Wan said the valuations for Chinese small-cap stocks make them too risky to buy. “This is outright gambling,” he said. “I’m leaving this to those who can dance with wolves.”

- Goldman Sachs Group Inc.(GS), the fifth- biggest U.S. bank by assets, will repay $10 billion to the Treasury Department tomorrow, Chief Executive Officer Lloyd Blankfein wrote to congressional leaders.

- Sweden’s economy, enmeshed in the steepest recession in at least 15 years, will suffer a further blow from its banks’ decade-long expansion in the Baltic states. Writedowns for Swedish banks in eastern Europe, especially the Baltics, may cost 5 percent of Swedish gross domestic product, Fitch Ratings Ltd. estimates, even after Latvian lawmakers last night approved deep cuts in public spending to unlock the next part of a bailout loan and avert a devaluation.

- Japan plans to offer loans to power producers in the U.S. and Australia that buy so-called clean coal generators from Japanese manufacturers, according to a government document obtained by Bloomberg News.

Wall Street Journal:

- A backlash over plans for strict hedge fund regulations in Europe may bolster efforts by U.S. hedge funds to keep any new rules called for by the Obama administration from being overly strict. Earlier this month, London-based hedge funds warned the U.K. government's Treasury they may leave the country if a European Union plan is approved forcing managers to register with regulators and provide information on their holdings, fees and the amount of money they borrow. U.K. officials even backed them up over the weekend, with one reportedly saying he would fight "tooth and nail" in support of the U.K. funds to keep them from leaving. London is No. 2 in the world for hedge funds, after New York and its suburbs. The heavy resistance to hedge fund regulation in Europe comes just before President Barack Obama, on Wednesday, is set to announce major financial regulation reforms after a global crisis in markets that helped throw most of the world into recession. Increasing oversight of hedge funds is near the top of his list of reform plans, and observers say he will, at a minimum, want a law forcing hedge fund to register with the Securities and Exchange Commission. This would likely give the SEC the ability to check in on the funds and review their books to ensure the integrity and security of markets. But such a rule may not go far enough, say many analysts, who note Bernie Madoff, arrested last year for running a $50 billion Ponzi scheme, was registered with the SEC.

- General Motors Corp. (GMGMQ) plans to idle its plant in San Luis Potosi, Mexico, for seven weeks this summer to adjust for weak demand in the Mexican and international markets, the company's Mexican unit said Tuesday. The plant, which produces the compact Chevrolet Aveo and Pontiac G3, will be idled from July 1 to August 21, General Motors de Mexico said in a press release.

- Four power companies are expected to split $18.5 billion in federal financing to build the next generation of nuclear reactors -- the biggest step in three decades to revive the U.S. nuclear industry and one that could vault the utilities ahead of some of the sector's strongest players. UniStar Nuclear Energy, NRG Energy Inc., Scana Corp and Southern Co. are expected to share a set of federal loan guarantees to be awarded by the Energy Department. The guarantees would enable the companies to start building the reactors as early as 2011, with the plants likely to come online by 2015.

- Trade organizations representing an array of technology companies Tuesday criticized a Chinese mandate to require computer makers to install Web-filtering software on PCs sold in the country. The plan "raises significant questions of security, privacy, system reliability, the free flow of information and user choice," according to a letter sent by 19 organizations to Li Yizhong, China's Minister of Industry and Information Technology, a copy of which was reviewed by The Wall Street Journal. "We urge the Chinese government to reconsider implementing the requirements," the letter said.

- The U.S. House of Representatives voted Tuesday to approve a $106 billion bill to pay for the wars in Afghanistan and Iraq through September, in a vote that also provided $1 billion in funding for additional assistance to the troubled U.S. auto industry. It also created funding to pay for a program dubbed cash-for-clunkers that would allow owners of older, heavier polluting cars to receive a cash voucher upon trading it in for a newer, cleaner car. The vote, at 226-200, was much tighter than that of an earlier margin in a vote on a House version of a war funding bill. This is because the bulk of Republicans -- almost all of whom had supported the legislation earlier -- voted against the bill due to the fact that it includes $5 billion in funding to boost lending capabilities at the International Monetary Fund. The funds will enable the IMF to lend an additional $108 billion to developing countries struggling in the face of the global economic downturn. In the end, just five GOP lawmakers voted in favor of the bill, in an attempt to paint Democrats as out of touch with the priorities of average Americans. Republicans decried the money as misspent, both because they said Americans are suffering at home and in need of assistance, and also because they said it could lead to the IMF lending money to enemies of the U.S. Also included in the legislation is money to pay for several foreign aid programs, such as greater assistance for Pakistan to help the Asian nation to deal with a burgeoning refugee crisis.

- House Democrats are crafting a transportation spending bill that would cost roughly $450 billion over six years, but no consensus has emerged on how to fund it, according to people familiar with the matter. The bill for the first time would establish standards -- like reducing oil consumption and spurring economic growth -- that would influence which highway and transit projects get federal funding. It would also consolidate to six or fewer the number of Transportation Department programs used to channel money to states, giving local officials more flexibility to combat their transportation challenges.

- Pro-government and opposition demonstrators poured into the streets of Iran's capital Tuesday for a fourth day of sometimes-violent rallies, as the country's religious leaders agreed to a partial recount of Friday's disputed presidential vote. Amid the unrest, and more shooting by government-backed militia, authorities arrested prominent opposition leaders and clamped down on media covering the crisis.

- European new-car registrations last month slipped 4.9% from a year earlier, but Germany's Volkswagen AG and Italy's Fiat SpA saw demand rise as scrapping incentives fueled sales of smaller cars. New-car registrations in Europe dipped to 1.27 million vehicles in May, the 13th consecutive month of shrinking demand, despite successful scrapping initiatives in several major markets that cushioned the fall, the European Automobile Manufacturers Association, or ACEA, said Tuesday in a statement. In the first five months of the year, registrations in Europe were down 14% compared with the same period last year at 5.96 million vehicles.

CNBC.com:
- As we head toward the release date for Apple's next big iPhone, the 3GS, pundits and experts are stepping forward with some pretty robust sales estimates.

- Not all airline stocks may be created equal, at least according to Stifel Nicolaus airline analyst Hunter Keay.

NY Times:

- Wall Street’s great investment houses have never faced a serious foreign challenge in their own backyard. But as tectonic shifts reverberate through the banking industry, their overseas rivals are edging into some of the most lucrative corners of American finance.

IBD:

- Into this busy field comes a small upstart, San Antonio-based Rackspace Hosting (RAX). Nine-year-old Rackspace had already carved out a niche in managed hosting, in which it owns and operates the infrastructure for clients' internal networks and Internet needs. Cloud computing was a natural extension.

Business Week:
- The Obama Administration wants to save money by streamlining approvals for "follow-on biologics." The biotech industry, with much to lose, cites risks. The Biotechnology Industry Organization dashed out a hostile response to the FTC's suggestions, issuing a statement that faulted the agency for "an exceedingly narrow policy perspective." The industry fears that limiting patent protections and market exclusivity would crush profits, which would in turn make it difficult for companies to invent new drugs. The average innovation takes $1.2 billion to bring to fruition, the industry group says. The FTC, it adds, "appears to minimize greatly the impact on innovation that would occur under a new paradigm in which biosimilar competitors would be able to take a free ride off the massive [research and development] investment made by the initial innovators."

CNNMoney.com:

- Can reinvigorated financial watchdogs take a bite out of surging oil prices? Dicker said that should oil prices continue to rise, the drumbeat for action will continue to get louder. He said he could even envision regulators forcing all futures traders to liquidate their contracts when they expire, rather than rolling them over into the next month -- which is how regulators responded when the Hunt brothers tried to corner the silver market 30 years ago. "If the screaming gets loud enough," he said, "you could see some pretty draconian measures."

Forbes:

- Get ready for a slew of press releases when the Russell Indexes rebalance on June 29. The Rochester Medical Corp. was early in touting its coming inclusion in the Russell 3000, a broad index that covers 98% of the liquid stocks on the world markets. Members of the Russell 3000 are from the large-cap Russell 1000 or small-cap Russell 2000, which will include small-cap Rochester.

- Oil’s Paper Bubble. Perception is once again substituting for reality in the oil markets. Prices are going in the opposite direction of demand. "I don't have a prediction short term, because it's a little bit of a fool's game," says Mark Brown, oil services research analyst for Pritchard Capital Partners. Fadel Gheit, senior energy analyst for Oppenheimer & Co., says perception once again is substituting for reality, with speculators driving up the market to levels that are "unjustifiable." "Market forecast supply and demand, in my view, will not support an oil price above $50, let alone above $70," he says. "So, obviously, the oil price is inflated, and they are inflated in the hands of the same players that brought about the global financial crisis." He says traders are taking positions, holding oil in tankers offshore and waiting for the price to spike, which becomes a "self-fulfilling prophesy" based on paper demand, not real consumption. "Demand is rising artificially because a big chunk of it goes to storage," he says. "Somebody is holding the oil and releasing it at higher prices--the same gimmick, the same game that we have gone through before." Gheit, who has testified before Congress urging better regulation in the market, believes "financial players have seized" the oil business in the last four or five years, with major oil companies having less impact on the market than major investment banks. "If Exxon makes an oil forecast tomorrow and Goldman Sachs makes an oil forecast tomorrow, the market will take Goldman Sachs and not pay attention to Exxon," he says, adding, "it has nothing to do with supply and demand of the physical commodity." "We had the crash (last year), we got hurt pretty badly, now we are back and we are doing exactly the same thing that we did before, which is accelerate, accelerate, accelerate," he says. "It will eventually crash. The question is not if, the question is when."

Politico:

- Reacting to a rising tide of anger from gay and lesbian supporters at a series of slights and deferred promises, President Obama will tomorrow sign an executive order extending benefits to same-sex partners of federal employees. The move, which mirrors the policy of many large corporations, will have an immediate effect for many workers, but it is a deeply reactive response to a core Democratic group whose concerns have been festering for six months. The executive order -- scheduled for signing tomorrow at 5:45 p.m., may in the short term give Joe Biden something positive to say at a June 25 fundraiser that has seen prominent guests drop out, a host sharply attack the administration, and which is expected to be marked by protests. The silence on gay rights in the early days of the administration have pushed many gay rights leaders toward demands that Obama go beyond smaller-bore issues toward the heavier political lifts of ending "Don't Ask, Don't Tell" and the Defense of Marriage Act and supporting same-sex marriage. And they're shifting toward a more confrontational strategy, which could include a march on Washington later this year. The executive director of the Empire State Pride Agenda, a large state-based gay rights group, Alan Van Capelle, greeted today's announcement sarcastically.

Rasmussen:

- Eighty percent (80%) of U.S. voters want the government to sell its stake in General Motors and Chrysler as soon as possible. A Rasmussen Reports national telephone survey finds that only 11% disagree and want the government to retain ownership for a long time. Support for ending the government ownership is so strong that 64% favor a proposal that would force the government to sell the auto companies within a year. Only 26% are opposed.

Washington Post:

- President Obama has embraced Bush Administration justifications for denying public access to White House visitors logs even as advisers say they are reviewing the policy of keeping secret the official record of comings and goings. In recent days, the Secret Service has rejected requests from two organizations for the logs, which document the West Wing meetings that have helped shape Obama's policies on banking regulation, economic recovery, foreign policy and the auto industry. Today, Citizens for Responsibility and Ethics in Washington filed a lawsuit against the Obama administration seeking release of the visits of coal company executives to the White House. Msnbc.com reported today that their broader request for logs since Jan. 20 was also denied.

- Advisers of hedge funds, private equity, venture capital funds and other private investment pools would be required to register with the Securities and Exchange Commission, according to Senate legislation introduced on Tuesday. Senator Jack Reed, chairman of the Senate Banking Committee's subcommittee on securities, said his bill would require advisers that manage more than $30 million in assets to register with the SEC. Smaller funds would be supervised by states.

- The CIA is pushing the Obama administration to maintain the secrecy of significant portions of a comprehensive internal account of the agency's interrogation program, according to two intelligence officials. The officials say the CIA is urging the suppression of passages describing in graphic detail how the agency handled its detainees, arguing that the material could damage ongoing counterterrorism operations by laying bare sensitive intelligence procedures and methods. The May 2004 report, prepared by the CIA's inspector general, is the most definitive official account to date of the agency's interrogation system. A heavily redacted version, consisting of a dozen or so paragraphs separated by heavy black boxes and lists of missing pages, was released in May 2008 in response to a Freedom of Information Act lawsuit by the American Civil Liberties Union.

Crain’s NY Business:

- Facing the inevitable assault of government regulation, the hedge fund industry is quietly building up its arsenal. The Managed Funds Association, the industry trade group, just hired heavyweight lobbying firm Brownstein Hyatt Farber Schreck to handle its relations with the federal government. Congress is mulling over how to regulate and rein in the $1.5 trillion hedge fund industry. The lobbying firm already represents the U.S. Department of Energy, the National Association of Homebuilders and the Private Equity Council, among others. Investment firms Apollo Management and Citadel Investments are also among its clients. With the threat of multiple bills floating around Capitol Hill, the Managed Funds Association is pumping money into its cause: It spent $750,000 in lobbying fees in the first quarter of this year, according to filings listed on OpenSecrets.org. The group is expected to outspend last year’s total of $2.5 million. With approximately 60% of hedge fund assets managed from Manhattan, the Big Apple is still considered the hedge fund capital. The MFA is hoping that Denver-based Brownstein Hyatt will give it an edge with Washington legislators: the firm hosted the kickoff party at last year’s Democratic National Committee, held in the Denver Art Museum. One of its name partners, Steve Farber, was chief fundraiser for the Democratic National Convention. Last month, two dissident senators were persuaded to drop their objections to former Goldman Sachs partner Gary Gensler becoming chairman of the Commodity Futures Trading Commission. Mr. Gensler’s nomination had been held up for months by Sens. Bernie Sanders (I-Vt.) and Maria Cantwell (D-Wash.), who argued that Mr. Gensler was too cozy with the derivatives world. In addition to being a Wall Street master, Mr. Gensler is a former Treasury Department official under President Bill Clinton who helped write policy that exempted credit default swaps from regulation. Many blame the complex securities for last year’s market collapse. The industry has a few other political aces in its corner. New York Sen. Chuck Schumer sits on both the Senate financing committee and the banking committee. And the lawyer heading the MFA’s lobbying effort, Carmencita Whonder, joined Brownstein Hyatt’s Washington office in 2007 after serving as Mr. Schumer’s principle adviser on the banking committee.

AP:

- The latest cost estimates for health care legislation in Congress are around $1.6 trillion over 10 years, two Senate sources said Tuesday as concerns mounted over the price tag for the sweeping overhaul. Two Senate staffers, one Democratic and one Republican, said Congressional Budget Office estimates put the cost of the Finance Committee version of the bill at around $1.6 trillion. On Monday, the budget office said the Senate Health, Education, Labor and Pensions Committee version would cost $1 trillion over ten years and only cover about one-third of the nearly 50 million uninsured. The staffers who disclosed the latest estimates spoke on condition of anonymity because of the sensitivity of negotiations over the legislation. A third staffer, a Finance Committee Democratic aide who also spoke on condition of anonymity, indicated committee members are working to lower the cost to less than $1 trillion over 10 years, a level preferred by the Obama administration. Costs are becoming a big worry for moderate Republicans the administration is hoping to win over, as well as for fiscally conservative Democrats. The high estimates have disappointed senators and slowed down the work of key committees. Sen. Olympia Snowe, R-Maine, on Tuesday said the process that produced Kennedy's bill is "broken." "We have a fundamental obligation to ensure this legislation does not increase the deficit and, sadly, current congressional health care reform efforts fall woefully short," Snowe said in a statement.

Reuters:

- Adobe Systems Inc(ADBE), the maker of Photoshop and Acrobat software, posted the narrowest profit margin in more than 3 years, disappointing investors even though its revenue fell less than analysts had feared. The company's profit margin, excluding special items, dropped to 33.7 percent from 39.4 percent a year earlier. Adobe's stock fell 2.4 percent in extended trading.

- Large U.S. corporate bankruptcies have accelerated in recent weeks as the U.S. economic slowdown claims more victims, according to industry data. Eight public companies with assets of more than $1 billion have filed for bankruptcy protection in the last four weeks, compared with five multibillion-dollar company bankruptcies in the prior four-week period, according to data compiled by BankruptcyData.com and reviewed by Reuters.

- Venezuela on Tuesday passed a law to increase the government's stake in the petrochemical sector to a minimum 50 percent stake in all projects in a move that could affect companies such as Japan's Mitsibushi Corp. President Hugo Chavez has increased pressure on the private sector through nationalizations and by exerting authority over companies. The government has banned Coca-Cola Co's Coke Zero. The government is also planning to buy out a minority stake currently held by six Japanese companies in a major aluminum smelter. Here are some of the actions Chavez has taken against businesses in the oil-rich country.

Financial Times:

- Best Buy(BBY), the world’s largest consumer electronics chain, on Tuesday said its stores in Shanghai had seen a surge in the popularity of local Chinese products over the past year, in what may be a sign of the future shape of the global electronics market. Bob Willett, head of Best Buy’s international division, said the company’s six stores in Shanghai had see “massive movement towards local brands” over the past year – which include names such as Lenovo, TCL and Haier – in a business that was previously dominated by Japanese and Korean brands. “We are seeing 30-40 per cent improvements in local brands. International brands – Sony and Samsung – are declining by nearly 50 or 60 per cent in Shanghai alone,” he said. “We are seeing huge shifts and some of those shifts will translate to other parts of our business.”

TimesOnline:

- An ugly trade row has blown up between Europe and the United States over a decision by France, Germany and the UK to give Airbus launch aid for its latest aircraft. Airbus is seeking €3.5 billion in repayable aid to help it offset the estimated €11 billion it will cost to develop the A350XWB, which is due to enter service in 2013. However, the US government attacked the decision claiming it was “a major step in the wrong direction”. Sources familiar with the US government’s policy added that Europe’s decision to give Airbus launch aid would strain trade relations and could lead to penalties against European companies. Jim McNerney, the chief executive of Boeing, told The Times: “I’m disappointed Airbus is going to take that stuff on the eve of a WTO ruling on its appropriateness. It seems to me a step backward and suggests that they think the WTO process is irrelevant.”

- The scramble for Iraq's oil wealth is set to intensify after fresh agreements to develop three new exploration blocks in the country's Kurdish north. The decision from the Kurdistan Regional Government, which governs the semi-autonomous region, to allocate the concessions comes amid mounting international interest in the oil-rich province. Iraq holds the world's third-largest proven reserves of oil, after Iran and Saudi Arabia - about 115 billion barrels, according to BP - but large parts of the country, including the Kurdish region, where crude oil bleeds from the rocks in some places, remain relatively unexplored and there is the potential for the figure to rise sharply. The US Geological Survey estimates that the region could be found to contain 40 billion barrels of reserves. Industry sources told The Times that a formal announcement from the Kurdish authorities on which companies had won the concessions, which lie on Iraq's mountainous eastern border with Iran, was expected soon. A key reason for the present burst of activity is improved co-operation between Iraq's central government in Baghdad and the Kurdish authorities in Erbil, which since 2003 have clashed repeatedly over the latter's decision to strike deals to develop its oil reserves independently. After years of squabbling over how oil revenues should be distributed, exports of crude from the region were finally allowed to start on June 1.

China Securities Journal:

- China won’t have inflation this year even as loans increase by a record, citing Yao Jingyuan, chief economist of the National Bureau of Statistics. Industrial overcapacity and a “grim” job situation will prevent prices from rising, Yao said. Deflation will remain a concern for China’s economy this year, he said.

Sankei:

- North Korea is preparing to launch a long-range missile at a site in the country’s northeast as well as one from a northwest base. The two missiles are likely to be either standard or upgraded versions of the Taepo Dong-2 rocket.

Singapore Ministry of Health:

- The Risk of Community Spread of Swine Flu Rises in Singapore.

Late Buy/Sell Recommendations

Deutsche Bank:

- Raised (USB) to Buy.

Night Trading
Asian Indices are -2.0% to -.25% on average.

Asia Ex-Japan Inv Grd CDS Index -3.04%.
S&P 500 futures +.21%.
NASDAQ 100 futures +.21%.

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Economic Releases

8:30 am EST

- The Consumer Price Index for May is estimated to rise .3% versus unch. in April.

- The CPI Ex Food & Energy for May is estimated to rise .1% versus a .3% gain in April.

- The Current Account Deficit for 1Q is estimated to shrink to -$85.0B versus -$132.8B in 4Q.

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,000,000 barrels versus a -4,382,000 barrel decline the prior week. Gasoline supplies are expected to rise by +550,000 barrels versus a -1,553,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,000,000 barrels versus a -318,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by .13% versus a -.41% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly MBA mortgage applications report, Fox-Pitt Kelton Small/Mid-cap Bank Conference, Jeffries Healthcare Conference and the (MAT) analyst conference could also impact trading today.

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

Stocks Finish at Session Lows, Weighed Down by Financial, Commodity and Tobacco Shares

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In Play

Stocks Lower into Final Hour on Rising Economic Worries, China Trade Tensions, More Shorting, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Biotech longs. I took profits in my (URBN) long and added to another long this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 4.71% and is very high at 32.27. The ISE Sentiment Index is below average at 111.0 and the total put/call is above average at .99. Finally, the NYSE Arms has been running high most of the day, hitting 1.79 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is rising 5.20% today to 111.0 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 3.73% to 134.16 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 3.11% to 45 basis points. The TED spread is now down 418 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.67% to 42.06 basis points. The Libor-OIS spread is falling 1.55% to 40 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.83%, which is down 81 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. The most economically sensitive stocks are underperforming again today. Weekly retail sales showed deterioration for the second consecutive week. Various credit default swaps indices continue their recent surge higher. As well, China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program, which could become a large negative. On the positive side, the market is holding up relatively well, considering today’s news. Market leading tech stocks are especially strong. Moreover, education, airline, road & rail, hmo, drug, biotech, medical and computer services stocks are all higher on the day. I plan to maintain my current market exposure barring a closing swoon. Nikkei futures indicate a -7 open in Japan and DAX futures indicate a -30 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising economic worries, china trade barrier concerns, rising credit market angst and greater financial sector pessimism.

Today's Headlines

Bloomberg:

- JPMorgan Chase & Co.(JPM) and seven other banks will spend about $3.88 billion in the second quarter related to dividend and interest costs to repay government bailout funds, Rochdale Securities analyst Richard Bove said.

- Philip J. Baker, managing director of the collapsed Chicago hedge fund Lake Shore Asset Management Ltd., was indicted by a U.S. grand jury for allegedly operating a $300 million fraud scheme. The 27-count indictment was unsealed yesterday, Chicago U.S. Attorney Patrick J. Fitzgerald said in a statement today. While an arrest warrant has been issued for Baker, 44, his whereabouts are unknown, the prosecutor said. The U.S. Commodity Futures Trading Commission last year accused Baker in a civil enforcement suit of having defrauded at least 700 investors by hiding trading losses.

- The cost of protecting U.S. corporate bonds from default rose to the highest since May 29 as economic data released yesterday contrasted with the market’s “very optimistic outlook.” Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 12 rose 5 basis points to 134 basis points at 9:49 a.m. in New York, signaling a deterioration in the perception of credit quality, according to Phoenix Partners Group. Contracts have gained almost 13.5 basis points since reaching a one-year low on June 5, according to CMA DataVision. Contracts on the Markit iTraxx Crossover Index of 45 companies with mostly high-risk, high-yield credit ratings rose 11 basis points to 728 basis points, the highest since May 29, according to JPMorgan Chase & Co. prices in London.

- Kim Jong Il’s third son, the likely successor to North Korea’s leader, made a secret visit to China this month to meet President Hu Jintao, the Asahi newspaper said.

- Two US reporters detained and sentenced to 12 years hard labor this month by North Korea planned a “smear campaign” against the communist country’s human-rights policies, North Korea said today.

- Arvind Raghunathan, former head of Deutsche Bank AG’s global arbitrage business, will open his new hedge-fund firm next month with more than $1 billion, a sign that investors are trickling back after record losses last year. Roc Capital Management LP’s assets will include $500 million in a separate account from Deutsche Bank, according to people familiar with the New York-based firm.

- Slumping demand for commodities is spurring traders to use their raw-material stockpiles as collateral in financing agreements, said Jeremy East, head of global commodity derivatives at Standard Chartered Plc. “We see the stocks remaining very, very high for awhile. There’s still a lot of aluminum that’s in warehouses but not shown on the LME.”

- Rubber dropped to a three-week low as oil fell, boosting the appeal of its synthetic alternative, and a decline in global equities raised concern that raw materials demand may be slow to recover. Futures in Tokyo lost as much as 2 percent to the lowest since May 26 as crude oil slipped below $70 a barrel, reducing the cost of rival synthetic rubber.

- Wheat production in Australia, the world’s fourth-largest exporter, may reach the highest in four years, according to data from the nation’s commodity forecaster. Output may be about 22 million metric tons in 2009-2010, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in a statement. That compares with its March forecast of 22.1 million tons and last year’s crop of 21.4 million tons. Wheat in Chicago has dropped 9.7 percent this month as favorable weather helped improve prospects for the winter crop in the U.S., the world’s biggest exporter. Recent rainfall across growing regions in Australia has provided optimism for planting, the bureau said.

- Iran restricted the reporting of unauthorized events and “illegal protests” by foreign media after four days of demonstrations following the re-election of President Mahmoud Ahmadinejad in a June 12 ballot. “No reporting activities should take place without coordination and permission of this office,” the Culture Ministry’s office for the foreign media said today in a faxed statement in Tehran. “Reporters should not take part in news events that have not been announced by this office.” Reporters should avoid being present at or covering “illegal protests” without the permission of the Interior Ministry, it added.

- Morgan Stanley(MS), which won clearance to repay $10 billion to the U.S. Treasury last week, said today it will also cease issuing new debt that carries a guarantee from the Federal Deposit Insurance Corp. “Morgan Stanley does not plan nor expect to issue any more debt under the FDIC guaranteed debt program,” said Mark Lake, a spokesman for the New York-based bank.

- A Brooklyn-born economist who gave up teaching at the University of California at Berkeley in 1973 to trade the first Treasury-bond futures is getting his way with the biggest change in U.S. environmental policy in 20 years. And he has an unwitting ally from Chicago. Legislation to let polluters buy and sell carbon-dioxide emissions like pork bellies is the outgrowth of Richard L. Sandor, founder of the Chicago-based network of people trading pollution permits from Beijing to Brussels known as Climate Exchange. It doesn’t hurt that the six-year-old market got $1.1 million of seed money from the city’s Joyce Foundation, whose board included a little-known state senator named Barack Obama. Now the 44th president is determined to enact America’s first limits on greenhouse gases.

- The House is considering imposing a $37 billion tax on drugmakers by denying deductions for advertising of prescription drugs, Ways and Means Committee Chairman Charles Rangel said.

- Europe’s inflation rate dropped to zero in May as energy costs retreated and the global economic slump forced companies to lower prices. Inflation in the economy of the 16 euro-area nations is at the lowest level since the data were first compiled in 1996 and is down from 0.6 percent in April, the European Union statistics office in Luxembourg said today, confirming an initial estimate published on May 29.

- Research In Motion Ltd.(RIMM), the maker of the BlackBerry phone, will release a Tour model that’s compatible with networks abroad, layering on features to lure customers away from Apple Inc.’s latest iPhone. The BlackBerry Tour 9630, which has a sharper screen than its predecessors, will run on third-generation networks, RIM co- Chief Executive Officer Jim Balsillie said in a phone interview yesterday. Sprint Nextel Corp. plans to sell the device for $199.99 with a two-year contract, after rebates.

- Russian industrial production declined at a record pace in May as the government’s 3 trillion- ruble ($96 billion) stimulus package failed to boost orders during the country’s worst economic crisis in a decade. Output slid an annual 17.1 percent, the seventh consecutive decrease, compared with a drop of 16.9 percent in April, the Federal Statistics Service in Moscow said in an e-mailed statement today. That was the biggest contraction since the service moved to a new methodology in 2003. The median estimate in a Bloomberg survey of 16 economists was for production to shrink 15.9 percent.

- Gasoline futures topped $2.11 a gallon for the first time since Oct. 7 as refinery outages increased speculation supplies can’t meet demand and as the dollar weakened against the euro.

- Best Buy Co.(BBY), the world’s largest electronics retailer, said first-quarter profit fell 15 percent as sagging consumer demand drove down sales at older stores. The shares fell 3 percent in New York trading.

- Democrats who control California’s Legislature said tax increases are needed to help close a $24 billion deficit, setting up a battle with Republicans that may leave the state short of cash next month. Speaker of the Assembly Karen Bass, a Los Angeles Democrat, said higher taxes and fees are needed instead of all $16 billion in cuts proposed by Republican Governor Arnold Schwarzenegger. Democrats yesterday proposed a $15 automobile license fee and said they may consider a 9.9 percent per-barrel levy on oil produced in the state.

- Zicam nasal sprays and swabs may cause permanent loss of smell and taste and consumers should stop using them, U.S. regulators warned today, sending shares of manufacturer Matrixx Initiatives Inc. down the most ever. Matrixx, based in Scottsdale, Arizona, fell $10.68, or 56 percent, to $8.56 before Nasdaq Stock Market trading was halted.

- Former President Jimmy Carter urged the Gaza Strip’s Hamas leadership to join Middle East peace efforts and condemned Israel’s blockade of the territory, saying Palestinians are being treated like animals. “Tragically, the international community too often ignores the cries for help and the citizens of Palestine are treated more like animals than like human beings,” Carter, 84, said in a speech to graduates of a United Nations school in Gaza. “We are pushing towards the dream of having our independent state with Jerusalem as its capital,” Haniya said, standing beside Carter at a press conference. Carter said earlier in the day that he almost cried when he saw the wreckage of the American School in the Gaza Strip and felt guilty because Israel used U.S.-made war planes to bomb the campus. The American school, a private institution that is not affiliated with the U.S. government, was destroyed in a Jan. 3 air strike that killed a guard. The Israeli army said it targeted the campus because Palestinians were using the site to fire rockets at Israel’s southern towns and cities.

- Vaclav Havel, the Czech who led his country’s “Velvet Revolution” 20 years ago, described Iran’s President Mahmoud Ahmadinejad as a man possessed and warned he could “damage a lot of people.” “The Iranian president does not represent any religious nor national or other ideas,” Havel, 72, said in a Bloomberg News interview in Prague today. “In my eyes he is a man possessed. Unfortunately we are living at a time when a man possessed could easily inflict damage to a lot of people, due to modern technology.”

- Health insurers led by Cigna Corp.(CI) and Aetna Inc.(AET) rose in NY trading after the Congressional Budget Office said an overhaul plan of the US medical system would cost $1 trillion and still not cover all Americans. A plan proposed by Senator Edward Kennedy would leave about 30 million people uninsured, short of President Obama’s goal of covering everyone in the country, the budget office said. The report gives a stronger hand to Republicans fighting measures the industry opposes such as a government-backed insurance program, said Ana Gupte, a Sanford C. Bernstein analyst in NY. “The call people are making is that it will likely give the Republicans a bargaining chip,” Gupte said. “It could make the legislation less onerous or left-leaning as far as the plans are concerned.”

- Home prices in the U.S. may fall another 14 percent before reaching a bottom as an increase in unemployment offsets lower prices, Deutsche Bank said. “Affordability is no longer the driving issue in the housing market, and we believe prices still have a ways to fall in many areas before home prices reach their trough,” Deutsche Bank analysts led by Karen Weaver, wrote in a report yesterday.

Wall Street Journal:

- The head of Russian oil firm OAO Lukoil Holdings will lead a delegation to Iraq on Wednesday to continue talks on reviving a $3.4 billion oil deal from the Saddam Hussein era, a Lukoil official said.

- President Obama swept to office on the promise of a new kind of politics, but then how do you explain last week's dismissal of federal Inspector General Gerald Walpin for the crime of trying to protect taxpayer dollars? This is a case that smells of political favoritism and Chicago rules.

- Oklahoma Republican Sen. Tom Coburn, a fiscal conservative and earmark foe, has released a report detailing $5.5 billion in projects included in the $787 billion economic stimulus package that he considers wasteful or at least a questionable use of taxpayer dollars. The 45-page report “100 Stimulus Projects: A Second Opinion” includes a “Top 10” list of projects singled out by Coburn, as well as a breakdown by region.Among the top 10 are funds for repairing bridges in rural Wisconsin, including $840,000 for a small bridge that carries just 260 vehicles daily. It also lists $800,000 for the John Murtha Airport in Johnstown/Cambria County in Pennsylvania “despite the fact that virtually no one uses the airport.” Click here for The Wall Street Journal story on the report.

CNBC:

- Small business has led the economy out of all past recessions and will do so again, Steve Odland, chairman and CEO of Office Depot told CNBC. “Small businesses are so important to our economy—they create all the jobs, they lead through these kinds of different slowdowns and right now, all eyes are on small business,” Odland said in a live interview from the National Summit in Detroit.

Fox News:

- Hedge-fund liquidations continued at a breakneck pace during the first three months of 2009, but cooled off from the record number of collapses seen during the market meltdown at the end of last year. According to new data released Tuesday by Hedge Fund Research, 376 hedge funds closed during the first quarter, bringing the total number of funds that have disappeared since mid-2008 to nearly 1,200. However, the 376 funds closed last quarter is down 50% from the record level set during the previous quarter amid the height of the credit crisis. Still, the first quarter’s attrition rate of 4.05% is the second-highest rate ever, exceeded only by the previous quarter’s 7.77% rate.

MarketWatch:
- Funds of hedge funds, which allocate billions of dollars to managers in the $1.4 trillion industry, shut down at a record pace during the first quarter as investors questioned the value of the niche in the wake of the financial crisis and the Bernard Madoff scandal, according to data released Tuesday by Hedge Fund Research. Almost 200 funds of hedge funds liquidated in the first quarter. That represents an attrition rate of more than 8%, nearly double the previous record set in the fourth quarter of 2008, HFR said. Liquidations of funds of hedge funds accounted for more than half of the 376 funds that shut down across the industry in the first quarter, HFR reported.

FXStreet.com:

- National chain store sales fell 4.5% in the first two weeks of June versus the previous month, according to Redbook Research's latest indicator of national retail sales released Tuesday. The latest numbers are starkly different from recent weeks because they don't include Wal-Mart Stores Inc. (WMT), which said last month it would no longer provide monthly sales figures. Redbook said retailers faced unfavorable comparisons to a year earlier in men's apparel because the prior-year results were boosted by stimulus checks on Father's Day. It added household basics "held up well" and said sales of seasonal merchandise have been driven by sale pricing.

LA Times:

- As the immigration reform debate begins to heat up again, some observers expect that one of the biggest and most controversial new elements will be a proposed national worker identification card for all Americans. A "forgery-proof" worker ID card, secured with biometric data such as fingerprints, is an idea favored by Sen. Charles E. Schumer (D-N.Y), the new chairman of the immigration subcommittee. Schumer, who will lead the effort to craft the Senate's comprehensive immigration overhaul legislation, called the card the best way to ensure that all workers were authorized.

Politico:

- America’s big-city mayors are steaming over what they view as “a very dangerous precedent” set by the Obama administration in its decision to shun the U.S. Conference of Mayors annual meeting in Providence, R.I., this week. In its attempt to honor the picket line of a local firefighters union involved in a labor dispute with the city, the administration has inadvertently angered some of its staunchest supporters in urban America, who argue that by declining to send an official contingent to the three-day mayors’ conference, the administration is caving in to labor and snubbing local governments at a time of economic strife.

USA Today:

- The Air Force will train more drone operators than fighter and bomber pilots combined for the first time this year, signaling a fundamental shift for the 61-year-old service, records and interviews with top officials show. The growing ranks of drone operators mark a turning point for the Air Force as it looks to a future that relies increasingly on unmanned aircraft. Over the next few decades, the Air Force plans to develop drones that would serve as fighters, bombers and tankers, the heart of its manned fleet, according to its Unmanned System Update.

Reuters:
- Derivatives exchange Eurex will offer hurricane futures on wind damage as it expands its product offering to catastrophe derivatives, the platform operated by Deutsche Boerse said on Tuesday.Eurex said the new contracts, designed in cooperation with market participants, will be available from June 29, making Eurex the first European exchange to offer hurricane futures.

- A top Federal Reserve official warned on Tuesday not to take recent gains in a range of asset prices as proof that the U.S. economy is on the verge of a strong recovery. "The panic's hasty retreat should not be confused with robust recovery," Federal Reserve Board Governor Kevin Warsh said in remarks prepared for a speech to the Institute of International Bankers annual meeting in New York.

- The U.S. Treasury Department will not propose a new regulatory framework for the insurance industry when it outlines sweeping new rules for the financial services sector, sources familiar with the plans said on Tuesday. Rep. Barney Frank, chairman of the House Financial Services Committee, said on Tuesday that the Treasury Department is not ready to weigh in on the key question of an 'optional federal charter' for insurers, said industry sources who heard him speak.

- Investors say they are getting more promotional material from hedge funds than ever before, as funds seek to replenish assets withdrawn or lost because of negative performance during the financial crisis. Investors such as family trusts, pension funds and high net worth individuals say the sales drive intensified in the run-up to the GAIM hedge fund industry conference which began here on Tuesday.

Financial Times:
- China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world. In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms. “From a domestic political perspective this makes some sense because local governments do tend to favor foreign products in some categories,” Dong Tao, chief China economist for Credit Suisse, said. “But given how important free trade is for China’s economy this is not the right message for them to be sending to the rest of the world right now.” Just a few months ago Beijing was raging against a proposed “Buy American” clause included in the US economic rescue package. “The whole world is dying to see China spread its orders around and save their economies,” said Mr Tao. “But what this policy reflects is heightened anxiety about these job pressures and the potential for social unrest.” China’s trade surplus rose 15.7 per cent to $88.8bn in the first five months from the same period a year earlier. “Any movement – overt or subtle – to discriminate against foreign products and services is protectionist and an inefficient use of stimulus funds,” said James Zimmerman, partner with the international law firm of Squire Sanders & Dempsey in Beijing.

El Economista:

- Petrobras SA(PBR) this year may overtake its Mexican counterpart Petroleos Mexicanos as Latin America’s biggest oil producer. Petrobras by the end of 2009 will be producing more than 2.6 million barrels a day of oil, the current production level of Petroleos Mexicanos.

Yonhap News:

- North Korea’s Defense Minister Kim Yong Chun arrived in Beijing at the weekend. Officials at South Korea’s embassy in Beijing witnessed “a high-ranking North Korean official” arriving on an Air Koryo flight from Pyongyang at the VIP lounge in the international airport in Beijing on June 13. A source identified the man as Kim, Minister of the People’s Armed Forces of the National Defense Commission. The defense minister may have been in Beijing to deliver a message from North Korean leader Kim Jong Il to Chinese officials, the report said.

Xinhua News Agency:

- China supports Russia's bid for membership of the World Trade Organization (WTO) and hopes for its accession into the alliance at an early date, a senior official of the Chinese Ministry of Commerce said here on Monday.

Bear Radar

Style Underperformer:
Small-cap Value (-1.73%)

Sector Underperformers:
REITs (-2.12%), Oil Service (-2.05%) and I-Banks (-2.04%)

Stocks Falling on Unusual Volume:
MXWL, WTI, INT, CLMT, UBS, RTP, CHU, FCX, PHI, GENZ, APWR, RMBS, FLIR, CSKI, HOGS, LPHI, FUQI, IPCM, ARST, IRIS, URBN, MWIV, ARRS, PMTI, MRTN, ITWO, DEP, OKS, BBY, AGO, GWR and HAR

Stocks With Unusual Put Option Activity:
1) URBN 2) WDC 3) TEL 4) ATHR 5) VNO