Wednesday Watch

Evening Headlines
Bloomberg:

• Greek Quarantine Tested as Spain Denounces Contagion 'Madness'. Investors are already testing the euro region’s efforts to contain the Greek crisis. Greek bond yields yesterday rose above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area. “If the execution of the announced measures in Greece faltered it would certainly make it more difficult to bring the sovereign debt markets of Spain and Portugal into calmer waters,” said Kommer van Trigt, who helps oversee 140 billion euros ($183 billion) at Robeco Group in Rotterdam. “We want to see more evidence that measures are really being implemented.”
  
• Dodd and Shelby Agree on Plan to Bar Bank Bailouts. Senate Banking Committee Chairman Christopher Dodd said he and Republican Senator Richard Shelby have agreed “conceptually” on changes to the financial- overhaul bill aimed at preventing bailouts of Wall Street firms. The deal would eliminate a proposed industry-paid $50 billion fund to cover the government’s costs of liquidating a failing financial firm, Dodd said today in an interview. Republicans said the fund would encourage bailouts rather than prevent them. Dodd said the compromise with Shelby of Alabama, along with an amendment by California Democrat Barbara Boxer that would prohibit spending taxpayer funds to keep failing firms in business, “takes that issue completely off the table.” “I’m satisfied, as I believe my colleague from Alabama is, that we’ve reached an agreement on the too-big-to-fail provisions,” said Dodd, a Connecticut Democrat.
  
• Wyser-Pratte Says Euro May Reach Dollar Parity as Spain Looms. U.S. investor Guy Wyser-Pratte said the euro could drop to parity with the dollar and the Greek debt crisis will probably spread to Spain. “The key in Europe is not Greece or Portugal but Spain,” Wyser-Pratte, an activist investor in Europe for more than a decade, said yesterday at the Bloomberg Markets Hedge Fund Summit in New York. “They’re taking too long” to reorganize their banks, he said. Governments in the region are under pressure to slash spending as German Chancellor Angela Merkel’s coalition steps up calls for allowing “orderly” default of euro-region member states. Many of the region’s countries devalued their currencies in the past to make their economies more competitive, an instrument they can no longer use after joining the euro, said Pierre Lagrange, co-founder of GLG Partners Inc., a manager of hedge and mutual fund investments. Merkel faces elections on May 9 in North Rhine-Westphalia, Germany’s most populous state. She is campaigning on her refusal to rush aid to Greece, saying her firmness forced the Greek government to commit to bigger savings. Greece’s deficit was 13.6 percent of gross domestic product last year, the region’s second-biggest after Ireland, compared with 3.3 percent for Germany. Wyser-Pratte, founder of New York-based investment firm Wyser-Pratte & Co., said the elections will be a “referendum” on Merkel and German willingness to finance weaker European nations. “If that turns against her the whole thing could unravel,” he said. Investors considering buying assets in Europe should short the euro, betting on a decline, he said.
• Ahmadinejad Hails U.S. Arms Disclosure, Warns Against Sanctions. The Obama administration, which took a “positive step forward” by disclosing the size of the U.S. nuclear arsenal, risks the failure of its diplomatic game plan by pursuing new sanctions on Iran, its President Mahmoud Ahmadinejad said. “We fear that a group of radicals may be willing to push Mr. Obama, who came to power with the motto of change, speedily toward an irreversible point,” Ahmadinejad said during a news conference in New York. “It is very clear that if the U.S. starts another sanction against Iran, it means it is the end of Mr. Obama’s efforts. We really don’t want to see that.” Even as he praised the first declaration of the size of the U.S. nuclear arsenal, Ahmadinejad called for an “independent supervisory body” to verify the figures. He questioned why the world should trust the accuracy of the U.S. statement, while the Obama administration doesn’t trust Iran’s own declaration of the peaceful aim of its nuclear program.
• Mortgage Bond Spreads at Widest in Five Months: Credit Markets. Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates climbed to the highest in five months relative to U.S. Treasuries as Europe’s worsening government finances led investors to shun all but the safest assets. Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds widened as much as 0.05 percentage point to about 0.78 percentage point more than 10-year Treasuries, the widest gap since Dec. 8, before closing at 0.75 percentage point, according to data compiled by Bloomberg. Spreads have climbed from 0.68 percentage point on April 26. Even with the U.S. promising to pump unlimited capital into Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac through 2012 to ensure they can meet $4.6 trillion of guarantees on housing debt, speculation that Greece’s debt crisis will infect Portugal, Spain and the rest of the European Union and make interest rates more volatile is sending investors fleeing to the safety of Treasuries. “You hate to assign everything to Greece, but any time you get sovereign-debt risk issues, I think that gives MBS investors pause,” Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial Capital Markets, said. “It’s not that far- fetched” to think that if multiple countries default, there’s a chance Fannie Mae and Freddie Mac eventually could too, he said.
  
• U.S. Seen Attractive for Hedge Funds as Global Rules Tightened. The U.S. will remain more attractive for hedge funds and private-equity firms than Europe as regulators globally seek to tighten oversight of alternative- asset managers, said hedge-fund manager Frank Brosens. While details of the regulatory overhaul are still being worked out, the U.S. proposals are “not a bad direction,” Brosens said today at the Bloomberg Markets Hedge Fund Summit in New York. Europe has a less favorable environment, he said. European regulators said last year they may seek to restrict hedge funds’ use of debt and limit bonuses, rules that would apply to U.S. managers seeking to market themselves to European investors. “It’s going to make it quite complicated,” Brosens said. Brosens was a candidate to run the U.S. Treasury office overseeing the government’s $700 billion bank bailout program until he withdrew his name from consideration last March.
• Cayne Said to Blame Market for 2008 Collapse of Bear Stearns. James “Jimmy” Cayne, the former chairman and chief executive officer of Bear Stearns Cos., will blame market forces and loss of confidence in his firm for its collapse in 2008, according to a person who has reviewed his Congressional testimony. “The market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy,” Cayne said in written testimony to be presented to the Financial Crisis Inquiry Commission in Washington tomorrow, according to the person who declined to be identified since the remarks aren’t public until delivery. JPMorgan Chase & Co.(JPM) agreed to buy the firm through a forced sale in March 2008. Alan Schwartz, who succeeded Cayne as CEO and negotiated Bear Stearns’s fire sale to JPMorgan, also will testify, as will former President Warren J. Spector. Schwartz will tell the panel the firm was well capitalized and blame the fall on rumors, the person said. After guiding the company’s stock up more than 10-fold in 14 years, Cayne got $10 a share on the sale of the 85-year-old firm, 6 percent of the peak a year earlier. He was among the largest shareholders in Bear Stearns at the time of the sale, and about two thirds of the $1.5 billion he accumulated from stock awards was wiped out. Congress appointed the 10-member FCIC led by California Treasurer Phil Angelides to investigate the causes of the financial crisis and report its findings to lawmakers by December. Panel hearings in Washington have focused on companies including Citigroup Inc. and Fannie Mae, and the commission has heard from former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin. Former SEC Chairman Harvey Pitt called a January FCIC hearing a “parade of sound bites” that failed to shed any light on why U.S. taxpayers had to spend $700 billion to bail out the U.S. financial industry. The panel had taken testimony from Goldman Sachs Group Inc. CEO Lloyd Blankfein, JPMorgan CEO Jamie Dimon, Bank of America CEO Brian Moynihan and former Morgan Stanley CEO John Mack.
• Commodities Plunge on Concern for China Growth, European Debt. Commodity prices plunged the most in two months as slowing Chinese manufacturing and budget gaps in Europe spurred speculation that the global economic recovery will slow, curbing demand for raw materials. The Reuters/Jefferies CRB Index of 19 raw materials fell 2.3 percent to 271.65 as of 2:38 p.m. in New York, heading for the biggest slide since Feb. Nickel plunged as much as 7.2 percent on the London Metal Exchange, leading today’s declines.
• Leveraged-Loan Market Shrinks to 2007 Level Amid Lack of CLOs. The leveraged-loan market shrunk last month to its size in July 2007, right before the onset of the credit crunch, amid a lack of new issues of collateralized loan obligations, CreditSights Inc. said. The amount of loans on the S&P/LSTA Leveraged Loan Index, representing about 95 percent of the institutional market for U.S. bank debt, dropped by $9.95 billion to $500 billion in April, Chris Taggert, a New York-based loan strategist at the debt-research firm, said in a report published yesterday. High-yield, high-risk loan volume has declined from $594.2 billion in 2008 and will continue to shrink as repayments and restructurings outpace new issues of bank debt, he said. Lack of new CLOs, which bundle leveraged loans and slice them into securities of varying risk, is driving “major undercurrents” in the market such as amend-and-extend transactions, bond issues to repay loans and manager consolidations of CLOs, he said.
• Calpers Suit Against Ratings Services Can Proceed. Standard & Poor’s, Moody’s Investors Service and Fitch Ratings must face the California Public Employees Retirement System’s lawsuit claiming their faulty risk assessments on structured investment vehicles caused $1 billion in losses.
• Treasury Rally May Produce Breakouts: Technical Analysis. Treasury 10-year note yields, the yield curve and 10-year swap spreads are all on the brink of breaking through long-held technical ranges, according to Royal Bank of Scotland Group Plc. Ten-year note yields closing below 3.667 percent; the difference between two- and 10-year yields finishing the day less than 2.69 percentage points and a 10-year swap spread above 1 basis point would all represent “a confirmation of trend changes,” William O’Donnell, a U.S. government bond strategist at RBS Securities in Stamford, Connecticut, wrote today in a note to clients. “A lot has to do not just with the contagion fears and maybe fears about banks yet again, but also the announcement at 9 o’clock by the Treasury tomorrow that they’re likely to be cutting supply,” O’Donnell said in a telephone interview.
• InterMune's(ITMN) Surprise U.S. Drug Rejection Sinks Shares. InterMune Inc.’s application for a potential $1-billion-a-year lung treatment was rejected by U.S. regulators, causing the drugmaker to plunge 79 percent in extended trading. The Food and Drug Administration asked for a new clinical trial of the medicine, Esbriet, to prove it delays progression of idiopathic pulmonary fibrosis, InterMune said today in a statement. The shares fell $35.76 to $9.68 at 5:33 p.m. New York time after the official close of the Nasdaq Stock Market.
• News Corp.(NWSA) Profit Tops Estimates on 'Avatar,' Cable TV Gains. News Corp., owner of the Twentieth Century Fox film studio, reported fiscal third-quarter profit that beat analysts’ estimates on ticket sales from the 3-D blockbuster “Avatar” and improving cable network revenue. Revenue rose 19 percent to $8.79 billion, also topping estimates. Operating income increased 55 percent to $1.25 billion in the quarter ended March 31.
• Buffett Turns Into One More Corporate Bubble: Alice Schroeder.
• Obama's Fed Picks Promise More Keynesian Failure: Amity Shlaes.
• CVS(CVS) Says Its Business Practices Probed by 24 States.
• Brazil Yields Show Biggest Rate Increase Since '03 on Inflation. Brazilian traders are betting for the first time that the central bank will raise the benchmark lending rate by 1 percentage point next month after last week’s increase failed to tame rising inflation expectations. Yields on overnight interest rate futures contracts due in July climbed two basis points, or 0.02 percentage point, yesterday to an 11-month high of 9.7 percent. The futures rose 14 basis points since central bank President Henrique Meirelles raised the overnight Selic rate by a bigger-than-forecast 75 basis points from a record low 8.75 percent on April 28. Bets on the first full percentage-point increase since Meirelles’s second month in office in 2003 are growing after economists drove up their year-end inflation forecast for a 15th straight week in a central bank survey published May 3. The median estimate rose to 5.42 percent from 4.25 percent in November and above the bank’s 4.5 percent annual target, as the expansion in Latin America’s biggest economy quickens. “The front end of the curve has just blown out,” said Ram Bala Chandran, a Latin America currency and rates analyst at Citigroup Inc. in New York. “The momentum is so strong that it’s hard to step in front of it. As long as inflation is on the rise, the central bank has to go after it.”
• Obama Backs 'Significantly' Higher Damage Cap After BP(BP) Spill. The Obama administration is backing “significantly” higher limits for damages BP Plc might face for the oil spill in the Gulf of Mexico and won’t rule out scaling back plans to expand offshore drilling. “Beyond clean-up and containment, BP must be held responsible for the damages this spill causes,” White House communications director Dan Pfeiffer wrote on the White House website yesterday. The administration “strongly supports” a move in Congress to raise an existing $75 million cap on damages under the Oil Pollution Act.

Wall Street Journal:

• Suspect Admits Bomb Plot. A 30-year-old man pulled from a jetliner just before it was to take off for Dubai admitted that he tried to detonate a car bomb in New York's crowded Times Square after learning how to build bombs in a terrorist training camp in his native Pakistan, authorities say. Faisal Shahzad, a Connecticut resident who became a U.S. citizen a little more than a year ago, was charged with five terrorism-related charges Tuesday. The case quickly expanded overseas as Pakistani authorities arrested some half dozen people known to have been in recent contact with Mr. Shahzad.
• Bloomberg Questions Security. 'Clearly, the Guy Was on the Plane and Shouldn't Have Been. And We Got Very Luckly,' He Says. Mayor Michael Bloomberg asked Tuesday why the suspect in a failed attempt to bomb Times Square, Faisal Shahzad, was able to board a flight at Kennedy Airport if he was supposed to be on a "no-fly" list. "Clearly, the guy was on the plane and shouldn't have been. And we got very lucky," the mayor said at a news conference.
• Slick, Well Inundated With Dispersants. Agents That Break Up Oil Are Deployed From Air, at Seafloor. In addition to the dispersants, rough weather and shifting winds in the Gulf in recent days have helped to keep the spill offshore, bobbing the slick to and fro in the water, giving officials valuable time to prepare and to try to fight the spill. While the oil continues to gush, BP hopes to install a 70-ton dome that will funnel the oil up to a drilling rig. The containment dome is scheduled to leave an engineering yard in Port Fourchon, La., at noon Wednesday. The trip to the site of the leak will take 12 hours, and installing the device requires an additional two days. Pipes will then be installed connecting the dome to the rig, which will capture the oil, "hopefully" starting in six days, BP executive Doug Suttles said Tuesday. Meanwhile, BP and government authorities are using C-130 planes in the sky and remote-controlled robots a mile down on the seafloor to spray the oil with dispersants. They are scouring the globe for large stockpiles of the substance, bringing it in from Saudi Arabia and Malaysia on 747 cargo planes and from Hawaii on a ship. And they are working with dispersant manufacturers to increase production quickly.
• SEC Probes Firms Doing Business in Terror Hubs. The Securities and Exchange Commission is conducting a broad investigation into companies doing business in nations designated as state sponsors of terrorism, as the U.S. government seeks to determine whether any operations were used to support terrorist activities, people familiar with the matter said. The SEC's enforcement division has sent letters to several companies in the pharmaceutical and energy industries, these people said. The State Department currently designates four countries—Cuba, Iran, Sudan and Syria—as state sponsors of terrorism. The letters, which were sent within the past two months, are part of an investigation by the SEC division that looks into potential violations of the Foreign Corrupt Practices Act. It isn't clear which companies received the letters.
• What-Ifs for Goldman Sachs(GS). Behind Stiff Upper Lip, Some Executives, Alumni Consider Life After Blankfein.
• For China, Attacks Shine a Light on Its Treatment of the Mentally Ill. The spate of recent attacks on children in China has raised questions about how the world's most populous country treats its mentally ill. Since late March, five separate incidents around the country have been reported where individual men attacked children with knives and other objects in or near schools. The horrific acts, which have left 11 people dead and some 70 injured, don't appear coordinated. But they have frightened the country and led to increased security in and around schools.

Bloomberg Businessweek:

• China Exchange-Traded Fund's Short Sales Rise to 2-Year High. Foreign investors are short selling China’s stocks through a yuan-denominated exchange-traded fund at the highest rate in more than two years, underscoring concern that property curbs will slow the economy. The ratio of short selling to total turnover on the iShares FTSE/Xinhua A50 China Index ETF reached 39 percent yesterday, the highest level since Feb. 19, 2008, according to data compiled by Bloomberg. “Market sentiment is bearish due to the property crackdown by the government,” said Zhang Kun, Shanghai-based strategist at Guotai Junan Securities Co. “Investors are concerned about more severe measures down the road.” China’s stocks have plunged this year as the government unwound monetary stimulus and stepped up measures to prevent a housing bubble inflated by record lending last year. The Shanghai Composite has slumped 14 percent in 2010, Asia’s worst performer, while the FTSE/Xinhua China A50 Index, which tracks the 50 largest Shanghai and Shenzhen-traded companies by total market value, has declined 19 percent. BlackRock Inc., which owns iShares, is among money managers reducing their holdings on Chinese stocks on expectations that economic growth has peaked. State Street Global Advisors has an “underweight” position on China amid concern shares are expensive relative to smaller developing nations.

CNBC.com:

• Is Perfect Financial Storm Brewing Overseas?

NY Times:

• Debate Flares on Goldman's(GS) Role as Market Maker. Goldman Sachs insists that it did nothing wrong and was just acting as a middleman when it sold billions of dollars of securities that are at the center of the Securities and Exchange Commission’s fraud case against the firm. But John C. Coffee Jr., a professor of securities law at Columbia University, told a Senate hearing on Tuesday that Goldman was much more than a middleman and that it therefore had a duty to its clients that went beyond just filling orders. “Goldman was not a neutral dealer, but a soliciting placement agent,” Mr. Coffee told a Senate Judiciary subcommittee. “Acting as a placement agent for a securities offering that one has itself designed is very different from a dealer simply quoting a two-sided spread.” Mr. Coffee took issue with Goldman’s explanation, calling it a “straw man argument.” He argued that the firm was much more than a market maker in this case. By actively marketing the portfolio, Goldman owed its clients taking the long side of a synthetic C.D.O. the same level of care that they would get if they were buying a real C.D.O. made up of actual mortgages. “Put simply, this is why they came to Goldman: for its expertise and skill,” Mr. Coffee said, referring to the clients that went long on the portfolio. “That the C.D.O. was instead a synthetic one and thus inherently involved a short side, and a credit default swap, changes nothing; the investor in the synthetic C.D.O. should continue to be able to expect that Goldman is seeking attractive securities, not dogs, to place in its portfolio.” “Goldman should not have permitted one client to bias the deal in its own favor,” Mr. Coffee said. “Nor should it have represented that a neutral and objective portfolio manager was selecting the portfolio if it knew that the short side was heavily influencing the selection of the securities in the portfolio.”
• Questions for Banks on Fudging the Books. It’s an open secret on Wall Street that many big banks routinely — and legally — fudge their quarterly books. But now Washington is taking a hard look at a range of maneuvers that help banks dress up their financial statements, and raising some uncomfortable questions about banks’ bookkeeping. The techniques in question, which are normally relegated to the shadows of finance, are expected to be thrust into a public spotlight on Wednesday by the federal committee that is investigating the causes of the financial crisis. The Financial Crisis Inquiry Commission is expected to focus most sharply on the way banks slim down their balance sheets before reporting their results and on loans they receive from entities like special-purpose vehicles and hedge funds, which are allowed to operate with little public disclosure.

Business Insider:

• Chanos: China Has Been a Good Place to Be Short. We hope to bring you fuller video and coverage later, but Jim Chanos and Stephen Roach just concluded a very interesting debate on China on Bloomberg Television. Chanos, obviously, is a skeptic. Roach is a bull. Roach thinks migration from the rural areas to the city will continue. Chanos thinks we could see reverse migration, as the property boom ends and peasants are forced back to the countryside. Another point, which we can't agree with enough, is the absurdity of Western commenters going out of your way to praise Chinese government policy moves, while slamming government intervention in the economy domestically.
• Here's What the Fed is Doing to Kill the Audit, And Here's How You Can Stand Up To Them.
• Here is the Homegrown "Revolution" That Could Save Us From an Oil Crisis. Shale oil and natural gas has long been lauded as a potential savior for the U.S. energy market, but many don't realize just how substantial reserves of these materials are. What we have in the United States was either too costly or too difficult to acquire before, and now we have the tools capable of extracting the wealth of resources beneath our collective feet, according to Continental Resources.
• Local Government Fiscal Emergency: Fresno, CA.
  

Zero Hedge:

• Dom S-K (IMF) Says US Taxpayer Subsidy to Greece Should Have Come at Cheaper Rates. IMF CHIEF SAYS EUROPEAN LOAN SHOULD HAVE BEEN AT IMF RATE. Because, you know, it is so usurious and greedy of US taxpayers to demand a 5% rate for a 3 year loan to a bankrupt country.

The American Spectator:

• Big Government vs. Small Business. As the owner of a small restaurant, it felt good the other morning to open the newspaper and read this sentence: "Be proud, small-business owners! You're now the most trusted group in America. Listen up, federal government! You're neglecting small business -- and most people think so." That was how Rhonda Abrams summarized the findings of a recent study by the Pew Research Center in USA Today.

New York Magazine:

• CBS News(CBS) and CNN Are Back in Partnership Negotiations.

Politico:

• Washington Post or Huffington Post? The once-cautious Washington Post has begun to invest heavily in the liberal blogosphere, transforming its online presence – a combination of accident and design – into a competitor of the Huffington Post and TalkingPointsMemo as much as the New York Times.
• Holder: NYC Could Host Trial. The Obama administration is still considering New York City as a possible venue for the trial of Khalid Sheikh Mohammed, Attorney General Eric Holder said Tuesday. “Unfortunately, New York and Washington, D.C., remain targets of people who would do this nation harm,” he said at a briefing on the investigation into the attempted Times Square bombing. “Regardless of where a particular trial is ... that is going to remain true.”

USA Today:

• Google(GOOG) Moves into Online Travel Business.

Radio Television Hong Kong:

• Property price increases in china will peak in the second half of this year on government tightening policies, the Chinese Academy of Social Sciences said. The rapid surge in prices has a negative effect on the economy and the rising ratio of investment in real estate by state-owned companies poses a risk of creating a future financial crisis, according to the academy's report.

China Ministry of Housing and Urban-Rural Development:

• Qiu Baoxing, China's vice housing minister, said the nation must act to curb rising property prices and the formation of asset bubbles.

China Global Times:

• Expo Attendance Falls Short. Attendance at the World Expo in Shanghai, in its first four days since opening, has fallen short of expectations, adding new concerns for organizers who have been already troubled by complaints about long queues and a lack of affordable food options. Tuesday was the first unofficial day of the Shanghai World Expo when visitors who hold standard tickets or appointed, unused day tickets could visit the Expo Park. A total of 146,100 visitors showed up at the park Tuesday, slightly more than Sunday. Organizers forecast an influx of 70 million visitors, mostly Chinese, over the next six months. To achieve this target, an average of 380,000 people need to visit the site daily. So far, the highest attendance was on Sunday, with 215,000. On Monday, the last day of the long public holiday, only 131,700 people, the lowest level so far, showed up at the site. Although officials said about 1,050,000 tickets for the three opening days had been sold, only half of that number showed up.

Evening Recommendations
Citigroup:

• Reiterated Buy on (BRCM), target $42.
• Reiterated Buy on (OPEN), raised estimates, boosted target to $45.

Night Trading

• Asian indices are -3.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 111.0 +10.5 basis points.
• S&P 500 futures -.15%.
  
• NASDAQ 100 futures -.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PHM)/-.22
• (VSH)/.22
• (PWR)/.09
• (WMB)/.37
• (TWX)/.48
• (TRW)/.73
• (CECO)/.64
• (CBS)/.05
• (FLS)/1.30
• (PRU)/1.30
• (SPW)/.26
• (BMC)/.70
• (ICE)/1.31
• (LVS)/.02
• (SYMC)/.37
• (KCP)/.04
• (TIE)/.02
• (DVN)/1.45
  

Economic Releases
8:15 am EST

• ADP Employment Change for April is estimated at +30K versus -23K in March.

10:00 am EST

• The ISM Non-Manufacturing report for April is estimated to rise to 56.0 versus a reading of 55.4 in March.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Rosengren speaking, Fed's Lacker speaking, Challenger Job Cuts report, weekly MBA mortgage applications report, (NKE) investor meeting, (STT) investor forum, (IHS) investor day, (BPO) analyst meeting, Deutsche Bank Healthcare Conference and the UBS Ag Chemicals & Seed Biotech Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply lower, weighed down by technology and real estate shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Falling Sharply into Final Hour on Rising Economic Fear, Increasing Financial Sector Pessimism, China Bubble Worries, Rising Sov Debt Angst

Broad Market Tone:

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

Equity Investor Angst:

• VIX 24.94 +23.53%
  
• ISE Sentiment Index 100.0 -25.93%
  
• Total Put/Call .95 +23.38%
  
• NYSE Arms 2.23 +134.05%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 95.04 bps +5.18%
  
• European Financial Sector CDS Index 114.31 bps +9.95%
  
• Western Europe Sovereign Debt CDS Index 121.0 bps +5.52%
  
• Emerging Market CDS Index 232.71 bps +8.24%
  
• 2-Year Swap Spread 30.0 +5 bps
  
• TED Spread 20.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .15% -1 bp
  
• Yield Curve 266.0 -3 bps
  
• China Import Iron Ore Spot $173.90/Metric Tonne +.58%
  
• Citi US Economic Surprise Index +17.10 -3.2 points
  
• 10-Year TIPS Spread 2.33% -7 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -310 open in Japan
• DAX Futures: Indicating +13 open in Germany

Portfolio:

• Slightly Lower: On Losses in my Financial, Biotech, Medical and Tech long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges, added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as equities trade near session lows on heavy volume despite more positive US economic data. On the positive side, Drug stocks are holding up relatively well. Oil is finally submitting to the deteriorating fundamentals for most commodities. On the negative side, Airline, Coal, Alt Energy, Oil Tanker, Steel, Paper and Semi shares are especially weak today, falling 4.0%+. The Spain sovereign cds is soaring +28.7% to 210.44 bps and the Portugal sovereign cds is spiking +20.1% to 345.08 bps. Moreover, the UK and Russian sovereign cds are jumping 10.0%. Other key gauges of credit angst are also breaking out to the upside. The CRB Index is close to breaking down through its 200-day moving average. I expect this to happen convincingly over the coming weeks. The 10-year yield is now falling too much and is breaking down technically, despite hedge funds' crowded short position in long-term govt debt. Weekly retail sales rose +2.4% this week, which is down from a +2.7% gain the prior week and down from a +3.9% increase the week of April 6th. I continue to believe the most over-owned global cyclicals are at greatest risk of further substantial declines. Slowing China/European growth, high energy prices, less inventory rebuilding and a slowdown in govt stimuli are going to slow global growth more than most investors anticipate over the coming months, in my opinion. Asia will likely come under meaningful pressure tonight, which could lead to further downside in US stocks tomorrow morning. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, tax hike worries, regulatory fears, more financial sector pessimism, growing economic fear, China bubble worries and profit-taking.

Today's Headlines

Bloomberg:

• Greek Government Bonds Tumble, Bunds Climb Amid Debt Concern. Greek government bonds tumbled and German bunds rose amid concern Europe’s most-indebted nations will struggle to contain their deficits and as German Chancellor Angela Merkel’s coalition stepped up calls to allow “orderly” defaults in the euro region. Merkel said in an interview with ARD television late yesterday that it’s time to learn lessons from the Greek bailout and raised the option of “an orderly insolvency” as a way to make sure creditors participate in any future rescue. “Investors are reassessing the situation and realize there are still challenges ahead,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “The problem is far from over, and the market can’t rule out further fiscal deterioration and rating downgrades among peripheral countries.” Investors demanded an extra to 627 basis points for holding 10-year Greek debt instead of benchmark German bunds. The spread dropped earlier to 539 basis points, the lowest since April 21. Financial aid for Greece was “never designed” to cover the nation’s entire financing needs over the course of the three-year package, German Economy Minister Rainer Bruederle told reporters today. “I expect Greece to make the effort necessary to be able eventually to sell loans in the market,” he said. Any decline in German debt is “a buying opportunity,” wrote RBS’s Sian. “Deflationary forces in the euro area have never been higher, and the weakness of the periphery warrants low ECB rates for some time,” according to Sian.
• Greek Rescue Doubts Spur Sovereign Debt Risk on Contagion Bets. The cost of insuring against default on sovereign bonds rose on concern that the $144 billion aid package for Greece may not solve the nation’s deficit crisis or prevent contagion to Europe’s debt-ridden economies. Credit-default swaps on Greece surged 84.5 basis points to 731, according to CMA DataVision prices, implying an almost 45 percent probability of default over five years. Contracts on Portugal, Spain, Italy and Ireland also rose. There’s “a deep mistrust among the investor base on the viability of the Greek story in a medium-term context,” Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam, wrote in a note to investors. Swaps on Spain increased 51 basis points to 208.5, Portugal rose 83 to 358, Italy climbed 23 to 157 and Ireland increased 46 to 223, CMA prices show. “Austerity measures might push these economies closer to the edge, triggering a private sector default cycle that cannot be easily stopped,” Philip Gisdakis, a Munich-based strategist at UniCredit SpA, wrote in a note to investors. The spending cuts may also weigh on the broader region “as the inevitable budget adjustments and normalization of current account deficits for the weaker economies will reduce aggregate demand in the eurozone,” Gisdakis wrote. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 25 basis points to 451, according to JPMorgan Chase & Co. prices. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 7.25 basis points to 94.5, JPMorgan prices show. The Markit iTraxx Financial Index of 25 banks and insurers increased 12.5 to 131 and the subordinated index surged 25 to 205.
• Oil Falls Most in Three Months as Dollar Surges, Equities Drop. Crude oil declined the most in three months as the dollar strengthened against the euro, curbing the appeal of commodities to investors, and a slowdown in Chinese manufacturing sent global equities lower. Oil fell more than $3 a barrel as the dollar climbed to the highest level versus the common currency in a year on concern the Greek debt crisis will spread. A Chinese purchasing managers’ index fell to a six-month low.
• Copper Falls to Nine-Week Low as Chinese Manufacturing Slows. Copper fell to a nine-week low on concern that demand will falter after manufacturing in China, the world’s largest metals user, expanded at the slowest pace in six months. A purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics slid to 55.4, the lowest level since October. Copper prices dropped 5.6 percent in April, the first monthly decline since January, partly on concern China’s efforts to cool its economy will slow demand for industrial commodities. “China is the driver,” said Donald Selkin, the chief market strategist at National Securities Corp. in New York. “People are worried about what impact their tightening will have, and this manufacturing report shows things are already slowing. Copper will have a tough time.” “This could be the start of a more sustained correction,” Daniel Brebner, an analyst at Deutsche Bank AG in London, said by phone. “China appears to be set on instilling some discipline on growth, draining liquidity to rein in inflation, and control excess speculation in some asset classes, such as real estate.”
• Goldman(GS) Partners Give Blankfein Standing Ovation, Hintz Says. Goldman Sachs Group Inc.’s employee morale remains good and Chief Executive Officer Lloyd Blankfein received a standing ovation from partners at an April 20 earnings call, analyst Brad Hintz told clients. According to the firm, “employees are pulling together like a team under pressure,” Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to clients today after a meeting with five senior executives at Goldman Sachs. “The partnership has closed ranks, too, and at Goldman’s April 20, 2010, managing directors earnings call, Lloyd Blankfein received a standing ovation from his partners.”
• Obama Plans New Rules as For-Profit Colleges Mobilize. The Obama Administration is gearing up to produce tougher regulations that may reduce the amount of federal financial aid flowing to for-profit colleges, cutting the companies’ annual revenue growth by as much as a third.
• Pfizer(PFE) Profit Beats Estimates on Added Wyeth Products. Pfizer Inc., the world’s biggest drugmaker, said first-quarter profit rose more than analysts estimated as products added from the acquisition of Wyeth overcame costs from the U.S. health overhaul.
• Euro Falls to a One-Year Low as Greek Bailout Concern Persists. “The ECB’s credibility has been shot to pieces, and we’ve yet to see the political fallout from the Greek bailout,” said Steven Barrow, head of Group of 10 currency research at Standard Bank Plc in London. “The only restriction on the euro’s downside is that the market is already so short the currency.”
• Wadhwani Sees Sovereign Crises 'Recurring' After Greek Bailout. The euro region faces the danger of further debt crises because of its delay in bailing out Greece and the failure to prepare a system to rescue other nations, former Bank of England policy maker Sushil Wadhwani said. “We don’t really have a credible mechanism in place to deal with potentially Portugal and Spain,” Wadhwani said in a televised interview at an event hosted by Fathom Financial Consulting in London today. “My strong suspicion is that we have recurring sovereign debt crises. Although I’m not sure how long it’ll take for the next one.”
• Senators Take Aim at $40 Billion of Card-Industry 'Swipe' Fees. Visa Inc.(V) and MasterCard Inc.(MA) face a renewed threat to one of the credit-card industry’s biggest revenue sources after Senator Patrick Leahy backed legislation to curb fees charged to merchants on each transaction. Leahy, a Vermont Democrat and chairman of the Senate Judiciary Committee, will co-sponsor a measure by Senate majority whip Dick Durbin of Illinois, Durbin spokesman Max Gleischman said today. The so-called interchange or “swipe” fees average about 2 percent of each purchase. The industry has escaped previous attempts to curtail swipe fees, which bring in more than $40 billion a year. Now the nation’s biggest card networks and lenders, including Bank of America Corp. and JPMorgan Chase & Co., find themselves pitted against two of the most powerful senators over the fees, which some lawmakers and retailers have said are excessive and hurt small businesses.

Wall Street Journal:

• Times Square Suspect Received Bomb Training. Times Square bombing suspect Faisal Shahzad told interrogators that he received training in bomb making during a recent five-month trip to Pakistan, according to a senior U.S. official familiar with the matter. The official said Mr. Shahzad received his training in the tribal region of Waziristan bordering the Afghan border. South Waziristan is currently the site of a continuing Pakistani military offensive against Islamic militants affiliated with al Qaeda. The region of North Waziristan is the locus of the Central Intelligence Agency campaign to kill militants with unmanned drone strikes. Mr. Shahzad, a 30-year-old naturalized U.S. citizen originally from Karachi, returned in February from a five-month visit to Pakistan, authorities said.
• Debt Jitters Hit European Markets. European stocks slumped Tuesday, and the euro reached a fresh one-year low against the dollar as sovereign-debt concerns continued to mount and the focus shifted to Spain as the next high-profile victim of the euro-zone debt crisis. In equity markets, Spanish banks tumbled on speculation that ratings agencies could downgrade Spain's sovereign-debt rank. Although Fitch Ratings and Moody's Investors Service moved to dispel the market rumors of an imminent downgrade for Spain, Madrid's IBEX declined 5.4% to 9859.10, hitting lows not seen since last July.
  
• Goldman(GS) Disciplined on Short Sales. The Securities and Exchange Commission and the regulatory arm of NYSE Euronext disciplined the equities arm of Goldman Sachs & Co. for alleged violations of rules on short-selling stocks.
• Lawmakers Draft Web-Ad Privacy Safeguards. Advertisers and Internet companies have been scrambling to head off regulation they say will hamper growth of online advertising. The pressure is expected to build Tuesday as lawmakers prepare to announce proposed privacy legislation. More than a year in the making, the draft legislation proposes regulating Internet companies' tactics for collecting information about Web visitors and the use of that data for ad targeting. It also could apply to the practices for collecting consumers' information in the offline world.
• Apple(AAPL) Draws Scrutiny From Regulators. FTC, Justice Department Discuss Possible Inquiry Amid Complaints From Application Developers, Advertising Firms. U.S. antitrust enforcers are taking a keen interest in recent changes that Apple Inc. made to its licensing agreement with iPhone application developers and are likely to open a preliminary investigation into whether the company's actions stifle competition in mobile devices, according to people familiar with the situation.
• Citadel Senior Executive Has Left Firm. Patrik Edsparr has left Citadel Investment Group, making him the Chicago hedge-fund firm's latest top executive to depart. Citadel spokeswoman Katie Spring said Mr. Edsparr was "let go" from the firm within the last two weeks.
• EU Close to Hedge-Fund Deal. European Union lawmakers are nearing an agreement on hedge-fund legislation that would significantly restrict the ability of funds based in some offshore tax havens to raise money from EU investors, the lawmaker in charge of the legislation at the European Parliament said Tuesday. The proposal would require European authorities to create a "black list" of countries, with European investors being prohibited from sending their money to funds based in those countries. To escape the list, countries would have to satisfy a list of four or possibly five criteria, said Jean-Paul Gauzès, the French politician who is leading debate.

CNBC:

• Cost of Goldman(GS) Debt Insurance Soars.

Business Insider:

• Beautiful Chart on The End of the Age of Europe. Europe is embroiled in a sovereign debt crisis, but it is just the start of a downward trend for the continent, if this GDP chart is to be believed. This beautiful chart from Spanish economics blog Venturatis, makes it clear that European nations are falling behind in the GDP competition, and sure to fall behind more over the next 40 years if they can't stick together and make the European Union a growth titan. Notably, the United States remains a massive growth market throughout the next 40 years.
• Pakistan Arrests Times Square Suspect In Karachi -- Is This Linked to Mumbai?
• Remember Soaring Yields? As Bespoke notes, the much vaunted spike in yields seems to be fizzling.
• Gasparino: Goldman(GS) Eager to Settle With SEC, Talks Beginning as Soon as Today.
• 15 More Facts About China That Will Blow Your Mind. Thanks to the ridiculous rate of change being forced upon China, the nation is filled with excess and economic distortion.
  
  

Zero Hedge:

• CMBS Delinquencies Hit Fresh Record, Now at $51 Billion, 268% Increase From Prior Year. The latest RealPoint monthly CMBS delinquency report update is out and it continues to get worse and worse. In March, the total amount of delinquent CMBS increased by $3.2 billion to $51.5 billion, or 6.4% of the total notional outstanding. "Overall, the delinquent unpaid balance is up almost 268% from one-year ago (when only $13.89 billion of delinquent unpaid balance was reported for March 2009), and is now over 23 times the low point of $2.21 billion in March 2007.

CNNMoney.com:

• Times Square Bomb Plot Suspect Arrested 'At Last Second'. Authorities hunting for the suspect in the botched Times Square bombing dramatically beat the clock overnight, seizing a Pakistani-American citizen moments before he was set to begin a long trip to his strife-torn homeland. Faisal Shahzad, 30, was arrested around 11:45 p.m. ET Monday at New York's John F. Kennedy International Airport, said Attorney General Eric Holder.
• 4 Ways to Tell if Lloyd Blankfein's Days are Numbered at Goldman Sachs(GS).
  

hedgeweek:

• Capital Flows to Asian Hedge Funds Stall. Following two consecutive quarters of capital inflows, the Asian hedge fund industry saw net redemptions of approximately USD700m in the first quarter of 2010, reflecting continued concerns about strategic and regulatory risks, according to data from Hedge Fund Research.

OC Register:

• Supply of O.C. Home for Sale up 31%. The latest O.C. home inventory report from Steve Thomas at Altera Real Estate says …

Politico:

• White House in P.R. 'Panic' Over Spill. The ferocious oil leak in the Gulf of Mexico is threatening President Barack Obama’s reputation for competence, just as surely as it endangers the Gulf ecosystem. So White House aides are escalating their efforts to reassure Congress and the public in the face of a slow-motion catastrophe, even though it’s not clear they can bring it under control anytime soon. “There is no good answer to this,” one senior administration official said. “There is no readily apparent solution besides one that could take three months. ... If it doesn’t show the impotence of the government, it shows the limits of the government.”
• Democrats: New Drilling 'Dead on Arrival'. A group of Democratic senators said Tuesday that the massive oil spill in the Gulf of Mexico has rendered plans for new offshore drilling "dead on arrival." "I will make it short and to the point: the president's proposal for offshore drilling is dead on arrival," Sen. Bill Nelson (D-Fla.) said. "If offshore drilling off of the coast of the continental United States is part of it, this legislation is not going anywhere. "If I have to do a filibuster, which I had to five years ago.. I will do so again."

USA Today:

• Winds Holding Gulf Oil Spill Offshore. Some good news swept through here Monday: Winds so far are keeping most of the Gulf oil spill away from shore, and chemicals are doing a decent job dispersing the giant swath of slick crude oil looming off the coast.

Reuters:

• US Bank Bill To Exempt Existing Derivatives - Senator. A sweeping rewrite of U.S. financial regulations will probably be modified to exempt existing derivatives contracts from greater collateral requirements, Democratic Senator Ben Nelson said on Tuesday. "I think it is being resolved right now," Nelson told Reuters. The move could benefit Berkshire Hathaway Inc (BRK/A), the insurance and investment company run by billionaire Warren buffett. Berkshire, based in Nelson's home state of Nebraska, has objected to the current version of the bill because it would be required to post greater collateral on billions of dollars' worth of derivatives contracts.
• U.S. Weekly Gasoline Demand Unchanged - Mastercard. U.S. retail gasoline demand was unchanged in the week to April 30 from the previous week, according to a MasterCard SpendingPulse report released on Tuesday. Gasoline demand averaged 9.213 million barrels per day last week for the second week running, the survey showed. Year-on-year, U.S. gasoline demand fell 2.3 percent, the SpendingPulse report said.

Financial Times:

• Regulators around the world must be able to limit the size of banks they supervise and split them up if they have grown too large, Jaime Caruana, head of the Bank for International Settlements, told the Financial Times Deutscheland.

Bear Radar

Style Underperformer:

• Small-Cap Value (-3.12%)

Sector Underperformers:

• Airlines (-5.41%), Steel (-5.03%) and Semis (-4.70%)

Stocks Falling on Unusual Volume:

• SYX, NSIT, MTA, STD, TIN, PTNR, REP, UBS, ADSK, TTWO, PBR, CKEC, TTES, EHTH, GLRE, SHLM, PTRY, HOLX, ASIA, SHOO, TECH, COCO, ASMI, MXIM, MCHP, COLB, EBAY, APKT, DNDN, DWSN, PEI, PTE, KMP, TKS, GSH, GHL, EVY, RBC, DSC, NLY and LUX
  

Stocks With Unusual Put Option Activity:

• 1) ADSK 2) CAR 3) AFL 4) NLY 5) MA
  

Bull Radar

Style Outperformer:

• Large-Cap Value (-2.13%)

Sector Outperformers:

• Drugs (-.84%), Foods (-1.46%) and Utilities (-1.56%)

Stocks Rising on Unusual Volume:

• OSTK, SM, NTRI, IPXL, EXBD, ZBRA, SWM, ANN and MCK
  

Stocks With Unusual Call Option Activity:

• 1) SKX 2) ANN 3) GD 4) NTRI 5) HLF
  

Tuesday Watch

Evening Headlines
Bloomberg:

• Japan Faces 'Growing' Urgency to Reduce Budget Gap, S&P Says. Standard & Poor’s indicated that a fiscal plan scheduled for next month by Prime Minister Yukio Hatoyama’s government may be key to whether it will cut the nation’s sovereign credit rating. The proposal will be “an important statement of the government’s commitment” to rein in the deficit, William Hess, director of sovereign ratings for Asia, said in an interview yesterday in Tashkent, Uzbekistan. “Something has to appear to change our assessment for where things could end up.” At stake for Japan is keeping the AA grade after S&P lowered its outlook for the rating in January, and shoring up confidence that it will avoid contagion from a Greek crisis threatening to engulf other sovereign borrowers. Finance Minister Naoto Kan said this week that Greece has shown the need for Japan to take a “very firm” stance toward reducing debt, which is approaching twice the size of Japan’s economy. “There is a growing sense of urgency, even though it’s stated very quietly, that the situation isn’t sustainable,” said Hess, who was in the capital of Uzbekistan to attend an annual meeting of the Asian Development Bank.
• Greek Government Workers to Escalate Protests Over Budget Cuts. Greek Government Workers to Escalate Protests Over Budget Cuts. Greek government workers plan to shut down hospitals and schools today and disrupt flights as protests escalate after 30 billion euros ($39.5 billion) of additional wage cuts and tax increases were unveiled this week. ADEDY, which represents more than 500,000 civil servants having their pensions and pay slashed under the new measures announced by Prime Minister George Papandreou on May 2, will begin its protest with a rally at midday joined by striking teachers. A general strike, the third this year, is planned for tomorrow, with the participation of private-sector workers. “Opting for the easy path of cutting wages and pensions can’t be accepted,” said Spyros Papaspyros, the head of ADEDY, the federation of civil-servant unions. “Protests will increase.”
• How Investors Can Profit From Break-Up of Euro: Matthew Lynn. When the euro celebrated its 10th anniversary last year, it seemed to be a solid currency. Only a few eccentrics speculated about whether it may break up one day. In the last few weeks, Greece has changed all that. New York-based investment bank Morgan Stanley is among those saying the possibility of a euro collapse has to be considered.
• U.S. Discoloses Arsenal of 5,113 Nuclear Warheads. The U.S. nuclear arsenal consists of 5,113 active and inactive warheads, a Pentagon official said, revealing the size of the nation’s stockpile for the first time. The current total of warheads is down from 22,217 in late 1989, the official told reporters at the Pentagon. He asked not to be identified. The U.S. has kept classified the specific nuclear warhead total, which would include strategic weapons mounted on missiles and bombers for longer-range as well as shorter-range tactical arms and those that aren’t deployed. President Barack Obama aims to set an example of U.S. transparency and willingness to pare its nuclear arsenal in hopes of compelling other nations to follow suit.
• Fed Ask Appeals Court to Review Bailout-Data Ruling. The Federal Reserve Board asked an appeals court to reconsider a ruling requiring the agency to disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever. Attorneys for the Fed today asked the full U.S. Court of Appeals in New York to reconsider a unanimous ruling by a three- judge panel. If the court refuses, the Fed can appeal to the U.S. Supreme Court.
• Nickel Peaking as China Prefers Pig Iron Over 2010's Best Metal. Nickel, this year’s best-performing commodity, is poised to decline as world supplies climb at the fastest pace in a decade and China’s search for lower-cost alternatives slows demand growth. Global output will jump 6.8 percent, the most since 2000, said Bank of America Merrill Lynch. China, the biggest consumer, more than tripled production of the cheaper nickel pig iron in the first quarter, said Wang Chongfeng, a Shanghai Metals Market analyst. Nickel has climbed so much that the 5-cent U.S. coin contains 6 cents worth of metal and prices are 59 percent above mining companies’ breakeven level. The commodity, which beat the other 23 futures in the Standard & Poor’s GSCI Index, will drop 19 percent by the third quarter to $21,250 a ton, according to the median estimate of 17 analysts surveyed by Bloomberg News. “The price is way ahead of itself and will serve as nirvana for world nickel producers,” said Nick Moore, head of commodity strategy at Royal Bank of Scotland Group Plc in London, who has followed metals for more than 25 years. “The higher the price, the more likely a deluge of supply comes to market.” The commodity for three-month delivery advanced 42 percent this year and reached a 23-month high of $27,595 a ton on the London Metal Exchange April 16 after stainless steelmakers boosted output by the most since at least the early 1970s, according to Macquarie Group Ltd. World stainless steel output jumped 55 percent in the first three months to 7.9 million tons from a year earlier, and will increase 20 percent to 31 million tons in 2010, the biggest gain since 1976, Macquarie said.
• Businesses Ask Geithner for More Leeway on Healthcare. The U.S. Chamber of Commerce and 12 other business groups asked members of President Obama’s cabinet including Treasury Secretary Timothy Geithner for more leeway in implementing the health-care overhaul. The groups said they’re being forced to make contract, employee-benefit and other decisions without guidance on how to comply with provisions that take effect in September. The letter dated April 30 was sent to Geithner, Health and Human Services Secretary Kathleen Sebelius and Labor Secretary Hilda Solis. The groups, which include the Blue Cross and Blue Shield Association, the National Retail Federation and the American Benefits Council, requested at least six months to comply with the regulations once they are implemented, and a “good-faith” standard for measuring compliance. “We’ve got a lot of existing and new costs to manage and face a lot of uncertainty over whether the health-care law will actually lower health-care costs,” said Neil Trautwein, employee-benefits counsel for the National Retail Federation, in an interview. “It’s not really a good idea to swamp the business community when we’re still struggling to get off the mat from the last recession.”
• Schwarzenegger Drops Support for Offshore Oil Wells. California Governor Arnold Schwarzenegger no longer supports a plan to allow limited drilling for oil off the state’s coast because of the Gulf of Mexico spill, said Aaron McLear, his spokesman.
• China Stocks Drop to 7-Month Low as Banks Increase Reserves. China’s stocks fell, sending the benchmark index to the lowest in seven months, after the central bank ordered banks to set aside more deposits as reserves for the third time this year. The Shanghai Composite Index dropped 1.2 percent to 2,836.51 at 9:35 a.m. local time. The CSI 300 slid 1.3 percent to 3,027.77. The Shanghai Composite plunged 7.7 percent last month, the biggest decline since January, as the government unwound monetary stimulus and stepped up measures to prevent a housing bubble inflated by record lending last year. It has slumped 12 percent in 2010, the world’s second-worst performer.
• State Street(STT) 'Underweight' China, Brazil Stocks on Valuations. State Street Global Advisors has an “underweight” position on the largest emerging markets including China and Brazil on concern shares are expensive relative to smaller developing nations as economic growth slows. “We’ve been a little cautious on the larger countries in emerging markets, China amongst them, that seem to have reasonably rich valuations,” Richard Lacaille, London-based global chief investment officer at State Street Global Advisors, which oversees $1.9 trillion, said in a Bloomberg Television interview in Hong Kong.

Wall Street Journal:

• Bomb Probe Looks Abroad. Investigators Cite Possible Foreign Links to New York Case; Names, Clues Surface. U.S. authorities said they were examining the possibility that there were multiple plotters with foreign links behind Saturday's botched car bombing in New York's Times Square. Officials on Monday said early indications didn't necessarily point to al Qaeda or other terrorist groups, but declined to detail evidence pointing overseas. A person briefed on the case by law enforcement said investigators found forensic evidence belonging to a man of Middle Eastern origin in the bomb-laden SUV left at the crime scene. This person said authorities have identified the man, but weren't releasing that information while they try to locate him. In Washington, White House spokesman Robert Gibbs characterized the attempted bombing as a terrorist act.
• Congress Members Bet on Fall in Stocks. Some members of Congress made risky bets with their own money that U.S. stocks or bonds would fall during the financial crisis, a Wall Street Journal analysis of congressional disclosures shows. According to The Journal's analysis of congressional disclosures, investment accounts of 13 members of Congress or their spouses show bearish bets made in 2008 via exchange-traded funds—portfolios that trade like stocks and mirror an index. These funds were leveraged; they used derivatives and other techniques to magnify the daily moves of the index they track.
• Oil Agency Draws Fire. Republican Seeks Scrutiny of Regulator; BP(BP) Tries Well Fix. The Gulf disaster is ratcheting up congressional scrutiny of the Minerals Management Service, the federal agency charged with regulating the nation's offshore oil-and-gas industry. Rep. Darrell Issa (R., Calif.), announced Monday that Republicans on the House Committee on Oversight and Government Reform would investigate whether the MMS has pushed for regulations necessary to ensure the safety of offshore operators in the Gulf of Mexico. Citing a report in The Wall Street Journal, Mr. Issa expressed concern in a letter to Interior Secretary Ken Salazar that the MMS "may have sidelined regulatory efforts that would have brought the U.S. oil industry in line with prevailing industry safety standards."
• Democrats at Ramming Speed. The White House wants to pass as much legislation as possible before losing its big majorities, no matter how unpopular its proposals are.

Fox News:

• Goldman Sachs(GS) CEO Knows Job Is on Line in Face of Government Probe by Charlie Gasparino. Friends of Lloyd Blankfein say the embattled chief executive of Goldman Sachs knows his job is on the line and that unless he reverses both the negative publicity and the effect it has been having on Goldman’s share price, he will soon be relinquishing power, FOX Business has learned.
  

NY Times:

• The Fight to Be the Next Caymans. With alternative hedge fund managers taking flight from such offshore bases as the Cayman Islands, Luxembourg is looking to be the domicile of choice, The Financial Times reported.
• Big Paydays for the Chiefs in the Media. The media industry may be going through some rough times, with the landscape changing day to day, but at least one aspect is business as usual: big paydays for the people at the top. Top executives at the country’s largest media companies continued to reel in multimillion-dollar pay packages in 2009, a year of widespread cost-cutting throughout the industry. In several cases, the packages even increased from the year before. At the top of the list is Leslie Moonves, chief executive of the CBS Corporation(CBS), whose pay package in 2009 totaled almost $43 million, more than twice what he made in 2008, according to an analysis by Equilar, an executive compensation research firm. Not far behind was Viacom’s chief executive, Philippe P. Dauman, who was paid nearly $34 million, a 22 percent increase over 2008. Sumner M. Redstone, who controls CBS and Viacom, was paid more than $33 million from the two companies combined. “Anybody who reads the business section knows the margins are being squeezed at media companies, so the fact that there are these huge packages makes no sense,” said James F. Reda, the founder of James F. Reda & Associates, a compensation consulting firm with offices in New York and Atlanta.

Business Insider:

• Guess Who's Paying For The Greece Bailout? That's Right -- YOU. The bailout outrages never stop. Of the 110-billion Euro Greece bailout, 30-billion (approx $40 billion) will be paid for by the IMF. The US supplies almost 20% of the IMF's funding (per quotas). So that means US taxpayers are providing ~$8 billion of the $145 billion going to kick the Greek can down the road. That's the first outrage. (Why is this our problem?) The second outrage is that, as in some of the US bailouts, our bailout money is JUNIOR to Greece's existing debt. That means that, over the next couple of years, the idiot banks that loaned bankrupt Greece money will get their money back. And then, when Greece runs out of cash again, we'll be left holding the bag (along with Germany and the rest of the folks who bailed Greece out).
• President Obama Having JPMorgan Chase & Co.(JPM) Chief Executive Officer Jamie Dimon Over For Dinner Tonight to Chat Financial Reform.
  

NBC:

• Suspect Arrested in NYC Bomb Attempt. A U.S. citizen of Pakistani descent, Shahzad Faisal, was arrested Monday night on Long Island, Williams reported. Earlier, an official told The Associated Press that the potential suspect recently traveled to Pakistan.

Washington Post:

• Pakistan Native Sought in Times Square Bomb Case. An FBI-led Joint Terrorism Task Force on Monday took over the investigation into the failed Times Square car bombing amid growing indications that authorities are focusing on a possible international connection, U.S. officials and law enforcement sources said. Authorities were closing in on a man who they said was a naturalized U.S. citizen from Pakistan, according to a senior Obama administration official. The man is believed to have used cash to purchase the Nissan Pathfinder that was set ablaze but failed to detonate Saturday night on a tourist-crowded block in Midtown Manhattan.

L.A. Times:

• America's Lead Weight. Unions have benefited the country, but changes in the economy have made mainstream unionism itself an impediment to growth. Do you have to love labor unions to be a good Democrat? That was the question raised last year by the unpopular bailouts of unionized Detroit automakers. It's been raised again this year by California's budget crisis, created at least in part by generous pensions for unionized public employees. I think the answer is no. It's time for Democrats, even liberal Democrats, to start looking at unions and unionism with deep skepticism.

market folly:

• Hedge Funds: Very Short 10 Year Treasuries.

cnet news:

• Microsoft's(MSFT) Browser Share Dips Below 60%. Microsoft's browser market share continued to fall in April, with Internet Explorer now in use for fewer than three in five Web connections. IE's share of the market in April was 59.95, down from 60.65 percent in March, according to Net Applications. Google's Chrome grabbed the lion's share of that, increasing to 6.73 percent from 6.13 percent, while Firefox also gained nearly a tenth of a percentage point, to finish April with 24.59 percent.

Rasmussen Reports:

• Generic Congressional Ballot: Republican 44%, Democrat 37%.
  

The Hill:

• Hedge Funds Donate Big to Democrats. The world’s top-earning hedge fund managers have bankrolled almost exclusively Democratic campaigns. The top 10 highest-paid hedge fund managers in 2009 have dished out campaign contributions almost only to Democrats. Over their lifetimes, those managers have given almost $33 million in campaign contributions to Democrats, according to research by the National Republican Congressional Committee (NRCC) and that is based on data maintained by the nonpartisan CQMoneyline. The same managers gave roughly $600,000 to Republicans, according to the research. The contributions went 98 percent to Democrats and two percent to Republicans. The money went to Democratic campaign committees, individual lawmaker’s election bids and other political action committees.

Reuters:

• Volcker Says U.S. Should 'Think About' New Taxes. As government spending rises, the United States will need to consider raising money though new taxes, White House economics adviser Paul Volcker said Monday. Government spending is now close to 25 percent of GDP, up from 20 percent, he said. "You would have to be an optimist to believe it will go down to 20 percent again," he said after a talk on financial reform at Washington University in St. Louis. "We have to begin thinking about new taxes." Ideas could include a carbon tax or an energy tax, "and then there's that awful value-added-tax" he said.
• California May Vote to Freeze Landmark Climate Law. Organizers of a California ballot measure that would suspend the state's landmark climate change law, possibly for years, said on Monday they had enough signatures to qualify it for the November ballot. The initiative would put the state's Global Warming Solutions Act, signed into law in 2006 by Governor Arnold Schwarzenegger, on hold until the state's unemployment rate falls below 5.5 percent for four consecutive quarters. Currently the state's unemployment rate is 12.6 percent and hasn't dropped below 5.5 percent since 2007.

Financial Times:

• FT Says Conservatives Most Suited to Be in UK Government.

TimesOnline:

• Goldman Sachs(GS) Shareholders Pull No Punches. Shareholders hammered the board and top executives of Goldman Sachs for gross mismanagement of the beleaguered bank, accusing them of lying about damaging fraud charges and unjustly enriching themselves at investors’ expense, in a series of legal actions revealed yesterday.

Der Spiegel:

• The Mother of All Bubbles. Huge National Debts Could Push Euro Zone into Bankruptcy. Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.

Global Times:

• Beijing Property Sales Plunge Over Holiday Weekend. Property average recorded sales in Beijing tumbled abruptly over the long May Day holiday, with the daily sales of second-hand property dropping by more than 80 percent compared with the last month, according to an official real estate website. Analysts say the abrupt cooling down of the property market in Beijing is a result of a raft of tough measures issued by the central and local governments recently to curb run-away prices. The moves include the recent limiting of homebuyers to one new apartment, but analysts also warned that the measures could deflate the property bubble in the long run, depending on their implementation. The latest figures from the Beijing Real Estate Management Network show that the daily sales of second-hand property in Beijing dropped to 211 over the weekend, against average daily sales of 1,164 last month - an 82 percent decline. "The significant drop in housing sales is inevitable, as both consumers and developers are taking a look-and-see attitude after a series of regulations since last December aimed at cooling down the red-hot real estate market," said Yin Bocheng, former director of the Real Estate Research Center at Fudan University. "The drop is expected to continue over the next few months. The market performance depends on whether housing prices will stay at a level accept-able to consumers and developers," Yin said.

Xinhua:

• China needs to rein in credit to keep price increases in control even after the government raised the deposit reserve requirement ratio for financial institutions, the China Daily said today in an editorial.

Evening Recommendations
Citigroup:

• Reiterated Buy on (MET), added to Top Picks Live list, target $55.

Night Trading

• Asian indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 100.5 -1.5 basis points.
• S&P 500 futures -.06%.
  
• NASDAQ 100 futures -.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (NYX)/.54
• (CVS)/.58
• (JOE)/-.01
• (CKP)/.09
• (RDC)/.75
• (MRK)/.75
• (COCO)/.46
• (EMR)/.55
• (BHI)/.38
• (MRO)/.17
• (PFE)/.53
• (MA)/3.15
• (ADM)/.71
• (AMT)/.18
• (DUK)/.32
• (NWSA)/.23
• (CHK)/.70
• (IPI)/.15

Economic Releases
10:00 am EST

• Factory Orders for March are estimated to fall -.1% versus a +.6% gain in February.
• Pending Home Sales for March are estimated to rise +5.0% versus a +8.2% gain in February.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, Geithner's testimony before the Senate Finance Committee on Bank Fee, ABC consumer confidence report, (SONC) analyst day, RBC Capital Markets Financial Institutions Conference, Deutsche Bank Health Care Conference and the FinTech Investor Conference could also impact trading today.
  

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